Advise me on NY finance vs. Silicon Valley startup scene

andrew_null · Post by **andrew_null** » Fri Nov 09, 2007 6:59 pm

My friend sent me this thread and I thought I'd chime in. I previously worked in venture capital for about ~2 years, most recently as an Entrepreneur in Residence at Mohr Davidow Ventures (early stage $2B on sand hill road, formed in 1983). I've spent about 4 years working in operational roles, including starting something up right now. (Here's my blog: http://andrewchen.typepad.com/)

Couple comments on the thread:

- The startup world is neither a path to riches nor a path to abject poverty. Like other professions, there are huge divergences in skill, but unlike many professions, you OWN all the value you create. Thus, really good people capture a ton of value, and bad or mediocre people eventually quit. Finance seems similar to this, which is good, but seems to require more work to start to own all the value.

- In the VC community, which is biased towards successful entrepreneurs, I know dozens of guys that have built fortunes ($50MM+) in startups. The bay area is different because you have generations upon generations of successful entrepreneurs that succeeded in semiconductors, telecom, enterprise software, consumer software, consumer internet, SaaS, etc., etc. That degree of history, immersion, and communal knowledge is not available anywhere else in the world.

- The most "famous" startups that you hear about are very biased towards being consumer companies - there are lots of boring enterprise software companies that make tons of money that no one ever hears about. With the right insight, any of you guys would have the credibility to build out a financial software/services company and get it funded out here, I'm sure.

- Nobody ever does startups for the money... it's way way too hard, and the variance is too high. If the most important thing to you is making money, stay in NY. Startups are more akin to art, where some percentage of the time you get funded and then you can pay yourself a normal salary. But the rest of the time, you are always dabbling on new ideas and trying to get stuff off the ground. People that do startups inherently love it, and would be doing it regardless of their financial situation.

- People get into VC a bunch of different ways, but basically you establish yourself "in the community" as someone who understands tech, and you get picked up when a firm is in need of a partner. It's a very rare thing to join at the partner level. Joining as an associate is easy with the right experience, but you pretty much get a job for 2-3 years and have to leave after that. You do see a lot of entrepreneurs that both succeeded or failed. In fact, you have a bunch of failed entrepreneurs floating around because that experience is rare and invaluable, and will aid them in their next company.

- Paul Graham is great for raising awareness of the startup scene, but people in the community don't go to him for money. Most of his kids are new to the scene and need the help and confidence to get started. It's better to hang out for a while, meet a lot of new people, and raise from established VCs in my opinion.

- If you were in NY, and wanted to join the startup community out here, the best way to do it is to either:

1) move out here and network, since there are jobs galore coming left and right

2) move out here and join a big company (google/yahoo/etc)

Once you have about 6 months or so familiarizing yourself with the area, it'll be easy to break off and do your own thing. The VCs and top-tier entrepreneurs are very accessible here, you just have to e-mail them or meet them at conference.

You can find my email from my blog if any of you end up out here.

cekpet · Post by **cekpet** » Fri Nov 09, 2007 8:21 pm

>Nobody ever does startups for the money

Yeah, fucking commies in our midst

btw, name one recent successful startup in the area relevant to trading/portfolio management/risk management

sfca · Post by **sfca** » Fri Nov 09, 2007 9:15 pm

It happens. I have an example but can't tell you the name without making it obvious where I work. A trader here left, started his own company to write wealth management software and was wildly successful. At the time I mentally sneared at him because I knew way more than he did in the subject. I suppose he just hired the correct people and went from there. What is that old saying that the worst hell on earth is that of neglected opportunity.

DrTarr · Post by **DrTarr** » Fri Nov 09, 2007 9:18 pm

sfca - There is still plenty of opportunity!

jslade · Post by **jslade** » Sat Nov 10, 2007 12:55 am

cekpet wrote:

[i]"name one recent successful startup in the area relevant to trading/portfolio management/risk management"[/i]

Ooo, ooo: I can name one!

http://www.financialengines.com

Of course, it was started by Bill Sharpe, so maybe it doesn't count. And, frankly, I don't know how successful they actually are. Compared to the P/L of a mid sized hedgie, and the type of fortunes people think of when they think of .com lotto, probably not so much.

