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Bill Gurley: startups seeking funding are starting to lower their expectations

69 points by mgav 11y ago

nostromo 11y ago
full article: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB8QqQIwAGoVChMIxvS3_-7UyAIVGOJjCh3soQ5K&url=http%3A%2F%2Fwww.wsj.com%2Farticles%2Fventure-capitalist-sees-signs-of-caution-in-private-tech-arena-1445366864&usg=AFQjCNGo0ySDopngKnDdSt1IPgfmL00_XQ https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...
- Mayzie 11y ago
  Thank you! Got hit with the subscription message.
  - kzahel 11y ago
    I made an extension the other day (that does not ask for any permissions) that helps in these cases https://chrome.google.com/webstore/detail/news-paywall-access/adpfpconnigelofkfenblmdhbnlaafkg https://chrome.google.com/webstore/detail/news-paywall-acces...
7Figures2Commas 11y ago
> Mr. Gurley said the root of many of Silicon Valley’s problems is a resistance to taking companies public. By staying private for longer periods, startups have eluded the scrutiny of public-market investors that is needed to help companies mature and become sustainable, he said. A lot of Silicon Valley's high-flyers are not yet great IPO candidates. Of those that could be taken public, many would face much lower valuations in the public markets, forcing them to raise less capital or sell more of themselves to raise equivalent amounts of capital to what they're raising in the private market. As such, one could argue that the startups have been acting completely rationally by taking advantage of the willingness in the private markets to invest at exorbitant valuations. Sure, the late stage valuations are all engineered and companies will pay a hefty price if they can't deliver the returns they're increasingly having to promise late-stage investors, but I think a lot of these startups have made a calculated decision to raise as much capital as they can selling the least amount of equity, and worry about the consequences later. It's not surprising the traditional VCs aren't thrilled with this.
- themartorana 11y ago
  This seems so odd to me. It's like working the odds to stay as VC-funded as possible and basically avoid growing up - and most of them must understand that profitability simply doesn't exist in their model (before they pivot to being another advertising billboard). The first step is admitting you have a problem, and as long as people keep giving you money, there's no need to admit anything. Heck. As long as people keep giving you money, is there really a need to make money in another way?
  - rl3 11y ago
    The flip side of that coin is that some companies, under pressure to "grow up", become misguided—destroying their core product and user base in the process. I would argue some business models aren't necessarily suited to generating significant or otherwise self-sustaining levels of revenue. However, that doesn't preclude these businesses from being incredibly valuable to larger, more established corporations with sizable cash reserves. Of course, publicly admitting you're building for an exit is tantamount to suicide in the present climate, so it's no wonder the current situation is what it is.
    - InvisibleCities 11y ago
      >The flip side of that coin is that some companies, under pressure to "grow up", become misguided—destroying their core product and user base in the process. If your core "product" is massively unprofitable, it's not really a product at all.
      - idibidiart 11y ago
        There is sellability and there is profitability. Two entirely different things, but ultimately that which is sellable will be exploited for financial gains, and often it is pro`fit`able
      - rl3 11y ago
        >If your core "product" is massively unprofitable, it's not really a product at all. Tell that to Instagram or Snapchat.
grandalf 11y ago
Easy money is not necessarily all that it seems: It drives salaries up and creates an arms race for scarce talent that is crippling to many startups. It also creates a hype/hockeystick contest which is also largely unhelpful.
- twelvedigits 11y ago
  I agree. The strategic need for startups to exist in the Bay Area combined with the cost of living/cost of talent has caused costs to soar, necessitating more funding. Combined with easy money, this has been a tinderbox waiting to blow for some time.
- rahimnathwani 11y ago
  But if there were no easy money then those startups would have less money to spend on salaries as well. If we believe that easy money benefits established companies more than it does startups (not sure) or funded startups more than bootstrapped ones (almost certainly) then the net effect might be bad. But an 'arms race for scarce talent' probably benefits a large proportion of the readers here, and harms a much smaller proportion.
  - jhonovich 11y ago
