Building a startup is intense and going through the many challenges creates scar tissue. This is not physical scar tissue, it is intangible.
Although it may seem like this would be difficult to identify, it is generally quite clear when someone has this kind of scar tissue. One reason that many investors prefer experienced startup founders is because they typically have scar tissue.
When we started PMA in 2002, the macro environment appeared to be terrible. Everyone was pessimistic and building a startup at the time was definitely a contrarian idea. Nevertheless, our first few months went relatively smoothly.
Then SARS hit Hong Kong. There were real heroes working in the hospitals, putting their lives in danger everyday, and many did not survive. In comparison, we were actually in minimal physical danger. Shops and restaurants became deserted, which was especially noticeable given that the population density of the city is among the highest in the world. In addition to the health issues and the economic impact, Hong Kong went through a massive crisis of confidence, and we were certainly affected. I would like to say that we all had enough foresight to be practically optimistic but that was not the case. We were simply hunkering down to make it through the challenge.
Eventually, we emerged from the crisis, and Hong Kong rebounded. There were many more challenges building PMA, but that experience helped us to become more resilient and eventually the company was acquired in 2006 for over US$200 million.
But the intangible scar tissue never went away. Even writing about it now, the impact is still there. More generally, everyone who was connected to SARS and Hong Kong during that time was affected in some way.
While building a startup is difficult, events like SARS remind us that there are bigger challenges to deal with in life. Many first time founders have already experienced challenges far greater than building a startup. They have intangible scar tissue.
If there is one thing that I simultaneously both hate and love about myself, it is that I always ask, “Why?” Though this was initially praised as a sign of intelligence, my parents and teachers soon found themselves frequently frustrated by my inability to follow instructions I didn’t understand or believe in. It’s not that I was disobedient. I was usually more than happy to comply, I just wanted to know, “Why?”
As I grew into adulthood, it was no longer just my parents and teachers who were frustrated by my inconvenient curiosity. It is me who feels consistently betrayed by my own mind. I have repeatedly tried to follow a common path, do what everyone else is doing, take cues from society about what life should look like, but I keep finding myself unable to accept them.
When I was in sales and trading at Goldman Sachs, I was making good money, living a comfortable life, filled with exciting things and interesting people, but yet every morning I would wake up and wonder, “Why am I doing this?” “Why does this matter?” No matter how hard I tried to suppress them, these exasperating questions relentlessly made their way into the top of my mind. And then I started questioning the questions… Why can’t I just accept how lucky I am? If I have found a situation that is both secure and stimulating, isn’t that everything I should want? Why do I have to constantly be questioning myself and my circumstances? And down the rabbit hole I went.
Inevitably, I had no choice but to accept the reality of my state of constant searching, relent to my own incessant nagging, and make some changes. Without a good answer for, “Why?”, I parted with the traditional path at Goldman, joined a start up, launched the business in a new market, hired a team, and ultimately joined another startup that happens to be a venture capital fund.
Now, we’re growing businesses from the ground up, including our own, and I get to meet with hundreds of entrepreneurs every year who are coming up with new ideas that they hope will change the world. I could have never imagined this is what I would be doing, I didn’t even know this type of job or career existed when I was at Goldman. But clearly I never would have ended up here if I hadn’t asked, “Why?”
So, at least in my professional life, I am learning to be grateful for this constant urge to know more, to know why. Besides leading me to places I could have never imagined, it helps find more efficient ways to get things done. It helps me see through overly optimistic entrepreneurial bullshit, to see holes in business models, to understand colleagues and customers more deeply, to focus on what matters when the details could get incredibly overwhelming.
But the power of “Why?” goes much deeper than that. It is so powerful, in fact, it is an integral part of how we evaluate founding teams. If you, as an entrepreneur, have figured out and are connected to your raison d’être, you have a serious competitive advantage. If you believe your product or service is absolutely essential to the world and you are able to effectively articulate why that is, you will find yourself unimaginably empowered to make that happen. We call this “being on a mission”, and here’s why it’s a key element of our investment thesis.