The other one that comes to mind is Starmine, but they're really "last man standing" out of about a zillion little such companies made up of Stanford OR graduates started in the mid 90s, and I don't know how profitable they are.

I think 'andrew-null' has some good points, though like all people who lived here through the .com stuff, he underestimates how difficult it is to make a company which does stuff which is held up to real success criteria (like finance). Example: military contractors. What they do, making Martian death rays and new kinds of radar and such, is considerably more complicated, and held to a higher standard of success than, say, selling petfood online, or writing a dumb database schema for X type of business. Oh sure, we all know the $400 toilet seat jokes, but the reality is, the military doesn't give you money for stuff which doesn't work. Also, the exit strategy for companies with real products is far different than .com lotto. Lockheed isn't going to think about buying Yoyodyne Martian death ray company until they have a very profitable product line (rather than a website idea which may or may not eventually gain 'traction'). At that point, why sell?

Nonius · Post by **Nonius** » Sat Nov 10, 2007 5:41 am

how's sharpe's company doing? I had a friend who was writing swaps pricing software who left a fairly established software co in SV to be employee 4 or 5 at that place. sounded like a lame idea though- port optimization for 401ks or something like that.

anyway, Roger Lang probably walked away with 100MM when he took infinity public. so, there are success stories on the financial software side.

jslade · Post by **jslade** » Sat Nov 10, 2007 8:47 pm

I don't really know how well they're doing at FE. I strongly suspect they're one of those companies who are profitable, or close to it (and so, not worth abandoning), but whose growth rate is mediocre.

That's one of the start up dangers that nobody talks about. What if your idea is sort of OK enough to make a living for you and some other people, but no better? Do you want to be chained to your mediocre idea for the next decade or more, looking for an exit strategy? I know quite a few guys this applies to. Their lives don't exactly suck, but I'm sure it isn't their dream of .com lotto and ultimate power; and they're more stuck in their positions than most employees, especially if they took big chunks of VC.

svquant · Post by **svquant** » Mon Nov 12, 2007 7:56 pm

Ah - the walking dead, not big enough for an exit (even a merger) and not a failure that it warrants a shut-down... there are many of these out in the valley. Every now and then one pops its head up and actually does something that creates an exit for those involved - although always with a nasty reverse split or having early investors & employees washed out in a recap.

As for successful financial startups - Infinity was very successful not just with an IPO but then the buy out on top of that by Sunguard. There was CATs too - which was okay. Also, one forgets Advent - which by all accounts was very successful especially as measured by their pre-IPO investors.

Don't know the details of Financial Engines but I'm sure it is not great - just been around too long without any big win or announcements, raised a lot of money at a high valuation in the early days (due to Bill being involved and the dot-com bubble) - it's capital structure just has to be ugly based on the external signs. Also, they have morphed their model from software and SaS to actually being an advisor and offering managed accounts. This appears where they are heading which is just another management company concentrating on 401Ks with scenario planning software. So the exit maybe okay but not from them being a software/technology company but a money management company.

In general most SV VCs will not understand hardcore financial software space in terms of investment especially if one targets the professional segment, eg Bloomberg users etc. If your idea has more of a consumer or web feel to it then there are a lot more doors that open up. This is from experience.

Another reason there are not a lot of financial software start ups out here is that the same skills are applicable to web and ad optimization and there are a lot of opportunities in that space which are easier to join, start up, and cash out on. In NYC or LDN you start hedgefunds or possible financial software companies/consulting outfits. In Silicon Valley you start and ad-network, ad-network arbitrage, traffic optimization etc company. It is easier to get funding, attract people, and get an exit then financial software for the same effort and skill set.

Nonius · Post by **Nonius** » Sat Nov 17, 2007 12:39 pm

yeah, I was at C*ATs back in the day. that friend who went to join FE was also at C*ATs. Infinity was better though, at least in market cap and pizzazz effect. what ever happened to Rennaissance, the software firm that is. probably sold to Sunguard too.