August 8, 2008 at 11:14Management company with a joint insurance fund
- Transfer
A recent article by Paul Graham on what to do "after a startup" and how to prepare for it.
Reader Level: High .
July 2008
This year, at a startup school, David Heinemeier Hansson gave a lecture in which he expressed the opinion that the creators of startups should do everything in the old way. Instead of hoping to get rich through the creation of an expensive company and the subsequent sale of fixed capital upon “quitting”, the founders should create companies that bring money and live on income.
It sounds good. Let's think about the best way to implement this plan.
The disadvantage of living on the income of your company is that you must continue to manage it. And anyone who runs their own business will tell you that this requires full attention. You cannot start a business and then retire when things are going well, otherwise surprisingly quickly everything will turn bad.
It seems that the main economic incentives for startup founders are freedom and security. They want to have enough money, (a) not to worry about being aground, and (b) they want to manage their time the way they want. Managing your business does not give either one or the other. Of course, you are deprived of freedom: no one is so needed as the boss. And, of course, there is no guarantee, because as soon as you stop paying attention to your company, its income will flow away, and with it your own income.
For many, it would be best to hire a management company when it grows to a certain size. Suppose you were able to find a really good manager. Then you have both freedom and guarantee. You will be able to pay attention to your business to the extent that you please, knowing that your manager will ensure that everything goes smoothly. In this case, income will continue to grow, and you will have a guarantee.
Of course, there are founders who will not like this idea: they are those who so much like managing their company that they would not want to do anything else. But it seems that there are few. The key to success in most types of business is a fanatical concern for the needs of consumers. What are the chances that your own desires will exactly match the requirements of this powerful external force?
Naturally, managing your own company can be very interesting. Viaweb was much more interesting than any other work that I had to do before. I made a lot more money from this, and the ratio of income to boredom that accompanies what I did is orders of magnitude. But was this the most interesting work I could have imagined? Not.
Whether the number of founders in such a situation is infinitely close to the majority or simply large is unimportant; one thing is certain: there are many of them. For them, it would be right over time to hand over the company to a professional manager if they can find a good enough candidate.
Well, so far everything seems to be going well. But what if your manager got under the bus? What you really need is a management company to manage your company instead of you. Then you are no longer dependent on one person.
If you own rental property, there are companies you can hire to manage it for you. Some of them will do everything: look for tenants and eliminate leaks in the water supply. Of course, managing a company is much more complicated than managing a rental property, but let's suppose there are management companies that could do this for you. They will charge you a lot of money, so is it worth the dressing skin? Personally, I would donate a large percentage of my income for additional peace of mind.
I understand that everything I describe already sounds too good to be true, and yet I can come up with some other way to make this idea even more attractive. If there were management companies, there would be an additional service that they could offer their customers: customers can allow them to insure their income by combining insurance funds. In the end, even the most professional manager will not be able to save the company, as sometimes happens if the market completely disappears, just as the real estate manager will not be able to save you from the fact that your building can burn to the ground. But a company managing a sufficiently large number of companies could declare to all its customers: we will combine the revenues of all your companies and pay you your proportional shares.
If such management companies existed, they would offer maximum freedom and assurance. Someone would run your company, and even in the event of its collapse, you would be protected.
Let's think about how such a management company could be organized. The easiest way is to create a new type of share capital, which would be an aggregate total fund of managed companies. In this case, by signing, you exchange the capital of your company for shares from this general fund, which are proportional to the valuation of your company, with which both parties agree. After which you automatically receive your share of the proceeds from the general fund.
The catch here is that due to the difficulty of canceling such an exchange, you will not be able to transfer to other management companies. However, there is a way to rectify this situation: suppose that all management companies come together and agree to allow their customers to exchange shares in all their common funds. Then, in essence, you could simultaneously choose all the management companies to manage yours in your place in any proportion that suits you, and later change your decisions as often as you want.
If there were such management companies with combined insurance funds, for many people following the path that David advocates, cooperation with such a company would seem to be an ideal plan. The good news: they really exist. What I have just described is a takeover by any public company.