1. Founders driven by a mission don’t give up when things get difficult. Funding falls through, you lose a big customer… you will learn a lot if you ask “Why did these things happen?” but you will persevere even more powerfully if you remember, “Why are we doing this in the first place?” The reality is most startups fail because founders give up and move on. We don’t blame them for that, everyone is on their own journey. But if you know why you’re on yours, you aren’t going to stop until you make it a reality.
2. Founders driven by a mission can attract the best talent. Everyone wants to be connected to something bigger than just themselves. It is part of being human. If you are able to inspire people in this way, provide them with a means of connecting to the larger fabric of existence, there is no doubt this is where you see talent being actualised, efficiency being maximised, and teams collaborating most effectively.
3. Founders driven by a mission build better brands. They have a stronger story to tell, and thus they sell more, they raise more money, and they grow bigger companies. Billions of dollars every year are spent on advertising, because we buy things for more reasons than simply the quality of the product. Just like employees, customers want to be connected to a powerful mission, too. If you can effectively articulate your mission, why you must exist, customer and investors might just believe you too.
I speak from deep, somewhat painful personal experience when I say that refusing to accept the way things are is nothing short of irritating and inconvenient. Digging a little deeper is not the easiest thing to do. However, if you have the courage to constantly question the status quo, and then ask yourself why you’re questioning the status quo, you will find yourself tapping into something more powerful than you could have ever imagined. Knowing your mission can make you unstoppable. And that is the power of “Why?”
What are the key dynamics, trends, and opportunities for education technology in Asia? From consumer, to mobile, to language learning, Asia is one of the most exciting places in the world to be an education investor, entrepreneur, or stakeholder right now. Here are slides from my recent keynote at New Zealand’s Edtech for Export conference in Wellington, New Zealand.
If Einstein were alive today, what would he think of our investment markets? He is vaguely attributed to have said that compound interest is the “most powerful force in the universe” but the evidence supporting this attribution is weak.
However, he would surely find it curious that we now live in a world of negative interest rates, where more than US$2 trillion has been invested in negative bond yields and banks are charging interest rates on deposits. Although the word deflation is constantly used in the media, the reality is still inflation, so whether measured in nominal terms or real terms there is no doubt that we live in a time where a certain group of borrowers are able to get paid to borrow money.
Since the driver of these interest rates is the cost of time, the financial sector has accidentally created a way for money to reverse the effects of time.
Besides being surreal, why is this important?
The obvious answer is that no serious investor should want to invest their assets into negative return assets if there are better alternatives. It is both a pessimistic view of the world and an inefficient use of assets.
Large companies are also taking a cautious view of the world, preferring to spend on share buybacks rather than new investment, with a record US$900 billion spent on buybacks and dividends in the US alone in 2014. In this case, share buybacks create the illusion of growth by shrinking the denominator, the number of shares outstanding. At an individual firm level, this can sometimes be the right strategy but can society overall shrink its way to prosperity?
For context, it helps to look at the size of investment at the opposite end of the investment spectrum, early stage companies focused on growth. Overall venture capital investment in the US was a record US$48 billion in 2014 and a closer inspection of the data shows that early stage deals received US$1.3 billion.
In today’s world, when the opportunities to create value through innovation are more exciting than anytime in history, society is investing the largest amount of money in the most pessimistic assets with the lowest expected returns and investing the least amount of money in the assets with the largest potential to create new innovation and highest potential returns. These are symptoms of a deeper problem: failure of the imagination.
As an early stage venture investment fund, this actually works better for us because it means less competition. Ultimately, however, early stage investment is not a zero sum game and so we would rather have more people invest to create more overall value.
Finally, if the perception is that there are no assets that can generate meaningful returns given the risk, investors are better off giving their money away because there is no shortage of social issues which have not been solved by markets.
