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Archive for the ‘startups’ tag

Startups and Libertarian Populism

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As more and more people look to the startup community to save our nation and our economy, it is only reasonable for things to get way more political. As more former bankers and teachers and rodeo clowns start companies, we’re witnessing the emergence of entrepreneurs as a political bloc.

But we are influenced by a different set of issues than the average partisan — H1B visa reform, patent reform, regulatory streamlining, et cetera — some of which haven’t yet been divided along partisan lines. In fact, it’s extremely difficult to assign the “entrepreneur’s agenda” to a traditional right-left spectrum. But this makes it even more interesting to attempt to arrive at some conclusions about the unique political beliefs of entrepreneurs.

However, some challenges. First, it’s notoriously hard to generalize anything about an entire industry. You can say that auto dealers and doctors tend to be conservative while teachers and scientists tend to be liberal, but technology-focused entrepreneurs are an even more diverse bunch. I’ve met founders who are die-hard socialists and others whose neo-conservative beliefs would make Glenn Beck blush. Second, politics is something that many founders simply don’t discuss in public. It’s tends to have a pretty poor risk-reward ratio.

However, I’ve seen a couple broad, fairly common threads among the political beliefs of startup founders, investors and early employees. I summarize them as “Libertarian Populism”, combining two political philosophies rarely seen together in the wild:

Libertarianism: A strong belief in individual freedom of thought and action. See the broad-based support for patent reform, creative commons licenses, regulatory reform (often de-regulation) and immigration reform.

Populism: The belief in the struggle of the people versus the “elites”, commonly represented by large corporations, specifically Wall Street. This tends to be particularly strong in developer-centric communities like Hacker News — most of the articles I’ve written that have hung on the front page for a while have had a strong populist streak.

But it’s more than just the independent adoption of these beliefs. Rather, libertarianism and populism are combined into a desire for freedom from all institutions, with little distinction between government and large corporations. After all, government and larger companies are both things that can (and do) harm small businesses. In many cases, government and big companies seemingly collaborate to attack startups: modern US patent policy, for instance, gives a massive advantage to enterprises with hoards of cash and lawyers.

Many entrepreneurs — especially the more common, cash-flow-focused entrepreneurs creating lifestyle businesses — consider their actions to be a declaration of independence of sorts from institutionalized corporate America and 9 to 5 drudgery. Yet the government’s rules tend to be written with the assumption that all companies are big companies, and the resulting administrative headache creates an antagonistic relationship between entrepreneurs and governments. Add to that the fact that big corporations — say, a health care provider — have similarly unfriendly rules, and the entirety of mainstream American institutions are thrown into the same bucket. Thus, libertarian populism.

This all has interesting implications. For instance, I’ve lately seen entrepreneurial populism leveraged to attack VCs. Take Chris Dixon, for instance, who has done a remarkable job leveraging his audience’s populist streak to paint VCs as the “other”. In reality, Chris is probably wealthier than most VCs — but he doesn’t have to answer to LPs, who are easy to lump into the government/corporate mob (and often justifiably so).

As our nation’s expectations of the startup community grows, expect the politicization of entrepreneurs to only deepen.

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Written by Brad Hargreaves

September 3rd, 2010 at 7:44 am

How Entire Industries Become Unethical

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Every office building in New York City grows by a few percent per year. Each stuffy pre-war tower, art-deco complex and shiny corporate center. They’re all growing, like those Kafkaesque SimTower projects that added a few lone offices to the roof each quarter when the rent came in.

Except they’re not actually growing — just adding more space on paper. All office buildings in New York City add a few percent per year to their official square footage, often in lieu of raising rent. So if you are a startup paying $30 per square foot for 1,000 square feet of office space and need to renew your lease, it is more likely that your landlord will claim that your office has grown — perhaps to 1,050 square feet — than attempt to raise your rent.