    "But an 'arms race for scarce talent' probably benefits a large proportion of the readers here, and harms a much smaller proportion." In the short term, yes. In the long term, it can lead to crashes where a large number of the readers here may struggle to get jobs at any price for a period of time.
    - rahimnathwani 11y ago
      "it can lead to crashes where a large number of the readers here may struggle to get jobs at any price for a period of time" You mean because high salaries, over the medium term, may result in increased supply of developers?
  - grandalf 11y ago
jluxenberg 11y ago
He said low interest rates have encouraged many investors to pour capital into private tech investing, fueling high valuations. If interest rates “stay at zero, rather than seeing a hard correction, you might start seeing volatility.” VCs are investing in private tech companies expecting 10-100x returns on about 20% of their fund. Which works out to at least 20% return per year on a 10-year fund. It doesn't make sense to me that an investor who would choose a VC fund as their vehicle would suddenly choose a Treasury note when interest rates go up 1-3%. A VC fund should still outperform that.
- pbh101 11y ago
  But if LPs are targeting a certain return, then their capital allocation could swing towards including more Treasuries when their interest rate goes up. Of course that's in a vacuum. In reality I expect many of the asset classes in their portfolio to have some dependence on Treasury rates, which perhaps would result in wider capital reallocations (or change in relative allocations going forward).
- cynicalkane 11y ago
  We're not talking about a binary choice. Rather, low Treasury rates influence the risk-interest demand curve across the broad market. People are pushed into low yield on low risk investments, which pushes yields lower on marginally more risky investments, &c. Furthermore, leverage allows you to make portfolios that mimic the risk of other portfolios of riskier/less risky assets. In a theoretically perfect market where the replication can be exact, this fact alone can generate the entire risk curve.
- austenallred 11y ago
  What Gurley is referring to here is actually a level higher up than VCs. He's talking about the people who give VCs their money - Limited Partners or LPs. LPs are usually very high net worth individuals or funds who invest a portion of what they have in venture funds. VCs are the people who get paid for managing those funds. If you're responsible for managing the Harvard Endowment Fund (which is larger than the GDP of most nations) you're going to be investing large chunks of capital, and you're going to try and diversify the way you invest it. Say you put 20% into commodities, 30% into real estate, 40% into mutual/hedge funds (the stock market) and 10% into tech via VCs. (Of course, these numbers are complete bogus.) If the market shifts and all of the sudden you expect really low returns from some parts of the economy, you may shift that money into other parts. So instead of putting 10% into tech you might bump that to 20%. If that happens across the board VCs will be flush with cash, but unless there's a systemic change in how companies are starting they'll still be responsible for dumping that cash into companies. Remember: if you're a VC it's literally your job to invest the money the LPs give you. All of the sudden every VC has tons of cash and there aren't enough good companies to invest it in. You might as well invest at really high valuations in the quickly growing companies: It's either that or taking bigger risks on lower quality companies. (Gurley has argued that both of these things are happening, but in this article he's more specifically arguing the former.) The assertion Gurley makes is that now the market is starting to correct itself a bit. That correction takes place when either the returns are low enough that LPs stop investing as much of their capital in VC or if other investment opportunities heat up and LPs abandon VC to some extent. Interest rates haven't gone up, so it's not like there's money moving out of VC to make other particularly great investments, but companies aren't being bought very quickly or going public. This means VCs aren't able to give cash money back to the LPs. Therefore the LPs can't reinvest this cash in new companies, and there's still some level of skepticism around whether these companies will return what they're "worth" on paper at the end of the day. If they put less money into VC the companies raising money will have a harder time doing so. Gurley is arguing that this is happening now. Overall VC is a minuscule part of the overall economy - it's basically a rounding error - but how much money is in VC is very much dependent upon how other parts of the economy are doing.
idibidiart 11y ago
Doom and Gloom. Tech shorting cycle has been initiated by the Borg.
- taneq 11y ago
  Gotta push the market down before the next round of buy-low-sell-high!