Circling back to Einstein, some people may argue that he would be in favour of the current asset allocation by society because it appears to be made by rational decision making in a scientific manner. But his comments suggest otherwise. In Einstein’s own words, “imagination is more important than knowledge.”
I remember it like it was yesterday. My co-founder and I just left Yahoo!’s New York City office. It was October 31st, 2002, and we were happy because Yahoo! asked us if we would go exclusive with them on our yet to be released online service. At the time, Yahoo! was one of the largest players online (think Google today) and they were offering to resell our data on their site, potentially a lot of money that could possibly make or break our startup. We were at it for months with no revenue and without a salary and unable to hire some more talent, so this was a much needed shot in the arm.
When we got outside, I called my mentor and our investor to tell him the good news. He said: “ Cool! What minimums did you negotiate?” Minimums I ask? As quickly as I was excited, I was now deflated.
The Deceptive Value of an Exclusive Contract
The deal we had shook hands on with Yahoo! had the potential to pay well over $1m in six months. Not bad for a startup with no customers, right? Wrong.
My mentor went on to explain that if Yahoo! were to get an exclusive reselling deal, or even a non-exclusive deal for that matter, they needed an incentive to hold up their end of the bargain. If Yahoo! miscalculated the demand from their users, if their sales force did not engage with us and actively sell our product, or if market conditions rapidly changed, we could make nothing. That would force our startup to close its doors.
In order to create some incentives for the larger party on the other side of any exclusive or non-exclusive contract, you should structure the deal where at the end of the term there is a minimum payment to be made if a threshold is not met. This way you are protected and the larger party has an incentive to uphold their end of the bargain. If the larger party won’t commit to the minimum, they have little faith that they can actually deliver the value that they are promising and that is a bad sign. Typically you should ask for and get a minimum of about 20% of the initial agreement.
For example, let’s say that you negotiate a contract with a channel partner in India. They promise you $1m in sales per year and want an exclusive arrangement in India. Ask them to “put their money where their mouth is” and offer to pay a minimum at the end of the term if they don’t sell enough. If you stick to a 20% minimum, at the end of the year if they produced no sales, they still pay you $200k. If they produced $100k of sales, they would pay you $100k (the difference between the actual sales they produced and the $200k minimum.) If they produced $250k of sales, they pay you nothing as they have reached the minimum.
If the minimum is not enough to cover your costs or offset the opportunity cost of going exclusive, you should not do the deal. If you are a pre-revenue startup and the larger party wants to go exclusive globally for some time, you should also demand that they make an equity investment as well-to show that they are serious and have some “skin in the game”.
Did Yahoo! Agree to the Minimum?
My partner and I went back to Yahoo! and proposed a non-exclusive arrangement and a minimum. They agreed but took a long time to sign the paperwork and get started. In the interim we went to Monster.com, their competitor (we were talking to Yahoo!’s HotJob unit), and signed a similar deal, with a minimum. Within 6 months, we were earning about $1m in revenue from both parties! So glad that we did not go exclusive.
“Prediction is very difficult, especially if it’s about the future.” – Niels Bohr
The Decision
Imagine that you are a key decision maker at the dominant communication network in the world, having successfully grown through astute acquisitions and network effects. The company’s market value has increased by more than 100x in a short period of time and you are now clearly the market leader.
Along comes a new startup with a proposal, actually a founder and his angel investors who are short of money and are looking for a face saving exit. They are asking for US$100,000 in exchange for their business. Of course, their business has no revenue and their new technology looks like a toy. Your internal team is far superior and has concluded that there is nothing interesting. The chances of this new toy market taking off are extremely small. Finally, even if you needed to compete with them, you could move quickly. Therefore, you dismiss them.
This is no imaginary case. The dominant communication network is the telegraph, owned and operated by the Telegraphy Company. The investors are Gardiner Hubbard and Thomas Sanders. The founder is Alexander Graham Bell and the toy is the telephone.
