From: Tim May <tcmay@got.net>
Date: Thu, 4 Sep 1997 03:54:07 +0800
To: cypherpunks@Algebra.COM
Subject: [LONG} Funding Cypherpunks Projects
In-Reply-To: <v03102814b032876b7309@[207.167.93.63]>
Message-ID: <v03102803b033539cb51d@[207.167.93.63]>
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I almost deleted these messages from Bob, but have decided to say a few
words about financing companies "to help the Cypherpunks cause."

As I lack the energy right now to compose an essay from scratch, I'll take
the easier way out and respond to Bob's points.

At 7:23 AM -0700 9/3/97, Robert Hettinga wrote:
>At 11:21 pm -0400 on 9/2/97, Tim May wrote:
>
>> Sorry I "donated" my time making up this list,
>
>To the contrary, it's not a donation at all. I see it as a set of
>investment criteria, myself. How is the market going to make something for
>you if it doesn't know what you want? Keeping in mind what I said about

To the contrary, I never write political and socioeconomic essays with the
expectation that someone out there will be "making something for me."
That's just plain disconnected from reality thinking. Why I write, and what
I write, has various motivations. No time to delve into a psychoanalysis of
this right now--my Cyhernomicon has sections describing the confluence of
technologies and opportunities I saw beginning in about 1987 or so, with
comments on why I think these are such exciting issues. I write because the
ideas interest me, not to make a few bucks. (And, as I explain later, the
odds of losing $1-2 million in VC investments grossly outweigh the odds of
making $10-20 M. Grossly.)

But generating "VC funding requests" is most definitely not even in my Top
Ten of reasons.

>Maybe they're misinterpreting all the stuff you've said over the years
>about "something must be done", "cypherpunks is not a group", and "we"
>ought to do to things, etc.

>From Day One, I have not shied away from talking about interesting building
blocks.  Including remailers, which I briefed the attendees at the first
meeting on (having been mightily influenced by Chaum's 1981 brief paper on
untraceable e-mail). And so on. This is well-covered history.

It is true that I try to avoid using the language "Here's is what I want
you to work on," and variants. My "things we need to work on" was my name
for a list--and not the first one--of things which I think are a lot more
interesting and important than working on, say, lists of "things that make
Cypherpunks happy," or silk-screening new t-shirts with the slogan du jour.

>Frankly, a discussion of specifications and desired results is worth much
>more than the wasted random effort saved when people just write code and
>let god sort it out. I mean, Michaelson-Morley may have been a neat
>experimental finding, but nothing really happened with gravity until
>Einstein figured out space-time, right?

I agree with this. Certainly for all of the chants about "Cypherpunks write
code," and the several years worth of (apparently) several dozen folks here
writing code of some sort, what are we really left with that has had a
major effect? Most of the code apparently being written either never makes
it into products, or is buried deeply, or just evaporates (as code tends to
do, a la bit rot). PGP, SSH, the remailer code, and a few other such
achivements are what lasts.

I don't trash such efforts. Rather, I think it means that it is vitally
important that we think carefully about what code is interesting and
important. This beats the hell out of people just starting in at coding for
the sake of coding.

Part of coding is carefully deciding what to code. This is Programming 101,
or at least should be. Deciding that a simple remailer would be an
interesting thing to code was  the important part of getting remailers
deployed....the actual coding of the first actual remailer (of the
Cypherpunks "true" style, not the WizVax/Kleinpaste/Helsingius nym server
style) took a weekend of Perl hacking by Eric Hughes. Knowing _what_ to
program is 90% of the effort.

...
>Of course not. See above. There are many more people who know how to write
>code than there are like you, Tim, who know what to do it *for*.
>Unfortunately, people who write code need to eat. Fortunately, people who
>know what to do can raise money to hire people who write code if the idea's
>good enough to sell twice: once to investors, and again to the market for

This is the crux of my essay here. Read this part even if you skip the rest.

First, this grossly oversimplifies the process of funding companies.
Methinks Bob has read about Jim Clarke's decision to fund Andreesson and
Company too many times. Rarely (very rarely) do the VCs hire people to
write the code for some vision.

