Feb 03 2011
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Jun 08 2010
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its been interesting to see the debate on carried interest rage over the last couple weeks.
here are a few thoughts:
1) I’m sympathetic to the idea that tax policy shouldn’t discourage venture investment. But the majority of carried interest is earned by two (much larger) other asset classes (hedge funds and private equity) that don’t have the same impact on job creation.
2) Why are capital gains taxed lower than ordinary income? I assume it is to encourage risk-taking and investment. If that’s the case, you shouldn’t get capital gains without the prospect of facing capital losses. VC’s don’t face capital losses on their investments – they get success fees.
3) The basis for carried interest is that investment managers, like startup founders, contribute time and effort (instead of capital) to create value for a new entity (an investment partnership, instead of a startup).
It seems like a huge tax shelter to be able to classify success-based fees as equity, if they are treated through a partner ship structure.
Mutual funds and hedge funds both do the same thing — invest money. Mutual funds take a fixed percentage of assets from clients. If you run a mutual fund, and you do really well, your annual bonus is taxed as ordinary income.
Hedge funds really get paid through carried interest. If you run a hedge fund, and you do really well, your annual bonus is taxed at capital gains rates.
Is that right? Both the mutual fund manager and the hedge fund manager invested a lot of time (but not necessarily risked their own capital)
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types of software businesses
Software businesses basically do the same thing: convert code into $. But there are different types of business models (“ways they get paid”). Here are a few examples:
- Tools (e.g., Oracle, MSFT)
- Services (e.g., 37signals, WebEx)
- Media (e.g., Google)
- Market / Brokerage (e.g., eBay, etsy)
- eCommerce (e.g., Amazon, Zappo’s)
This list needs refinement — for example, seems like there is overlap between tools and services. (Also, where would a consumer product company like intuit go?) Are there other categories to add?
If this is a useful categorization, how are these types of businesses different? What are the success factors? For example, as Jeremy Liew notes, online media businesses are all about scale.
May 20 2010
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how competitive is the internet industry?
In the midst of a debate on whether to regulate facebook, Chris Dixon and Keith Rabois raise an interesting quesiton — how competitive is the internet industry?
Chris makes the point that some industries are inherently uncompetitive. But Keith thinks its hyper competitive. Later, Chris agrees.
How do you know if an industry is competitive or not? Economic theory says that in the long run, the presence of competition reduces companies’ excess profitability. Highly competitive industries have low returns — think Airlines, or trucking.
By this definition, consumer internet is not that competitive, since the largest players (e.g., GOOG, EBAY) are able to earn very high returns. Another less conventional example is craigslist, which does over $100M in revenues with less than 50 employees. And there is a lot of venture capital invested in consumer internet companies. VCs aren’t exactly flocking to invest in airlines.
But at the same time, there are thousands of small consumer internet companies struggling to attract users, revenues, and profits. A large number of the firms in the industry earn little to no returns.
So the distribution of profits looks like a bell curve, with a few dominant firms earning high returns, and a large number of firms earning poor returns. This is kind of reminiscent of the music industry — for every U2, there are tens of thousands of garage bands. This distribution is probably similar to the biotech industry, which has lost money in total, despite the successes of companies like AMGN and DNA.
The question then, is how do you tell if something is a good industry? Do you have to measure the industry profitability in aggregate?
Jan 08 2010
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Dec 23 2009
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Viral Loop
Read Adam Penenberg’s Viral Loop last night. Verdict: mosty unoriginal, but pretty readable of some valley/startup history. A good history of HotOrNot in particular. The book relied too much on second-hand sources from Andrew Chen’s blog and Sarah Lacy’s Once Your Lucky, Twice Your Good.
Fun factoid on eBay history. According to the book, eBay stood for “Echo Bay”. The site, orginally called, Auction Web, was launched on labor day wekend in 1995. Omidyar ran it as a free service, during his nights and weekends, until May 1996. By then, site traffic had dramatically increased his hosting bills, and he was forced to ask for money from auctions, which came via the mail.
Nov 20 2009
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“ Whatever business errors deCode may have made, a principal reason for its downfall is scientific — the genetic nature of human disease has turned out to be far more complex than thought. Many researchers expected that just a handful of genetic mutations would explain most cases of any given major disease. But the mutations that deCode and others detected in each disease turned out to account for a small fraction of the overall incidence. Natural selection seems to be much more efficient than expected at ridding the population of dangerous genes, even of those that act well after the age of reproduction. That leaves thousands of different mutations, each very rare in the population, as the probable culprit. And because most of the mutations are rare, they are extremely hard to find. The mutations that deCode detected in each major disease were responsible for too few cases to support the development of widely used diagnostic tests or blockbuster drugs.
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“ According the NY Times, deCode Genetics filed for bankruptcy on Tuesday. This in my mind is the last nail in the GWAS coffin. deCode and the many other people pushing technological solutions to complex problems in human genetics have failed because they assumed there was a simple relationship between genotype and phenotype. The optimism expressed by Altschuler at the end of this news article is the last gasp from those going down with the sinking ship.
Nov 18 2009
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anybots telepresence robot
(via ) PSFK
Sep 19 2009
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Carbonite Prevents Firebug from installing
If you are running Carbonite, and firebug wont install, disable carbonite. Lesson of the day.