Unfortunately, despite the fact that open joint-stock absorbing companies are identical to the management companies in their structure, they do not consider themselves as such. Using the services of a real estate management company, you can come and say “manage my property intended for leasing instead of me” at any time you want, and they will be. Whereas absorbing open joint stock companies in this context are extremely volatile. Sometimes they tend to buy, and overpay a huge amount; and sometimes they’re not interested. They are like real estate companies run by crazy people. Or rather, Benjamin Graham's Mr. Market.
So, while absorbing open joint-stock companies only occasionally behave as managing companies with a joint insurance fund, it will take you several years for favorable circumstances to develop. If you wait a long time (say, about five years), it is quite possible that you will find yourself in the period when a certain absorbing open joint-stock company will light up with a desire to buy you. But you yourself cannot choose the moment when this will happen.
You cannot expect your investors to drag you for a long time, during which you may have to wait. Your company must make money. Opinions differ on how early to concentrate on this. Joe Kraus says you should immediately try to charge customers accordingly. Nevertheless, some of the most successful newly created companies, including Google, at first ignored revenues, and focused exclusively on development. The answer probably depends on the type of company you are creating. I can imagine some in which it would be good to use a heuristic approach regarding product design to ensure sales, which for others, on the contrary, would be a distraction. The criterion is probably
You can choose which revenue strategy you think is best for the company you are creating, provided you have a profit. If you make a profit, you will get at least the average from the acquisitions market in which open joint stock companies actually behave as management companies with a combined insurance fund.
David does not make a mistake in saying that you must create a company in order to live on the income it brings. It’s a mistake if you think that it is somehow contrary to creating a company and selling it. In fact, for most people, the latter is simply the best way out of the former.
I thank Trevor Blackwell, Jessica Livingston, Michael Mandell, Robert Morris and Fred Wilson for discussing draft versions of this work.
This translation is in Translated.by: translated.by/you/the-pooled-risk-company-management-company The
translation was commissioned by JumpIDEA
Reader Level: High .
July 2008
This year, at a startup school, David Heinemeier Hansson gave a lecture in which he expressed the opinion that the creators of startups should do everything in the old way. Instead of hoping to get rich through the creation of an expensive company and the subsequent sale of fixed capital upon “quitting”, the founders should create companies that bring money and live on income.
It sounds good. Let's think about the best way to implement this plan.
The disadvantage of living on the income of your company is that you must continue to manage it. And anyone who runs their own business will tell you that this requires full attention. You cannot start a business and then retire when things are going well, otherwise surprisingly quickly everything will turn bad.
It seems that the main economic incentives for startup founders are freedom and security. They want to have enough money, (a) not to worry about being aground, and (b) they want to manage their time the way they want. Managing your business does not give either one or the other. Of course, you are deprived of freedom: no one is so needed as the boss. And, of course, there is no guarantee, because as soon as you stop paying attention to your company, its income will flow away, and with it your own income.
For many, it would be best to hire a management company when it grows to a certain size. Suppose you were able to find a really good manager. Then you have both freedom and guarantee. You will be able to pay attention to your business to the extent that you please, knowing that your manager will ensure that everything goes smoothly. In this case, income will continue to grow, and you will have a guarantee.
Of course, there are founders who will not like this idea: they are those who so much like managing their company that they would not want to do anything else. But it seems that there are few. The key to success in most types of business is a fanatical concern for the needs of consumers. What are the chances that your own desires will exactly match the requirements of this powerful external force?
Naturally, managing your own company can be very interesting. Viaweb was much more interesting than any other work that I had to do before. I made a lot more money from this, and the ratio of income to boredom that accompanies what I did is orders of magnitude. But was this the most interesting work I could have imagined? Not.
Whether the number of founders in such a situation is infinitely close to the majority or simply large is unimportant; one thing is certain: there are many of them. For them, it would be right over time to hand over the company to a professional manager if they can find a good enough candidate.