69 points by mgav 11y ago

full article: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB8QqQIwAGoVChMIxvS3_-7UyAIVGOJjCh3soQ5K&url=http%3A%2F%2Fwww.wsj.com%2Farticles%2Fventure-capitalist-sees-signs-of-caution-in-private-tech-arena-1445366864&usg=AFQjCNGo0ySDopngKnDdSt1IPgfmL00_XQ https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...

Mayzie 11y ago
Thank you! Got hit with the subscription message.
- kzahel 11y ago
  I made an extension the other day (that does not ask for any permissions) that helps in these cases https://chrome.google.com/webstore/detail/news-paywall-access/adpfpconnigelofkfenblmdhbnlaafkg https://chrome.google.com/webstore/detail/news-paywall-acces...

7Figures2Commas 11y ago

> Mr. Gurley said the root of many of Silicon Valley’s problems is a resistance to taking companies public. By staying private for longer periods, startups have eluded the scrutiny of public-market investors that is needed to help companies mature and become sustainable, he said. A lot of Silicon Valley's high-flyers are not yet great IPO candidates. Of those that could be taken public, many would face much lower valuations in the public markets, forcing them to raise less capital or sell more of themselves to raise equivalent amounts of capital to what they're raising in the private market. As such, one could argue that the startups have been acting completely rationally by taking advantage of the willingness in the private markets to invest at exorbitant valuations. Sure, the late stage valuations are all engineered and companies will pay a hefty price if they can't deliver the returns they're increasingly having to promise late-stage investors, but I think a lot of these startups have made a calculated decision to raise as much capital as they can selling the least amount of equity, and worry about the consequences later. It's not surprising the traditional VCs aren't thrilled with this.

themartorana 11y ago
This seems so odd to me. It's like working the odds to stay as VC-funded as possible and basically avoid growing up - and most of them must understand that profitability simply doesn't exist in their model (before they pivot to being another advertising billboard). The first step is admitting you have a problem, and as long as people keep giving you money, there's no need to admit anything. Heck. As long as people keep giving you money, is there really a need to make money in another way?
- rl3 11y ago
  The flip side of that coin is that some companies, under pressure to "grow up", become misguided—destroying their core product and user base in the process. I would argue some business models aren't necessarily suited to generating significant or otherwise self-sustaining levels of revenue. However, that doesn't preclude these businesses from being incredibly valuable to larger, more established corporations with sizable cash reserves. Of course, publicly admitting you're building for an exit is tantamount to suicide in the present climate, so it's no wonder the current situation is what it is.
  - InvisibleCities 11y ago
    >The flip side of that coin is that some companies, under pressure to "grow up", become misguided—destroying their core product and user base in the process. If your core "product" is massively unprofitable, it's not really a product at all.
    - idibidiart 11y ago
      There is sellability and there is profitability. Two entirely different things, but ultimately that which is sellable will be exploited for financial gains, and often it is pro`fit`able
    - rl3 11y ago
      >If your core "product" is massively unprofitable, it's not really a product at all. Tell that to Instagram or Snapchat.

grandalf 11y ago

Easy money is not necessarily all that it seems: It drives salaries up and creates an arms race for scarce talent that is crippling to many startups. It also creates a hype/hockeystick contest which is also largely unhelpful.

twelvedigits 11y ago
I agree. The strategic need for startups to exist in the Bay Area combined with the cost of living/cost of talent has caused costs to soar, necessitating more funding. Combined with easy money, this has been a tinderbox waiting to blow for some time.
rahimnathwani 11y ago
But if there were no easy money then those startups would have less money to spend on salaries as well. If we believe that easy money benefits established companies more than it does startups (not sure) or funded startups more than bootstrapped ones (almost certainly) then the net effect might be bad. But an 'arms race for scarce talent' probably benefits a large proportion of the readers here, and harms a much smaller proportion.
- jhonovich 11y ago
  "But an 'arms race for scarce talent' probably benefits a large proportion of the readers here, and harms a much smaller proportion." In the short term, yes. In the long term, it can lead to crashes where a large number of the readers here may struggle to get jobs at any price for a period of time.
  - rahimnathwani 11y ago
    "it can lead to crashes where a large number of the readers here may struggle to get jobs at any price for a period of time" You mean because high salaries, over the medium term, may result in increased supply of developers?
- grandalf 11y ago