Second, writing code is cheap, and requires almost no capital. No
factories, no chip making machines, no clean rooms, etc. Just a bunch of
people with ideas doing it themselves.  Nearly all successful software
companies started out with almost no working capital.

(By contrast, I've watched several "idea" companies which had the "grand
vision" first and then sought to hire the hired guns to write the code. All
four that I have followed failed. One burned through about $5 million,
another through $2 million. And one that just finally gave up the ghost is
reported (by a friend of mine, and I haven't been able to confirm it) to
have absorbed more than $30 million in funding by the initial investors and
then by the parent company which acquired or  semi-acquired them and pumped
more money in.)

Third, I've seen a lot of programmers here in the Bay Area, either because
of my work at Intel on AI/Lisp sorts of stuff, or the Hackers Conference,
or many years of Bay Area parties, Cypherpunks events, etc.  A handful of
these programmers seem to be truly gifted...the rest are, well, hackers. OK
for churning out code with well-defined specifications (and even then the
well known Brooks' Law sorts of factors can make some of them grossly
unproductve). The few who seem really gifted would be fools to work for a
pittance for me--and I'm not willing to give them their easily-gotten daily
consulting rates for months on end, etc.

Fourth, in my years of Cypherpunks involvement, I have never seen any
reasonable investment opportunities. This is not to say there have not been
any, especially with the benefit of hindsight.

Side note: There have been several startups loosely associated, or even
closely associated, with Cypherpunks. Some were started before (Cygnus. for
example), and cannot really be called CP companies. What about C2 Net? I
have no idea what that company is now worth, but I know that it evolved
from Sameer's Community Connexxion. While we all nodded and applauded
Sameer's plan to hook up his dorm or whatever with terminals in the
bathrooms (I'm not joking, by the way), I never saw this as something to
put hard-earned money into. Nor did Sameer solicit "angels" to fund this
vision. At least I never heard him soliciting. He probably--and I haven't
checked with him on this--knew that the best opportunities were funded on a
shoestring, by those involved directly, by those living the dream, and that
diluting his ownership with outside funding would be a mistake. And this
shoestring operation was able to more nimbly move to take advantage of
opportunities, e.g., dropping the original focus on being a kind of "local
ISP" (which is what I perceived the original CC to be) and to instead focus
on SSLeay/Stronghold stuff.

Other companies have sought funding in a grander way. E.g., PGP, Inc. I had
no desire to invest in them, for various reasons. I wish them well, of
course.

Eric Hughes has a company, "Simple Access." To tell the truth, and in spite
of Eric being a longtime friend of mine (since 1990 at least), I really
have no idea what they do. The "www.sac.net" site is remarkably
uninformative. Perhaps by design. In any case, I don't think investing
money in this is what I want to do.

And there's Electric Communities (www.communities.com), containing several
past or present Cypherpunks. I have a lot of hope from them, for
"Microcosm," but,again, this is someone else's vision. It's too soon to
tell if they have a killer app on their hands. If they do, then business
magazines will write sage articles on the wisdom of the VCs. If not, as the
odds must say is likelier, just by Bayesian odds, then they'll be
forgotten, and the VC money will have just evaporated.


Fifth, what I have seen from all of these experiences is that the popular
impression of VC funding, that someone has a good idea, then finds a VC
angel to provide seed funding, then worker bees are hired, etc., is
basically wrong. Or at least a recipe for disaster.

The best growth opportunities come from nimble, mostly self-funded small
teams that can learn in an evolutionary way, changing focus as failures
occur and learning from mistakes. The worst growth opportunities come from
"grand vision" situations.

Sixth, we often forget that "history is written by the winners." We ask the
five star general what his strategies were, forgetting that he became a
general because he survived the battles and triumphed. Sort of like asking
the Lottery winner what her strategy was....one will get answers, but they
probably won't be useful.

Asking Jim Clarke or Bill Gates to opine on his strategies for success is
not quite as pointless, but is not real useful either. Ask also Manny
Fernandez about Gavilan Computer. Or ask the financiers of Ovation,
Processor Technology, Mad Computers, Symbolics, Thinking Machines, Trilogy,
or a hundred other examples of companies that burned through a billion
dollars of hard-earned investor money.