This is simply the way the commercial real estate world works, and it’s second nature to people in the business. All buildings grow every year — it’s called “loss factor“. But to someone who isn’t familiar with commercial real estate, the concept is completely absurd and unethical.

What makes it seem particularly wrong? Well, square footage isn’t just some abstract number. It’s a real measurement of area. Burger King can claim that a new line of burgers is “50% tastier” regardless of reality, but they would step over the line if they claimed that these same burgers had 50% less fat unless that were actually true. “Tastiness” is a subjective, abstract concept. “Fat” is not.

Somehow, over the course of the development of the commercial real estate industry, square footage has converted from a concrete unit to an abstract unit in the minds of people in the industry. But to the rest of us, square footage remains a concrete measure of area. When I hear 400 square feet, I think of a room that is 20×20 or 40×10 or perhaps even 4×100. When someone in commercial real estate hears 400 square feet, he or she thinks of a space they can lease for $12,000 per year at $30 per square foot. It doesn’t matter how big the space actually is.

Now that we’re here, I don’t see things getting any better — the Nash equilibrium of the situation is for each player to continue increasing the “size” of their spaces by a few percent per year. If one landlord bucks the trend, they’ll need to correspondingly raise their rent per square foot to stay competitive with other landlords. But if everyone else is smudging the size of their buildings, why should you stop? It just means that anyone who wants office space in New York City has to figure out this bizarre system — or get screwed.

So how does this kind of thing start? First, it’s important to recognize how commercial real estate is leased. A commercial space shares a nasty problem with an airline seat: a product that is not a commodity yet is bought and sold as one. In most searches that brokers perform, they are given a price cap by their clients — say, $35 per square foot. If a space falls above that cap, it simply isn’t shown to the client. Thus, a landlord (like an airline) is heavily incentivized to keep their price as low as possible to get visibility in front of lots of potential tenants. The other shoe can drop once the tenant is in the door. This is all analogous to bag check fees, ticketing fees and the other unpleasantries of 21st century air travel.

Therefore, landlords will try to throw as much as possible into the square footage to lower the all-important “cost per square foot”. Initially, the included items were somewhat reasonable — shared bathrooms, hallways and HVAC. In fact, that’s how loss factor is still explained by most brokers. But then someone decided to include not only hallways, but the elevators. Another landlord responded by including not only the elevators, but the lobby and delivery bay. Pretty soon, it got so complicated that square footage became an utterly abstract, meaningless number in the minds of anyone involved in the industry. The square foot was no longer a concrete measure of area.

I don’t think most people in commercial real estate are unethical. Rather, the industry has adopted unethical practices due to a combination of individually innocuous factors: the characteristics of pricing, selection and demand. The airline industry is also clearly trending in this direction, as is higher education. Once an industry is at the bottom of an ethical slope, it is ripe for disruption by young companies that can sell through an honest, straightforward process.

Like this? Vote for it on my favorite news site, Hacker News.

Written by Brad Hargreaves

August 28th, 2010 at 9:01 am

Learning from Failure is Hard, Learning from Success is Harder

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Unqualified lessons are hard to wring from startups. It’s difficult to really understand something without doing it, and no two people who do it have identical experiences. That said, I’ve seen two schools of thought on how to learn from others’ startup experiences:

1) It’s best to learn from success. Stories of failures have no prescriptive advice on how to accomplish something. Stories of success, on the other hand, offer models to copy.

2) It’s best to learn from failure. Success is fairly random, whereas failure usually happens for distinct reasons.

First, anyone thinking of starting a company should take lessons from wherever they’re available — successes, failures or those yet to be determined. But given a choice, the best lessons come from failure.

I’ve stopped thinking of a startup as a discrete success or failure. Rather, a company is a series of small (or big) successes and failures, one side of which eventually overwhelms the other. Some failures are singular and crushing — taking on a bad co-founder, for instance. Others are subtle and can sit under the radar for years, even in companies that are otherwise successful. Poor initial equity distribution or choice of corporate structure, for instance.

