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Dizzying Ride May Be Ending for Startups
- rdlecler1 11y agoIf Fidelity just did a 25% write down on SnapChat on the most senior portion of a $600m investment round, and assuming that Fidelity has at least a 1x liquidity pref/ratchet, then SnapChat is now valued at $462M floor, not $15 billion.
- vincent_s 11y agoWhat about other investors who also have liquidity preferences?
- ericd 11y agoThe latest investment/liquidity pref is usually satisfied first.
- mring33621 11y agoPeter Gregory is definitely, posthumously, very disappointed in SnapChat.
- econner 11y agoI don't follow. Can you explain in more detail?
- rdlecler1 11y agoIf they are guaranteed to at least get their money back AND they did a 25% write down, then they are assuming that if there was a liquidity event tomorrow, that that would only get back $0.75 on the dollar, and others less senior get $0. This means that SnapChats valuation mark-to-market price is only $462M because that is all they feel that could be recouped.
- damon_c 11y agoIf I may speculate, it seems like the end result of this situation will be that in the future, startups will avoid taking money from mutual funds or anyone else who must attempt to accurately value their holdings publicly, whenever possible.
- dragonwriter 11y agoThat preference would reduce the available supply of startup investment money, and thus valuations.
- untog 11y agoIf they have a choice. The situation where startups are spoiled for choice in investors will not continue forever. Frankly, the fact that public valuations (of any kind - see Square's IPO level) are lower than private ones should be ringing alarm bells all over, not be dismissed.
- kshatrea 11y agoLooking at India, this can be conflated with a global level ending of the dizzying ride. [0] gives a good overview of this. In short, the free lunch is now over and people are asking for results. I am sure it has a lot to do also at an economic level with the Fed now talking of tightening- that means interest rates are headed higher and there is more aversion to risk. I am not an economist, so others might have different opinions. [0] https://goo.gl/9MfjBa https://goo.gl/9MfjBa
- billybilly1920 11y agoit's ending again? Wasn't it supposed to end the year before, and the year before that, and the year before that? When is google going to just drop news.google.com and have an algorithm write the same stories over every year? Next up: The next [pick top product] killer! you won't believe how [pick new or underdog product] is going to completely replace [pick top product] due to it's [pick random feature in [pick new or underdog product]]
- zzalpha 11y agoFunny, folks used the same line of reasoning prior to the real estate bubble popping in 2007-2008. But, that doesn't stop the Pollyanna's...
- nnoitra 11y agoIf news like this had any predictive value then journalists would be the richest group in the world.
- gtpasqual 11y agoThis is a sad and futile argument. You're also trusting too much in Twitter tech celebrities.
- mironathetin 11y agoNext bubble burst is close.
- idibidiart 11y agothe sky is falling...
- mironathetin 11y ago... on our heads :o))
- mironathetin 11y agoCan't help a smile: Our pun is downvoted to be the least helpful on this page. Now look at the top rated contribution. A few more words but essentially the same meaning. Its just that the original nytimes article is so ridiculous, that it deserves nothing but making fun of it.
- idibidiart 11y agoSarcasm and subtle humor has always been problematic on the internets. It's just that on Hacker News you'd expect that most people are more clued and would appreciate the playful/funny variety, but noooo they tend to take it quite literally.
- deleted 11y ago[deleted]
- jgrahamc 11y agoIt's time for a new term: a "Pegasus" (a different kind of mythical horse than a unicorn): https://twitter.com/jgrahamc/status/658702918200250368 https://twitter.com/jgrahamc/status/658702918200250368 Pegasus (n) 1. Mythical winged horse; 2. Silicon Valley 'unicorn' with high gross margin. i.e. one that might actually take off.
- sp332 11y agoA pegasus doesn't have a horn. A flying unicorn is usually called an "alicorn" but also pegacorn, unisus, or unipeg. /pedantic
- bhauer 11y agoMaybe jgrahamc already edited his comment, but I don't see that he ever said a pegasus had a horn. On a separate matter, I would prefer to not use either term, but people love these convenient categories.
- debacle 11y agoTo be far more pedantic, Pegasus is the name of a single flying horse, it's not the name for horses with wings.
- AdieuToLogic 11y agoObligatory Futurama reference: You are technically correct, the best kind of correct :-)
- 11y ago
- Alex3917 11y agoI think a lot of companies who raised seed funding prior to 2010 or 2012 did so at excessively low valuations, and then tried to make up for it later by raising at excessively high valuations once they hit. The 'bubble' over the last couple years that's driven up pre-seed valuations should actually make the current crop of startups more stable over the long run. Also, the decaying state of physical infrastructure in the U.S. is only going to drive more people to spend time on the Internet, where network effects are only getting exponentially more powerful as new networks are getting built on top of existing networks. These days a social startup that's "only growing as fast as Facebook" might not even be able to successfully raise a seed round. There might be a cyclical downturn, but none of the underlying trends in society point to tech being a bad investment over the longterm.
- idlewords 11y agoThe fact that our roads are crappy is going to turn people into shut-ins?