Well, so far everything seems to be going well. But what if your manager got under the bus? What you really need is a management company to manage your company instead of you. Then you are no longer dependent on one person.
If you own rental property, there are companies you can hire to manage it for you. Some of them will do everything: look for tenants and eliminate leaks in the water supply. Of course, managing a company is much more complicated than managing a rental property, but let's suppose there are management companies that could do this for you. They will charge you a lot of money, so is it worth the dressing skin? Personally, I would donate a large percentage of my income for additional peace of mind.
I understand that everything I describe already sounds too good to be true, and yet I can come up with some other way to make this idea even more attractive. If there were management companies, there would be an additional service that they could offer their customers: customers can allow them to insure their income by combining insurance funds. In the end, even the most professional manager will not be able to save the company, as sometimes happens if the market completely disappears, just as the real estate manager will not be able to save you from the fact that your building can burn to the ground. But a company managing a sufficiently large number of companies could declare to all its customers: we will combine the revenues of all your companies and pay you your proportional shares.
If such management companies existed, they would offer maximum freedom and assurance. Someone would run your company, and even in the event of its collapse, you would be protected.
Let's think about how such a management company could be organized. The easiest way is to create a new type of share capital, which would be an aggregate total fund of managed companies. In this case, by signing, you exchange the capital of your company for shares from this general fund, which are proportional to the valuation of your company, with which both parties agree. After which you automatically receive your share of the proceeds from the general fund.
The catch here is that due to the difficulty of canceling such an exchange, you will not be able to transfer to other management companies. However, there is a way to rectify this situation: suppose that all management companies come together and agree to allow their customers to exchange shares in all their common funds. Then, in essence, you could simultaneously choose all the management companies to manage yours in your place in any proportion that suits you, and later change your decisions as often as you want.
If there were such management companies with combined insurance funds, for many people following the path that David advocates, cooperation with such a company would seem to be an ideal plan. The good news: they really exist. What I have just described is a takeover by any public company.
Unfortunately, despite the fact that open joint-stock absorbing companies are identical to the management companies in their structure, they do not consider themselves as such. Using the services of a real estate management company, you can come and say “manage my property intended for leasing instead of me” at any time you want, and they will be. Whereas absorbing open joint stock companies in this context are extremely volatile. Sometimes they tend to buy, and overpay a huge amount; and sometimes they’re not interested. They are like real estate companies run by crazy people. Or rather, Benjamin Graham's Mr. Market.
So, while absorbing open joint-stock companies only occasionally behave as managing companies with a joint insurance fund, it will take you several years for favorable circumstances to develop. If you wait a long time (say, about five years), it is quite possible that you will find yourself in the period when a certain absorbing open joint-stock company will light up with a desire to buy you. But you yourself cannot choose the moment when this will happen.
You cannot expect your investors to drag you for a long time, during which you may have to wait. Your company must make money. Opinions differ on how early to concentrate on this. Joe Kraus says you should immediately try to charge customers accordingly. Nevertheless, some of the most successful newly created companies, including Google, at first ignored revenues, and focused exclusively on development. The answer probably depends on the type of company you are creating. I can imagine some in which it would be good to use a heuristic approach regarding product design to ensure sales, which for others, on the contrary, would be a distraction. The criterion is probably
You can choose which revenue strategy you think is best for the company you are creating, provided you have a profit. If you make a profit, you will get at least the average from the acquisitions market in which open joint stock companies actually behave as management companies with a combined insurance fund.
David does not make a mistake in saying that you must create a company in order to live on the income it brings. It’s a mistake if you think that it is somehow contrary to creating a company and selling it. In fact, for most people, the latter is simply the best way out of the former.
I thank Trevor Blackwell, Jessica Livingston, Michael Mandell, Robert Morris and Fred Wilson for discussing draft versions of this work.
This translation is in Translated.by: translated.by/you/the-pooled-risk-company-management-company The
translation was commissioned by JumpIDEA