That said, most companies aren’t killed by one overwhelmingly bad decision. They’re killed by dozens of bad decisions that pile up and stick the company in an unrecoverable morass. These small, could’ve-gone-better decisions offer the best startup learnings, are the exact lessons covered up by success.

Take one of the greatest entrepreneurial success stories of our generation — Facebook. Clearly, Facebook did some things right. But they also did a whole lot of things wrong, and it’s hard for anyone to determine how much more Facebook could’ve screwed up before they would have doomed their chances to win the social networking wars. It’s entirely reasonable that they could’ve blown any number of decisions and still come out on top.

On the flip side, copying success is tricky. Let’s look at Facebook again. The most difficult thing about copying Facebook’s success (or any company’s success) is not deriving the factors that led to their success, but figuring out the level on which they should be copied. For instance:

Level 1: Facebook was successful, so I should copy what they created: a new social network. Good luck with that one.

Level 2: Facebook was successful, so I should copy their operational or strategic decisions for my own idea. As I pointed out above, it’s not obvious that Facebook made great operational or strategic decisions.

Level 3: Facebook was successful, so I should copy their methodology of thinking about ideas or products. This sounds high-level enough, but how does one execute on it? Does anyone know what goes on inside Zuckerberg’s brain? More practically, are those thoughts relevant to your product as opposed to a walled garden social network?

On the theme of translating theory into practice, I helped create Founders at FAIL, a forum for entrepreneurs to talk about their failures. Think Founders at Work, but all the stories have unhappy endings. I’ll be speaking there (along with GoCrossCampus founder Matthew Brimer) on August 18th.

Written by Brad Hargreaves

August 9th, 2010 at 6:22 am

Your Decisions are Wrong. Is Your Methodology?

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I made a lot of mistakes while running GoCrossCampus. Lots of people ask me questions that more or less amount to “If you could have done X differently, what would you have done?”

I always answer these questions sincerely. “Oh, I would’ve done A rather than B and C rather than D” or something like that. But in the back of my mind I know that counterfactuals make for odd teachers. That is, the information I have about the specific problem has obviously changed — and the more interesting lessons come from shifts in my decision-making methodology.

These “If you could have done X differently” questions are essentially asking “If you knew back then what you know now, how would the decision you made have changed?” Interesting, yes. But the information that led to the decision — for instance, my beliefs on the marketability of a product or the right way to scale an app — isn’t that useful. Rather, the juicy bits are the framework through which I took the information and produced an actionable plan. Consider the following question:

If you could do it again, how would you structure your financing round?

And answers:

I would’ve clearly taken a priced round rather than a convertible note given the difficulty we had in closing the round.


Given the information I had at the time, I would not have done anything differently. That is, even though my information was wrong, my decision-making methodology was sound.

In other cases, my methodology may have been wrong yet my decisions right — something we in the business call “getting lucky”. But those two replies are answering the question on different levels. One is concerning facts — the who, what, when, where and how of the situation at hand. The other is concerning methodology — given the facts at hand, how did I come to a decision?

When evaluating past decisions, too many entrepreneurs focus on the facts rather than the methodology. Methodology is replicable. The mental algorithms I use to convert data into a decision are used over and over again. Data is all too often ephemeral and unrepeatable, and condemning a decision-making methodology that was plagued by bad data is often a quick way to take a step backward (or vice versa, endorsing a poor system that got lucky due to circumstance or poor data.)

Focusing on the methodologies rather than the facts will allow you to see patterns and make better decisions in related but non-identical situations. If I get hit by a car, it would be odd to simply say “Wow, next time I’ll see the car.” Rather, I’m going to make fundamental changes to the way I think about crossing the street — specifically, how I gather information and translate that information into actions. Why should a startup be any different?