Seventh, I have no doubt that if I issued a cattle call for programmers to
write C code for some pet project I'd get some bites. The "burn rate" for a
supported programmer is higher than the salary, of course. (Many will work
for a share of the company, plus a living wage, but this of course means
incorporation....not a simple matter of just offering to hire programmers.)

Those small software companies I mentioned burned through $5 million in 3
or so years, with nothing to show for it. And they sure did have the grand
vision. Sorry, but I have no desire in even "giving away" a million bucks,
let alone several.

(Another sidenote: In 1993 I elected to help fund a small startup with an
extremely promising technology. And the principals were, and still are,
incredibly hard working people. I call them "sled dogs" for their
perseverance and 80 hours a week (each) work habits. I bought a small stake
in the company, for about $65K. So did several others. And some contract
money came in. The entire funding was burned through in a matter of a year
or two, and now they're struggling. They can't raise moe without giving
their remaining ownership of the company away, and potential investors
would want to see a real product, which they don't have. I still wish them
well, but....tick tock. And that $65K investment necessitated my sale of
$100K worth of various stocks, inclduding Intel, due to the income tax laws
being what they are. That $100K worth of stock would now be worth $600K,
roughly, given that Intel has gone from $15 to $100 in that period. C'est
la vie. But is sure makes me more cautious about funding little startups.
And I for damned sure won't write out checks for people I only casually
know from this mailing list and from occassional Cypherpunks meetings!!!)

I could easily spend $500K (costing me an actual $700K before taxes, less
some tax deductions as a business, possibly) hiring a staff of several
programmers for slightly more than a year. Then it'd be gone. Would a
"product"  be ready? You tell me the odds.

And what would come out of such an effort? I've watched a certain American
living in Europe burn through most (and maybe all?) of his fortune, and
(some say) his family's fortune, and he had the best of pedigrees and the
best set of ideas there is. Now many of us quibble with the choices he
made, in licensing, etc., but this should be a cautionary tale to anyone
who thinks such funding is easy.

I'm not being defeatist. I know that sometimes a $500K investment could
turn into tens of millions. It sometimes happens. But usually not, even for
the proposals that get funded. (And VCs tend to look at 10 to 30 proposals
for every one they actually fund, so the odds in the Cypherpunks pool ain't
real great that even a single proposal would reach the funding stage, let
alone turn into another Netscape or Yahoo.)

No, I'm not a defeatist. But I worked very hard for many years, saving a
large fraction of my paycheck and saving my purchased stock (including
stock options, which were not as lucrative as popular myth might have
it...what made them now worth so much money is that I didn't sell them when
they became available, as so many of my coworkers did). I don't intend to
blow through half a million or a million bucks a year funding some grand
vision, especially when there seem to be few grand visions that are
realistic.

(Plenty of zealots, though.)

>which the code's intended. And, rarely, as in your case, Tim, some people
>with money already know what to do and can hire people to do it. If they
>can "sell" *themselves* on the idea that the market will buy it. The guy
>who founded Aldus did it with Pagemaker. Osbourne did it, too, before he
>made the mistake of hiring a completely ignorant "professional" managment...

The Pagemaker team wrote it on a shoestring. No VCs until much later, when
a product existed. (BTW, similar to the models for both PGP, Inc. and
C2Net, where actual products are actually being sold or distributed.)

As it happens, I knew Adam Osbourne. (I used to go to the Homebrew Computer
Club, circa 1976-78, and met many of those who later became famous. This
also helped shape my skepticism about predicting success, as I would surely
have funded Bob Marsh at Processor Tech before funding Woz and Jobs...and
in fact I bought a Proc Tech Sol-20 in 1978 rather than an "Apple.")


>Well, it was more for the list's benefit than yours, Tim. You're just my
>unsuspecting foil, here. :-).
>
>If, say, John Gilmore were here saying the same kinds of stuff you were,
>I'd have sprung my little rhetorical trap for him instead, by getting him
>to list what we should do next, and then asking him which ones he's going
>to invest in. He'd probably be just as pissed off.