Of course, it turned out that the incumbent underestimated the founder and his investors, the toy market was not a toy after all and even when the Telegraph Company entered the telephone market it could not win, finally transforming entirely to become a money transfer business.
Problems and Solutions
Why is story from history particularly relevant today? All around the world, incumbents are vulnerable like the Telegraph Company. A downward spiral can begin anytime as the number of startups continues to grow. What are the key problems and, more importantly, solutions for improving corporate innovation?
Problem #1
The smartest people are always and without exception outside of your company.
Solution #1
Build a diverse network outside of your company. This means more than simply going to conferences and collecting business cards. It means building strategic relationships with key players who have diverse networks themselves. The focus should especially be on people connected with early stage startups because that is the most diverse ecosystem and large companies are poorly equipped to try and engage directly with early stage startups.
Problem #2
The structure of power laws results in impact being more important than probability.
Solution #2
Focus on imagination, not knowledge. Knowledge deals with what has happened in the past. It anchors our reality, which is generally helpful for day to day living, but is relatively poor at dealing with power laws and high impact but low probability events. Imagination empowers us to think about the future without the constraints of knowledge. The best way to start building something like imagination is through habits, starting small at first.
Problem #3
The world is path dependent and small inflection points have significant consequences.
Solution #3
Experiment early despite limited information. It is tempting to rely on being a fast follower but, as the Telegraph Company found out, even reversing a decision quickly may already be too late. Instead, it is more helpful to have a portfolio of experiments. That way, you can be involved in potential breakthroughs before it is too late. In addition, even the unsuccessful experiments will result in some learning, building the foundation for better decision making.
Beyond Predictions
Rather than being discrete problems and solutions, all of these issues are related and can be integrated. The common theme is that large companies should to find ways to engage with the diverse startup ecosystems globally.
Of course, the actual mechanics of engagement are not trivial. Holding contests and events is helpful for marketing but does not really address the issue of deeper engagement. On the other extreme, starting a corporate venture capital fund is not simple. For most companies, the most practical route is to partner with early stage venture funds who can act as a bridge with startups.
Regardless of the implementation, all companies need to find a way to make better decisions about the future and their corporate innovation strategy in order to avoid being replaced by toys which transform into platforms.
Not only is it hard to attract talent to your startup (know any free developers in the Bay Area?), as a founder you also have to set the proper structure. A common saying is that you need a “Hacker, Hustler, and a Hipster” on the founding team. In the earliest days that makes sense, especially when you are MVPing and hustling for your first customers trying to find a product-market fit.
Sometime after you have product-market fit and raise a round of funding, you need to hire outside of the core founding team. A lot of founders struggle with the right roles to hire and what the proper structure should be. Some founders hire too many engineers (typically non-technical founders) and some founders hire too many “business” or “marketing” people (typically technical founders), leading to being lopsided in one area. Founders run the risk of being engineering centric or marketing centric in their product development. In reality they need to be customer centric and embrace the Holy Trinity of Product Development.
The Holy Trinity of Product Development: Dev Lead, PM, PMM
When it comes to product development, you need three distinct roles. Those roles are what I call the Holy Trinity of Product Development: Developer Lead,Program Manager (PM), and Product Marketing Manager (PMM). These three roles work together to represent the customer and build the business, ensuring that you are not too engineering focused or too marketing focused. The role in the middle of that fine line is the Program Manager.
Program Manager (PM)
The program manager, sometimes called product manager, is the most important role in the trinity. The PM manages the product definition by talking with customers and potential customers. A PM owns the UX and functional specs and is the chief customer advocate. A PM not only owns the product definition, but also its strategy, position in the marketplace, and if it is a new product, its go to market strategy. Internally, the PM has to coordinate the teams to get the product out the door. This means working closely with the PMM and business teams on what makes sense for the business. The PM can’t set pricing (that is the PMM’s job) but surely can influence it. At the same time the PM has to work with the engineering team to get the product built on time and on budget. While a PM is not required to have any technical or coding skills, the more technical a PM is, the better. At Facebook for example, all PMs usually can write a little Javascript code. This allows the PM to talk to the engineering team in their own language.