Written by Brad Hargreaves

August 1st, 2010 at 1:32 pm

Venture Fundraising in Four Graphs

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Relating investors on board to chance of ever closing
Comparing months you've been fundraising to your chance of ever closing
Comparing Active Investor Conversations to the time cost
Comparing Hope and Time

Written by Brad Hargreaves

July 25th, 2010 at 1:21 pm

In Defense of Lifestyle

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You don’t have a company. You have a job.

- Yale prof and Honest Tea founder Barry Nalebuff, to me, September 2006

I was in college at the time, running a small antique furniture reseller called Aloysius Properties on the side. Aloysius was a fun business. We realized that Ivy League schools, especially our own Yale, were selling their turn-of-the-century-era wood furniture at fire sale prices as they renovated libraries and classrooms. Aloysius bought as much as we could get our hands on and sold it online at significant markups — a 20x multiple wasn’t uncommon in addition to a 15% shipping and handling fee. And our customers (almost exclusively wealthy southern women) were thrilled to have these pieces of academic history.

It was very much a lifestyle business in every sense of the term. Specifically, the founders (Matt Brimer and I) wanted a business that threw off a decent amount of cash with minimal hourly involvement — that is, a business to support our lifestyles as college students. And it was a total break from our college lives spent staring at books and screens — buying furniture out of university warehouses, physically moving inventory, talking to customers and coordinating shipping was different and exciting.

But this kind of business went over with the pre-Lehman Yale crowd like selling crack in New Haven grade schools. It was gross, physical labor — a waste of our precious mental resources that would surely be better spent pricing derivatives or being flown around the world by McKinsey. In more precise terms, Aloysius would not get one laid.

The university did have a nascent startup scene. Innovation was encouraged, and traditional jobs in high finance and consulting were held in slightly less regard. But there was a parallel problem in the Yale startup community, one that effectively took the place of the larger university’s fetishization of high finance. There was the palpable sense that unless you raise significant capital, you’re not running a real business.*

This left Aloysius high and dry. Matt and I abandoned the business in early 2007, choosing instead to focus our efforts on raising venture capital for an online gaming startup, GoCrossCampus. Things didn’t turn out badly — my next company, PayoutHub, was acquired earlier this year, albeit not for fuck you money.

Since then, I’ve slowly getting back into “lifestyle-like” cash flow businesses. It’s entirely possible that I’ll see an opportunity in a company to take it to the next level and scale it into a venture-fundable blow-the-doors-off next-coming-of-facebook success. But I don’t have to, and there’s nothing wrong with covering my downside by starting with the goal of building profitable companies and seeing where it goes from there.

As a caveat, scalability of personal involvement is important. This is the difference between a job and a company — and helped spell the doom of Aloysius. Aloysius Properties was not only a personnel-heavy business, but it would’ve been difficult to pass off to an intern with minimal instruction (my litmus test for cash flow businesses). If you can’t pass it on to an intern with fewer than a few hours’ per week involvement, it’s probably a job. As you might imagine — and contrary to our beliefs at Yale — the litmus test has nothing to do with raising venture capital.

* Over the last few years, the Yale Entrepreneurial Institute has done a great job shifting this culture. One of last year’s businesses was a grilled cheese restaurant. Cool.

Written by Brad Hargreaves

July 18th, 2010 at 1:45 pm

The Future of Gaming

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I write a lot about where the gaming industry is headed — specifically as it relates to building game mechanics into non-game apps. Past posts have talked about serious problems in the current thinking about “gameification” and the next game mechanics to be implemented across the internet.

Next week, some of these thoughts will be brought into event format. The New York Gaming Meetup is partnering with the Y+30 to host a panel event on the Future of Gaming at 92YTribeca in New York City. Specifically, we’ll be looking at what gaming will look like in thirty years. If you’re interested, RSVP here. Panelists include Ben Feder (CEO, Take Two Interactive), Stephen Totilo (Editor, Kotaku), and Eric Zimmerman (CEO, GameLab). I’ll be moderating (read: desperately attempting to keep mental pace with the panelists).

