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> 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

> 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.
      - austenallred 11y ago
        > Tell that to Instagram or Snapchat. This is no longer true for Instagram. It should generate $595 million in ad revenue this year, and is expected to reach $2.81 Billion in annual ad revenue in 2017. (Remember: this company was purchased for $1 Billion.) So, to recap, Instagram was "massively unprofitable" for five years, after which it started bringing in revenue most easily measured billions. In other words the notion that a product isn't "a product" until it's profitable is farcical.
        Pizzalover 11y ago
        Citation needed
  - chetanahuja 11y ago
    "However, that doesn't preclude these businesses from being incredibly valuable to larger, more established corporations with sizable cash reserves" A business that's burning 100's of millions a year and has valuations in billions of dollars is rarely going to be "incredibly valuable" to a bigger company.
- 7Figures2Commas 11y ago
  Like it or not, this is part of the game that's played in Silicon Valley. It's a high-stakes game to be sure and a lot of companies (perhaps most) are not going to make it. But I suspect many wouldn't have made it if they tried to build a profitable business anyway because they're operating services that probably can't be run profitably (or very profitably).
twelvedigits 11y ago
You wrote: "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." In the words of Clay Davis from The Wire: "You think I have time to ask a man, 'why he givin' me money?' Or 'where he gets his money from?' I'll take any motherfucker's money if they givin' it away." Many VC's encouraged startups to raise as much money as they could while the getting was good. That is a good move for the VC's (raises the value of their shares) and the entrepreneurs (they get more money). But everyone should have known that interest rates were going to rise in the future, and that's the one trigger that will truly change the capital market.

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.
    - austenallred 11y ago
      > Tell that to Instagram or Snapchat. This is no longer true for Instagram. It should generate $595 million in ad revenue this year, and is expected to reach $2.81 Billion in annual ad revenue in 2017. (Remember: this company was purchased for $1 Billion.) So, to recap, Instagram was "massively unprofitable" for five years, after which it started bringing in revenue most easily measured billions. In other words the notion that a product isn't "a product" until it's profitable is farcical.
      - Pizzalover 11y ago
        Citation needed
- chetanahuja 11y ago
  "However, that doesn't preclude these businesses from being incredibly valuable to larger, more established corporations with sizable cash reserves" A business that's burning 100's of millions a year and has valuations in billions of dollars is rarely going to be "incredibly valuable" to a bigger company.
7Figures2Commas 11y ago
Like it or not, this is part of the game that's played in Silicon Valley. It's a high-stakes game to be sure and a lot of companies (perhaps most) are not going to make it. But I suspect many wouldn't have made it if they tried to build a profitable business anyway because they're operating services that probably can't be run profitably (or very profitably).

twelvedigits 11y ago

You wrote: "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." In the words of Clay Davis from The Wire: "You think I have time to ask a man, 'why he givin' me money?' Or 'where he gets his money from?' I'll take any motherfucker's money if they givin' it away." Many VC's encouraged startups to raise as much money as they could while the getting was good. That is a good move for the VC's (raises the value of their shares) and the entrepreneurs (they get more money). But everyone should have known that interest rates were going to rise in the future, and that's the one trigger that will truly change the capital market.