What is amazing about the PM is that they have no power or authority over the PMM or dev lead, all they can do is influence the engeneering and marketing teams. It takes a unique skill set to get this done.
Developer Lead
The dev lead has a difficult role to play insofar as they have to represent the engineering team to the PM and PMM as well as work on all of the “tech stuff.” The tech stuff includes: setting the development architecture, get their DevOps game on by organizing the build (doing things like Continuous Integration and Continuous Deployment), coding, and choosing the right technology for the job (Rails or PhP anyone?) The dev lead also needs to keep the engineering team together and motivated and make sure that the agile process is, well, agile.
The hardest part of the dev lead’s job is interfacing with the PM and PMM. The nature of startups is that they are resource constrained and always in a rush to get something shipped. That means an insane amount of pressure on the engineering team. It is the dev lead’s responsibility to work with the business (PM and PMM) in order to set realistic deadlines and proper expectations, all while not being the guy complaining about lack of resources. Not always an easy task..
Product Marketing Manager
While the dev lead represents the engineers and the PM represents the customer, the PMM represents the business. While the PMM is responsible for what all non-marketing people think of as marketing (ad campaigns, trade show booths, email blasts, product placement, media placement, etc), they are also responsible for the business model of the product and making sure that the product makes money (or reaches its broader goals if it is a loss leader.) This means setting pricing, and if this is a freemium product, that is far more complex than you can ever imagine. The PMM is ultimately accountable for the product making money.
The Right Balance
Some startups and companies are tempted to combine the PM and PMM role. This is bad! What happens when you combine these roles is that the focus usually becomes either too customer centric or too marketing centric; you need two people and two distinct roles to prevent this from happening. The right structure creates the right environment. The right people in the wrong structure is a waste of talent, they will not be able to use all of their talents, they will spend too much time fighting the incorrect structure. No amount of free massages, free lunches, and unlimited cookies will fix an improper structure. (Actually it is Google, Facebook, Linkedin, etc who have pioneered the Holy Trinity in Silicon Valley. They adapted it from the larger tech companies such as Microsoft in the 1990s.)
The right people in the right structure/environment is where the magic happens.
This may sound like a lot of overhead, however, you are probably doing this in some form already. Typically at the early stage, founders take on these roles and hire people to pass them off to. It’s a sign that your startup has matured and left the experimental phase.
Being an early stage investor is now a status symbol. For individuals, funds and companies. Unfortunately, not everyone should be an early stage investor focused on the seed stage. What are the key considerations?
How much time do you really have?
This is the first question for everyone, from small angel investors all the way up to large corporates. No matter how much money you have, your main constraint is actually time. The most common feedback from people who have just started to invest in early stage companies is that the time commitment was beyond their expectations.
Every single investment made takes significant time, both in terms of due diligence before the investment and, more importantly, support after the investment. To build up a successful early stage portfolio, diversification helps because of power laws and so at least 15 investments but probably closer to 30 is the right size. In addition, to even find a single investment, most investors should first look at 100 potential companies. When you multiply the time commitment through that funnel, it suddenly starts to look like a full time job for one or more people.
Where is your geography?
The traditional approach to geography in early stage investing is hyperlocal. The upside of this philosophy is the close contact with the founding team. The downside of this philosophy is that your universe of opportunities has been reduced significantly and you probably lose the broader perspective of what is happening in other markets. In today’s world, not having a global perspective is a competitive disadvantage.
Some investors, including ourselves, take a cross-border approach. While this provides a significantly larger universe of opportunities and a more diverse perspective, it is extremely difficult for most people to execute in practice. You need a team that is comfortable across both physical distance and cultural nuance. Most early stage investors are actually better off partnering with someone who knows how to do this rather than trying to replicate this skill set in house because it is not easy.
Who is your network?