It should be a fascinating event. Sam Lessin’s Y+30 always brings a unique outlook to these things by stretching the scope our projection to thirty years. In the words of Bill Gates:

We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.

The Y+30 tends to be conscious of this quirk of the human mind — and accounts for it. It’s hard to project out thirty years without getting into the realms of sociology, psychology and philosophy (often in that order), so you have to be prepared for a wide-ranging discussion.

While I’ll save the best parts for those of you who attend the event, here are some topics I hope we’ll cover:

The future of the console. Will independent gaming consoles (or their analogue) exist in thirty years? Are full-body inputs the way of the future?

– Relatedly, what platforms will be most important to the gaming industry in thirty years? Will mobile gaming dominate?

– What features will be most important to gamers in thirty years? What trends will we want to read about?

Games and Society. Will the prevalence of online games for younger and younger children change the way those children interact with games (and the web, and society) as teenagers and adults?

The expansion of game mechanisms to non-gaming apps. How far is it going? Are we going to live in the world of Jesse Schell’s vision?

– Will people develop an immunity to traditional game mechanics? If so, how will this impact other aspects of life?

I’m sure plenty more will come up. Hope you can join us.

Written by Brad Hargreaves

July 13th, 2010 at 12:19 pm

The Next Generation of Game Mechanics

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I’ve already had a few things to say on the coming explosion of game mechanisms in non-game apps, but listening to Gabe Zichermann talk at last week’s New York Gaming Meetup raised some new questions.

I agree with Gabe on a lot of things. We’re absolutely seeing a proliferation of game mechanics throughout the internet, and the resulting points or badges are totally divorced from real-world value. But everything I’ve heard on this topic has presumed that most of the innovation in game mechanics has already happened; that the real advances will be in applying points, leaderboards and badges to anything and everything on the internet. In other words, we’ll see a world of thousands of companies replicating a limited pool of “proven” game mechanics to guide user behavior. There have even been entire companies formed to help companies stick points and leaderboards on their apps.

It’s a crock of shit, really. There is a whole world of compelling game mechanics out there, only a small part of which is the Activity > Points > Badges flow that Foursquare nailed. Game mechanics are going to expand throughout the web, but they’re going to diversify and incorporate a wealth of varied engagement strategies as they do. Different tactics work for different people and different sites, and consumers will demand diversity and deeper engagement as they become more hardened to “vanilla” game mechanics.

So what are these next-gen game mechanics, you ask? Here are a few I think we’ll see much more often:

Building and Growing: Most people like to build and grow things. You can chalk the psychology up to our agrarian past, but Ford knew this when they put a virtual tree into the Fusion. Leaderboards feel like a zero-sum game, and many people will respond better to a mechanism that feels more collaborative. Like growing a tree, for instance.

There’s a corollary mechanism to this — building or growing something that can help you play the game better in the future — that could be particularly powerful. This mechanism is analogous to building a strong base in a RTS game. People are doubly motivated to do it since it puts their involvement in the game on an exponential growth trajectory.

PvP Competition: This is a no-brainer. People can be motivated by leaderboards and badges, but it’s nothing compared to the passion you see in player versus player competition. That said, this is somewhat psychographically specific — lots of people have no interest in direct competition with other players, and I imagine that designers will initially approach PvP competition in non-game apps with a lot of caution. But I can’t see it staying on the sidelines forever given its power.

Real World Rivalries: I experimented with this in GoCrossCampus a few years back, and I still think there’s really something here. As I mentioned above, many people love to play games against other live players (whether asynchronously or in real-time), and real-world rivalries only accentuate the power of this mechanic. Your leaderboard isn’t doing enough to engage users? Let players represent major sports teams or their colleges and see which team/college is the best! Use real-world rivalries and your app can piggyback off your users’ natural loyalties and affinities.

