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Monday, February 15, 2010

Small Business or Startup?

On Hacker News and other websites, I read about starting a software business. Most of the advice is aimed at the startup/VC track rather than the small business track.

When you accept capital from outside investors, that forces you to act and plan in certain ways. The outside investors will want to cash out their holdings eventually. This means that the founder must aim towards an IPO or acquisition by a larger corporation.

A small business owner has different goals than a startup founder. In a small business, the owner wants to operate the business himself, perhaps until he retires. There are no outside investors. There is no pressure to get big fast and sell/cash out.

An example small business is a local pizza store. There probably will not be an IPO or sale. The owner will probably earn a decent income, but he has to actively manage the business. In a small pizza store, the owner usually works there himself or actively picks the employees/manager.

An example startup is YouTube. YouTube would never be profitable as a standalone business. YouTube's founders' goals were to get big fast and then cash out. Google was able to afford YouTube due to their search engine cash cow. Google's executives issued more shares of stock to finance the purchase. The State and financial industry subsidized the purchase. Most of those new shares were purchased by hedge funds with borrowed money, leverage, and negative interest rates.

The goal of a VC is not "Start a business that requires intelligent management and employees." The goal of a VC is "Start a business with a State-backed monopoly. Acquire a monopoly that can withstand being run by fools."

In the USA, incumbent businesses receive massive direct and indirect State subsidies. This makes the VC strategy profitable.

A startup needs some intelligent employees initially, to stake out the market before someone else. Then, with size and "economy of scale" (i.e. State subsidies), the intelligent employees are removed and clueless middle managers/parasites take over.

When the VC cashes out, it's via an IPO or sale to another public corporation. In other words, the VC is creating a monopoly that he can then sell to the banksters.

Unless you have connections, you should go with the "self-funded, keep 100% ownership, grow organically via reinvested profits" route. This is the small business route and not the startup route.

For example, I'd never get VC to support my blog or other agorist business ideas. My only option is to reinvest any earnings.

Most business advice that you see on the Internet is directed towards the VC route. That is because VCs are advertising their product and looking for clueless founders.

There are all sorts of legal technicalities that a VC can use to cheat you. Plus, if you look for VC, you're spending time and energy courting VCs instead of creating a useful product. If you're a first-time founder, and it turns out you're really skilled, then there are plenty of ways that the VC can structure the deal to cheat you. For example, the VC can require the founder to accept vesting of his own shares. Then, the VC can fire the founder in a year or two as the business is starting to be really successful.

VCs act arrogant because they're really State bureaucrats/parasites. A corrupt monetary system has given them a financing monopoly. Most VC funds raise money via the connections of the partners.

For example, a pension fund (State-controlled money) may invest in a VC fund. Then, the pension fund manager's brother-in-law is hired to work at the VC fund. Such arrangements happen all the time, via the Principal-Agent problem. They are investing other people's money.

As a non-insider you should pursue the small business route instead of the VC route. If you're planning to work as an agorist, that's your only option.

Also, if you seek VC, you need a potential billion dollar cashout. If your business idea is potentially $200k-$300k a year in income with no employees, then it's worth pursuing, but you shouldn't get VC.

It's important to realize that most of the "start a business" advice you read on the Internet is written by VCs or pro-State trolls. If you're starting an agorist-style business, then none of that advice is applicable. An agorist should just focus on creating a good product. By working off-the-books, an agorist avoids all the State overhead. The fact that a would-be startup founder is required to go begging to VCs is a type of tax.

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