Clearly the quality of your network will be a key driver of both your investment opportunities and the value you can provide after investment. In the past, having a network of strong connections to people in high places was the ideal. Access by itself was a key asset. As the cost of building an early stage startup has collapsed, the doors for everyone else have opened up. Knowing people in power will always be valuable, but it is not the most important feature of a network anymore.
Instead, the ideal network is diverse and connects small worlds with loose ties. This means spending time with different kinds of people across demographics and skill sets. Unfortunately, most investors are simply not experienced with diversity. If you do not have a diverse network, find someone who does and partner with them.
What is your value add beyond money?
Ultimately, money by itself is a commodity. At the early stage especially, where the capital requirements are smaller, having more money is not by itself a competitive advantage. In fact, the pressure of having large amounts of money to invest is actually counterproductive at the early stage.
Therefore, all early stage investors need to bring additional value beyond money. As discussed above, network diversity is a key point of differentiation. Domain expertise is another helpful factor and is fantastic when it works well. The challenge with domain expertise is ensuring that the investor is not trying to be an operator and run the business for the entrepreneur. It is important to ensure that investors understand the reality of what hands-on vs. hands-off really means. Ultimately, most investor value add is useful when it is complementary to the skills of the founding team, filling a gap. By definition, this is unique for each company.
Why are you investing?
If your motivation is to find a status hobby, you will be in for an expensive lesson. When it comes to hobbies, collecting classic cars would be cheaper and cooler. While this goes for individuals, the same logic applies for more sophisticated investors. Family offices who want to dabble in angel investing because of the fun factor may be attracted by the hype but ultimately will find it both less profitable and less enjoyable than expected. Even corporate investors, who have jumped in aggressively into venture capital, need to have a clear strategy. In all the cases, from individual angels through to the largest companies, it is important to have a deeper motivation than simply because of the excitement.
Some people invest simply to learn while of course many also want to make money. In both cases, you may actually be better off by investing in a fund or syndicate because having a more experienced investor will most likely result in stronger learning and higher returns as compared to simply making your own basic mistakes. The data shows that early stage investors fall into two categories: those who know what they are doing and those who don’t.
There is no question that we need more early stage investors. But before jumping in, ask yourself the above questions. If the answers still convince you to jump in, then go for it. If the answers create some hesitation, then find more experienced investors and partner with them so that you can still get the benefits without creating new headaches for yourself.
Everyone is talking about replicating and building the “next Silicon Valley” with the rise of Silicon “roundabouts” and Silicon “beaches” in several locations around the world. While this is going on very few people are talking about how Silicon Valley is evolving: specifically that Sand Hill Road is now the Wall Street of the West Coast.
The rise of the “Uber” Round
More and more tech startups are raising hundreds of millions or even billions of dollars in later stage “uber” rounds. (I call these the “uber” rounds as a play on the German for “super” or after the company Uber that has raised well over $4 billion in Venture Capital.) As of this writing, Lyft has just closed a $680 Series E. According to Crunchbase, Lyft is one of 20 startups that have raised $1B or more in venture funding in the past 5 years.
Companies are going public later and later, a trend started by Facebook; instead of rushing to an IPO, companies are staying private longer and are taking more and more uber rounds. (Some people think that these companies should be going public as the investing public can’t participate in the later stage growth, allowing the rich to get richer.) The average amount of money that companies have raised before going public has been going up, more than double since the 2008 downturn.
What is Going On?
Most pundits think that companies are staying private longer to avoid the hassle and expense of going public as well as regulations like Sarbanes-Oxley. While those are all reasons to stay private, the real reason is that Silicon Valley VCs on Sand Hill Road have evolved to grow larger and focus on late stage massive growth.
Typically an IPO is for massive growth. A company will get to a certain stage of maturity and then raise anywhere from $300m to over a $100b at an IPO. The IPO accomplishes a few things: allows early investors and employees to “cash out” and sell their shares to the public as well as provide much needed capital for massive growth.