Leveling: I’ve seen some non-game apps using this already — such as online forums that reward activity by “leveling up” members based on post count — but it’s still woefully underused. Levels give people goals, the lack of which can be the death of a traditional points-based reward system. If members don’t think they’re working towards anything other than more points or a slightly better place on the leaderboard, they probably won’t hang around too long. Social game developers know this well; it’s worthwhile to study the leveling system that Farmville uses to keep players from leaving in the early stages of gameplay.

Chance: When “gameifying” apps hits the mainstream, incorporating elements of chance into these game structures will be a big deal. People in the tech and media world like the meritocratic, deterministic nature of Foursquare, where points can only be earned, not “won”. But normal folks like to win and will often value a chance to win something valuable over something small and guaranteed. Game designers aren’t blind to this, and the game-based apps of the future will absolutely allow users to wager their virtual currency and tokens.

There are more, but this is enough to argue my point. It’s hard to imagine any of these tools not being used on a large scale over the next five years. Marketers and developers must stop mimicking points and badges and start thinking about how game mechanics integrate with their apps on a fundamental level.

Written by Brad Hargreaves

July 6th, 2010 at 6:52 am

Going Through Walls or Around Them

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I was having breakfast with a friend earlier this week, and we were talking about his business. Specifically, his relationship with his co-founder. Here’s how he summarized it:

There’s one key difference between us. When I see a wall in front of me, I try to figure out how to get around it. Should I scale it? Go around it? He doesn’t do that. He just walks through it.

A bad thing? No, actually, quite the opposite — it makes them a great team. Walls can be scaled, circled, tunneled under or simply plowed through. But as an entrepreneur, you have to get to the other side of any obstacle, and having as many tools as possible at your disposal is a good thing. If one strategy doesn’t work, you need the ability to try at least a few others on the road to cracking a tough problem.

It’s been said before, but it’s worth repeating: bring different personalities onto your team. Bring different backgrounds. Hammers see everything as nails, et cetera, and it’s impossible to totally check your biases at the door. The best you can do is bring together an interesting combination of biases.

Written by Brad Hargreaves

June 27th, 2010 at 6:36 am

Why They Don’t Answer Your Emails

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Occasionally, people don’t answer my emails.

Realizing that this is a fact of life — and an inevitable part of being an entrepreneur — has been one of the toughest things to wrap my mind around. When I was getting started, it was an insult. I came straight from a world (college) where people received possibly twenty relevant emails a day, and not answering any one of them was an intentional slight. But realizing that the startup world simply doesn’t work this way this was step one.

Step two — which is still in progress — is figuring out why people don’t answer my emails. That’s what this post is about.

(Step three, for the curious, is not answering all of my own emails. I’m really sorry.)

These are observations I’ve made from years of “warm” emailing acquaintances, potential partners, investors and people I met at conferences. This isn’t about cold emailing or email campaign optimization. I assume those people don’t email you back because they don’t know who the fuck you are. As always, your mileage may vary.

Finally, “Busy” is not a sufficient reason for the purposes of this list. Everyone is busy.

1) They’re embarrassed. I think this is the single least-understood reason why people don’t answer their emails. I do this a lot, and I know a lot of people who fall victim to the same pattern. If I’ve been bad at responding to someone, and I’ve sat on an email for three weeks, the chance that I’ll respond with each passing week grows smaller and smaller. If I email them, I’ll simply remind them of how long it took me to respond. Allie Brophy mentions this in her latest wonderful post.

The Fix: Push them. I’ve found that this is often an ideal situation to suggest an in-person meeting. Coffee or drinks can be scheduled well in the future, and removing the tension of a broken line of communication may actually re-open the dialogue in the meantime.

2) They don’t want to deliver bad news. Saying “no” sucks and — in many situations — little is gained by doing it. Turning someone down is difficult, which is why many people make their assistants write those notes. If someone doesn’t have an assistant or simply doesn’t care what you think, the rejection email isn’t getting sent.