jluxenberg 11y ago

He said low interest rates have encouraged many investors to pour capital into private tech investing, fueling high valuations. If interest rates “stay at zero, rather than seeing a hard correction, you might start seeing volatility.” VCs are investing in private tech companies expecting 10-100x returns on about 20% of their fund. Which works out to at least 20% return per year on a 10-year fund. It doesn't make sense to me that an investor who would choose a VC fund as their vehicle would suddenly choose a Treasury note when interest rates go up 1-3%. A VC fund should still outperform that.

pbh101 11y ago
But if LPs are targeting a certain return, then their capital allocation could swing towards including more Treasuries when their interest rate goes up. Of course that's in a vacuum. In reality I expect many of the asset classes in their portfolio to have some dependence on Treasury rates, which perhaps would result in wider capital reallocations (or change in relative allocations going forward).
cynicalkane 11y ago
We're not talking about a binary choice. Rather, low Treasury rates influence the risk-interest demand curve across the broad market. People are pushed into low yield on low risk investments, which pushes yields lower on marginally more risky investments, &c. Furthermore, leverage allows you to make portfolios that mimic the risk of other portfolios of riskier/less risky assets. In a theoretically perfect market where the replication can be exact, this fact alone can generate the entire risk curve.
austenallred 11y ago
What Gurley is referring to here is actually a level higher up than VCs. He's talking about the people who give VCs their money - Limited Partners or LPs. LPs are usually very high net worth individuals or funds who invest a portion of what they have in venture funds. VCs are the people who get paid for managing those funds. If you're responsible for managing the Harvard Endowment Fund (which is larger than the GDP of most nations) you're going to be investing large chunks of capital, and you're going to try and diversify the way you invest it. Say you put 20% into commodities, 30% into real estate, 40% into mutual/hedge funds (the stock market) and 10% into tech via VCs. (Of course, these numbers are complete bogus.) If the market shifts and all of the sudden you expect really low returns from some parts of the economy, you may shift that money into other parts. So instead of putting 10% into tech you might bump that to 20%. If that happens across the board VCs will be flush with cash, but unless there's a systemic change in how companies are starting they'll still be responsible for dumping that cash into companies. Remember: if you're a VC it's literally your job to invest the money the LPs give you. All of the sudden every VC has tons of cash and there aren't enough good companies to invest it in. You might as well invest at really high valuations in the quickly growing companies: It's either that or taking bigger risks on lower quality companies. (Gurley has argued that both of these things are happening, but in this article he's more specifically arguing the former.) The assertion Gurley makes is that now the market is starting to correct itself a bit. That correction takes place when either the returns are low enough that LPs stop investing as much of their capital in VC or if other investment opportunities heat up and LPs abandon VC to some extent. Interest rates haven't gone up, so it's not like there's money moving out of VC to make other particularly great investments, but companies aren't being bought very quickly or going public. This means VCs aren't able to give cash money back to the LPs. Therefore the LPs can't reinvest this cash in new companies, and there's still some level of skepticism around whether these companies will return what they're "worth" on paper at the end of the day. If they put less money into VC the companies raising money will have a harder time doing so. Gurley is arguing that this is happening now. Overall VC is a minuscule part of the overall economy - it's basically a rounding error - but how much money is in VC is very much dependent upon how other parts of the economy are doing.

idibidiart 11y ago

Doom and Gloom. Tech shorting cycle has been initiated by the Borg.

taneq 11y ago
Gotta push the market down before the next round of buy-low-sell-high!