Today companies are delaying the IPO and raising the growth capital with their uber rounds. On the surface this looks crazy. But in reality, it is genius.
Lean Startup and Uber Rounds
Let’s take a made up startup LeanCo as an example. Assume LeanCo already took a Series A ($8m) and Series B ($30m). Now they are kicking butt and are growing at the same rate as the other high performing startups. Say they have well over $250m in sales, expanding market share, healthy margins, and are expanding internationally. This is the textbook case for an IPO.
What would happen is that LeanCo would go to a big Wall Street bank and raise approximately $5-$10+ billion in an IPO. After all the costs and fees and the Wall Street bank’s cut, the company would have a lump sum of money, let’s just say $5b. Now the company has the war chest it needs in order to grow. Typically LeanCo will acquire smaller rivals, enter new markets, and build out new products and services.
Instead, the LeanCos are choosing to raise billions for growth before an IPO. Instead of raising $5b in an early IPO, they are raising $2-5b privately before a much later IPO (at a much higher valuation.) They are raising the money $400 or more at a time. Here lies the genius of this approach: LeanCo only raises what it needs, when it needs it in a private (closed) market that will provide a higher valuation than a public one. There are also other benefits to staying private during the growth stage, like not disclosing your financial health and spending to competitors.
For the investors, this is actually a much more conservative approach. By only giving LeanCo the money when it is needed and doing it incrementally, LeanCo has to operate in iterative cycles similar to the Lean Startup and Agile Development. For example, if investors provided LeanCo with $5b in one lump sum, LeanCo may spend it unwisely feeling that they have a lot of capital on hand. If investors give LeanCo $400m or so at a time, LeanCo will have to take an incremental approach. If LeanCo were to go under after an IPO, investors would lose all of the $5b. If LeanCo were to fail after raising “only” $2b, investors lose far less money.
The Post-IPO World
The VCs on Sand Hill Road in Menlo Park have changed the game. I remember in the .com bubble, the largest Venture Fund was $1b and the largest deal was around $75m. Now the VC funds on Sand Hill Road are all well over a few billon each and think nothing of leading a $500m round.
Eventually the startup companies are going public, however, that is only because at some point they have to in order for the VC investors to sell their positions and the employees to cash in their stock options. I’m sure that over time, Sand Hill Road will evolve past the IPO, where companies stay private forever and large East Coast financial institutions buy back those positions from the VCs and earn returns via dividends, etc. You are already starting to see the signs of this when large pension and investment banks such as Fidelity, T. Rowe Price, and Goldman Sachs are part of the last round of financing for companies like Lyft, Box, and Uber. In the future, you won’t be able to buy shares in a Facebook individually, but you will buy shares in a Fidelity “Silicon Valley” Mutual Fund. Silicon Valley is disrupting Wall Street.
What Does this Mean for Startups in Silicon Valley
We all know that New York City and Wall Street is the IPO center of the world. Did a startup have a competitive advantage by being located in New York? As a native New Yorker who built three startups in New York City, I can confidently say no. Mark Zuckerberg proved that when he showed up to his Wall Street pre-IPO meetings in his hoodie. When your company is ready and has the right numbers, the Wall Street Investment Banks will work with you, no matter where you are.
What about tech startups located in Menlo Park, Palo Alto, or Mountain View, close to Sand Hill Road? (Sticking to the geographical description of Silicon Valley.) Same thing, when your company is large enough to take the uber rounds, it does’t matter if you live in Menlo Park or Montana, or Mongolia, the VCs on Sand Hill Road in Menlo Park will work with you. You are already seeing this with startups being located in the City of San Francisco and not down south in Silicon Valley. The larger established companies such as Facebook (Menlo Park), Tesla (Palo Alto), Google (Mountain View), etc are down in Silicon Valley, but the young, early stage startups are up in San Francisco. This means San Fransisco is about the startups and Silicon Valley is about the money.
San Francisco is the new Silicon Valley. Silicon Valley is the new Wall Street.