The Fix: There’s often nothing that can be done here. Gentle reminders can get you to a clear “no”, but identifying this situation early and taking the hint can save you time. That said, I think many entrepreneurs greatly overestimate how often this is the reason for a non-response. Many people assume that someone isn’t interested when in fact one of the other reasons on this list is delaying the response.

3) They’re preserving option value. This is a corollary to (2) and is very applicable to VCs, but it requires a different response tactic. This is one of the most annoying things that VCs do, but it’s actually much more common than getting a simple “no”. VCs’ reactions to most pitches fall somewhere between “I’m writing the check now” and “security will escort you from the office”. For these median cases, they’ll only write the check when they see a term sheet from Sequoia, but they’d like to preserve their ability to invest in case Sequoia actually gives you a term sheet.

The Fix: Convince them that the train is leaving the station — they should make a decision or forever hold their peace. Investors are coming in, a strategic is interested, the round closes on X date, etc. This is hard to do but is really the only way to get out of this hole. But do it quickly or else the deal will get stale.

4) There isn’t a clear ask. I occasionally get messages that I’m not sure what to do with. Am I supposed to respond to this? Forward it? RSVP to an event? Help me out here. If I’m not sure what I’m supposed to do, I’m probably not going to do anything.

The Fix: Clearly state what you want in the first 1-2 lines of the email. It’s really that simple.

5) There’s no value proposition. Some people will do things out of the kindness of the hearts, especially for people they’ve met. Others won’t.

The Fix: I always try to tie my emails back to some kind of benefit the recipient could see down the road if they respond to my email. There are pluses and minuses to doing this — some people are more willing to help you for the sake of helping you than enter into some kind of vague trade — but in all I think it’s a positive.

6) Politics. Sounds weird to an entrepreneur, but responding to emails at-will is politically difficult in a lot of organizations. A low- or mid-level employee could get in a decent amount of trouble by even hinting at something that may not happen, whereas they probably won’t catch any flak by simply not responding.

The Fix: This is the toughest to overcome. Often it means you are approaching the wrong person in the organization, or you need to approach multiple people. Or perhaps there’s nothing you can do and you should just wait. It really varies based on the organization and situation.

Any others I’m leaving off? Why don’t you respond to emails, fair reader?

Written by Brad Hargreaves

June 20th, 2010 at 2:01 pm

Welcome to New York, Paul Carr

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If you haven’t read Paul Carr’s piece on his experience at New York Internet Week, go read it now. If don’t have time, I’ll summarize. Paul’s interaction with New York went something like this:

1. Media tool gets invited to New York by other media tools
2. Media tool goes to an internet week party populated by “identically unique hipsters”
3. Media tool only sees other media tools
4. Media tool goes back to the ‘burbs and writes shit about New York

Well. He argues that good content is dead, so at least he’s eating his own dog food. But he does get some things right. Old media is dying, and lots of people don’t understand how it’s dying. Many of those people hold on to false hopes that the bright shiny piece of technology of the day (social media, the iPad, Web 3.0) will save their shitty business models. Many of those people are in New York. He’s totally right on there.

But he’s the equivalent of a European tourist who visits Disneyland and thinks it is an accurate representation of America. He goes to an Internet Week party and thinks he gets it. Well, people who are actually creating interesting tech companies in New York don’t go to those hipster-filled digital / new media parties because they are clogged with PR reps, “content creators”, glassy-eyed social media strategists and starfuckers. Or they aren’t even aware of these panels and parties — as I’ve written before, the New York tech scene is huge yet strangely siloed, with founders aligning with particular industries rather than the broader “tech community”.

But — in Paul’s defense — the media world has used its superior resources to more or less occupy “high profile” NYC tech. If you go to a “tech” or “internet” event in the Valley, you’ll meet tech people. If you go to a similarly branded event in NYC, you’ll meet media people. And you’ll think there’s nothing to New York tech beyond hipsters and old media dreamers*.