The problem with your "rhetorical traps," by your own admission, is that
you just don't know what you're talking about in most cases, at least
insofar as startups and funding go. I recall your "hothouse" VC proposal (I
may have the name wrong, but the idea was the same as one of those hothouse
schemes, with offices for budding entrepreneurs, etc.).

Maybe in another post I'll give my views on why such hothouse schemes are
lousy ideas. But if yours is up and running and headed for success, I'll be
happy to stand corrected.



>Actually, if you count the money and time he's thrown at politics and
>lawyers, and S/WAN, and cypherpunks, and a few other things, you might say
>Gilmore's made an investment or two. Unfortunately, since he's not using
>actual investment criteria -- profits, in other words -- you might consider
>those investments to have been accidental. On the other hand, investing is
>always about personal choices, whatever they are, and so the loop closes on
>itself, I suppose.

John chooses to do the things he chooses to do. He has more interest in, or
faith in, the legal process. I have more interest in, or faith in, the
expository process. I write about 100 times as much as he does. To each
their own.

I won't get involved in Bob's seeming challenge to me to start matching
John's investments.

>The point is, all of the stuff you've listed costs money to do, Tim, or it
>would have been done already. Which means, unless you're doing this for a
>hobby, spending a very small fraction of your total income, (or an

It costs money, but almost certainly not VC money. Take just one example,
an offshore credit reporting agency not bound by U.S. restrictions under
the FCRA. There is no need for a VC to fund this...this is best done "on a
shoestring" by someone who starts small and expands.

(Think of how Amazon.com got started. Lots of similar examples.)

Personally, I would only get involved in such a thing if I lived offshore,
as the government could otherwise come after me (even for funding such a
thing). But the interesting pros and cons of such a project are well worth
discussing. Maybe someone out there will do it.

(This space reserved for someone to chime in about Vince Cate's ISP
operation in Anguilla.)


>So, Tim, why don't you pick your favorite project on that list, hire some
>people to write code, and go for it? Most of the stuff on your list can't
>cost that much to do, and, if it did, then it's probably the wrong project
>for you, personally, financially, to work on. If that project makes money,
>you can reinvest it in something bigger anyway. Capitalism 101.

Why don't you knock off the "Put up or shut up" kinds of remarks? It's
never a good basis for investment, to respond to "dares."

I'll say what I want to say. Maybe even someday a good investment will
appear. But from what I've seen of the folks at gatherings I meet them at,
few of them would be good candidates for a VC-funded approach.


>I think that Sameer in particular proves that the barriers to entry for
>some financial cryptography markets are still practically nonexistant from
>an investment perspective. Not for the stuff Sameer's doing, of course.

No, what it shows is the power of small entrepreneurs doing very local
things, with the things that succeed being all that we remember (the losers
are forgotten).



>Anyway, especially in anonymous digital bearer settlement, which is the
>really important stuff in financial cryptography, there are lots of
>opportunities out there, and some of them are bootstrapable. Some of those
>which aren't should be funded by single, monomaniacal, investors like the
>Aldus guy did with Pagemaker, or you, Tim, should do with your favorite
>project on the list. Hopefully, the rest the non-bootstrap stuff can be
>done with e$lab or something like it. At least that's what *I'm* hoping...
>;-).

Yeah, well let us know when "e$lab" gets really rolling. Personally, I
think you undercut your own significance by the heavy reliance on cutesy
names centering around "$" in place of "s," as in "e-$pam" and "e$lab."
Cutesy wears thin fast.



>So, Tim, again, which one of those projects do you want to do? Who are you
>going to hire to do them? More important, how much money do you think
>you'll get back by doing it?

See above for my answer.

In the meantime, knock off with the dares.

Maybe we should just mutually ignore each other for a while.

--Tim May

There's something wrong when I'm a felon under an increasing number of laws.
Only one response to the key grabbers is warranted: "Death to Tyrants!"
---------:---------:---------:---------:---------:---------:---------:----
Timothy C. May              | Crypto Anarchy: encryption, digital money,
tcmay@got.net  408-728-0152 | anonymous networks, digital pseudonyms, zero
W.A.S.T.E.: Corralitos, CA  | knowledge, reputations, information markets,
Higher Power: 2^1398269     | black markets, collapse of governments.
"National borders aren't even speed bumps on the information superhighway."