Want to meet New York tech? Head over to Hackers and Founders or the Y+30 or NextNY. You’ll meet awesome people there, but they won’t fly you out. If you insist on having your ticket paid for, you’ll end up in the same media bubble-world you unfortunately fell into this time around.

* Many in nyc new media are great people, and quite a few are my good friends. But they aren’t what Paul Carr is looking for at a tech event, and those are the buckets he’ll throw them in.

Written by Brad Hargreaves

June 14th, 2010 at 9:49 am

Incentives and Carried Interest

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The House recently passed a bill to tax carried interest at the higher income tax – rather than the lower capital gains – rates. This has generated considerable consternation and debate in the venture world and somehow led to Chris Dixon asking Jim Robinson to go fuck himself [1]. In brief, taxing carried interest – the “profit share” that money managers take from any positive returns they make – at income tax rates would increase the tax burden on VCs and possibly lead to changes in the way VC funds are structured. Some smart people think this is a good thing, as it seems a bit silly for money managers to receive a government subsidy at a time when there are so many money managers.

Let me add some thoughts into the mix [2]. First and foremost, I don’t really buy the argument that taxing money managers at a higher rate will directly lead to a decrease in capital flowing into funds. Pension funds, endowments and high net worth individuals still have lots of money, and they’re willing to pay someone to manage it. I may be wrong here, because I don’t pretend to understand all the subtleties of the system, but this is not the argument that speaks to me.

But I do believe that people respond strongly and (fairly) efficiently to financial incentives. Over the past two decades, some of our nation’s smartest people have gone into banking and private equity because you can make great money there. If science and engineering had the same compensation structure and magnitude as high finance, we’d have a lot more scientists and engineers.

Fred Wilson uses this argument as he writes in favor of taxing carried interest at a higher rate. If it were less lucrative to be a money manager – the result of this tax increase – fewer of our best and brightest would become money managers. On the surface, that seems like a good thing. And it may be. But one of the things that makes the American startup scene great is the number of smart VCs out there. Sure, VCs come in many flavors – some are brilliant folks dedicated to supporting entrepreneurs, and others are idiots. But the last thing we need is to turn VCs into mutual fund managers – the bottom of the financial hierarchy with minimal alignment with their investors or incentive to perform. Mutual fund managers don’t take carried interest, just a management fee. Because of this and other factors, mutual fund management is one of the least lucrative executive positions in finance and is staffed accordingly.

I don’t want to see venture capitalists without significant carried interest – timid, risk-averse and totally misaligned with the interests of entrepreneurs and LPs. This will inevitably lead to lower returns – and an eventual decrease in money flowing into venture capital, and by association, startups.

Money managers are given the task of allocating the free world’s capital. Their decisions of where to put that capital to work have an overwhelming effect on our nation’s growth, development and standard of living. There’s a strong argument to be made that they’ve been doing a terrible job of late – rather than investing the past decade’s excess wealth in infrastructure, science and technology, they decided to build houses in suburbia that now lie vacant, rotting in the Sun Belt summer. There’s a growing body of research showing that this choice will have a significant impact in our nation’s economic growth and competitiveness for decades to come.

I want the smartest people in the world deciding which companies have a chance to succeed or fail. There’s a problem in money management, but I’m not sure increasing taxes on the managers’ incentive to succeed is the right answer.

[1] Matt Mireles’s post on this exchange is totally worth reading.

[2] I don’t really have a dog in this fight. Tipping Point doesn’t manage a fund of outside capital, and thus we don’t make any money from carried interest. I don’t personally invest in venture-fundable companies, so I’m not secretly hoping that VCs get weaker so I have access to better deals. I really just want to see a thriving startup ecosystem that leverages technology to drive fundamental change.

Written by Brad Hargreaves

June 13th, 2010 at 10:13 am