- Alex3917 11y agoBasically, yes. I think better examples though would be: - A rapid increase in states requiring HS students to complete some of their classes online in order to save money. - Folks being unable to get treatment for all sorts of health conditions and mental illnesses. - The prison system not providing adequate job training or rehabilitation. - The costs of college education increasing while the quality of that education decreases. Are Internet startups the best way to solve all of these problems? Probably not. But in each of these cases startups are going to rake in the bulk of the money, if only because they're going to be the only game in town. Thanks to complete gridlock at the federal level and general incompetence at the state level, sandhill road has effectively become the new congress. And like it or not, this probably isn't going to change anytime soon. And as for your example with the roads, to quote @noUpside on Twitter the other day, "SF specializes in creating companies that are essentially 'New York as a Service' bc its infrastructure sucks." (https://twitter.com/noUpside/status/659094021151789056 https://twitter.com/noUpside/status/659094021151789056)
- chollida1 11y agoFidelity has just marked its shares down from $30.72 at the end of June to $22.91 for the end of September. To be fair, I think these markdowns have more to do with who is investing than the companies themselves. VC's do portfolio valuations much less frequently than mutual funds, PE firms or hedge funds do and they give less negative scrutiny to the valuation than the aforementioned firms do, the reason for this.... ... is VC firm's typically don't allow redemptions on monthly intervals which means they can keep an unrealistic valuation for longer where as Hedge funds, PE firms and mutual funds, who typically allow monthly redemption, need to properly value each holding at the end of each month. I mean if you are a VC, do you care if you don't write down Snap-chat at the end of the month, you really have no incentive to do so? You get paid on a quarterly basis on the size of your portfolio, why mark it down until you are absolutely certain that it needs to be marked down, this point is usually not until you actually go to sell, be it IPO or private equity deal. However, if you are a hedge fund and someone wants to redeem their assets, you want to make sure you value Snap-chat for what you can realistically sell if for as that's essentially what you are doing when you allow someone to redeem their funds from your firm. With people pulling money out of hedge funds, and PE firms on a monthly basis, this makes you have to pay attention to valuations on a much more granular time frame than historically VC firms would have.
- roymurdock 11y agoThanks for the explanation of the different incentive structures for VCs vs. mutual/hedge funds. Can you explain where large mutual funds get the money that they invest in the late rounds of these private companies? Is it mostly institutional/pension/retirement funds? Who is losing when Fidelity writes down a late stage investment in a private company? I'm assuming the fund manager, but do the investors lose as well, or will they only lose if it causes a panic/bank rush with all investors clamoring to withdraw from the fund asap?
- surfearth 11y agoNo PE firms allow quarterly redemptions in traditional fund vehicles. PE firms and VC firms use precisely the same legal structure and are both generally required to value assets and report to partners on a quarterly basis. Some PE larger PE firms will have quarterly/semi-annual audits, but most PE and VC firms audit their financial statements (and thus valuations) annually. Also note that most funds calculate fees on committed capital during the investment period (typically five years) and subsequently on invested cost, not fair value, afterword. Therefore the portfolio valuation has little to do with management fee calculations.
- hvs 11y agoFor those of you too young to remember, there were numerous articles written about the bubble bursting before it finally did in 2000-01. It wasn't a surprise that it did, just that no one knew precisely when it would. My point is that arguing that people have said this bubble was about to burst and that it hasn't yet isn't an argument that it won't.
- austenallred 11y agoA good strategy as an analyst is to predict a downturn coming. You can be wrong for six or seven years, and then if/when there is a downturn you say, "I told you so!"
- xienze 11y agoThe thing is though, there are just as many people saying "it's different this time". The person predicting a downturn will inevitably be right. The other person... not so much :).
- learc83 11y agoThere will inevitably be a downturn. When people say "it's different this time" they don't mean that there can never be a downturn, they mean that when it happens can't be predicted by looking at past events. And they mean that when it happens it will be different--perhaps not as bad. There is a huge difference between this time and last time. The internet is much more mature for one. People depend on web apps now in a way that's not going to change just because the market swings. Another thing that's different is that people spend more time on software distractions when the economy tanks, not less, so a global downturn is likely to drive consumer spending away from the real world into the virtual.
- zzalpha 11y agoThere is a huge difference between this time and last time. Is it, though? Instead of overvalued companies based on the theory of "put it on the internet", we have overvalued companies based on the theory of "put it on the internet and get a billion users". Companies that, by and large, struggle to break even without telling a compelling story for how they'll monetize (let alone achieve or retain) that huge projected subscriber base. For those that have a semi-believable revenue model (e.g., Uber), they make their money as rentiers, trying to scrape money off the top by matchmaking between actual service providers and customers... and in a lot of cases, they do so while violating labour laws vis a vis contractors (and in a lot of cases, regulations in the industry they're attempting to disrupt). I know the Pollyanna's around here want to insist that this time is different. That these companies have fundamentals now! Except, I don't see it. It looks like the same billion dollar gimmicks to me, just a decade and a half further down the road.
- alp1970 11y agoI always get scared when "delivery" based start-ups get hot. Reminds me of Kozmo, UrbanFetch, WebVan, Askville...
- ChicagoBoy11 11y agoEveryone in this thread should check out E-Dreams.
- lalos 11y agoJust like Postmates
- tmaly 11y agoI was doing a paid internship at Intel in 1999 out in Portland, OR. I remember seeing huge numbers of new hires every week. I met people out in Portland that were hired to due VB programming with no programming experience. A few months later, the music stopped and there were too few chairs to go around. I always think of the Austrian business cycle when I see such huge upswings in things
- bredren 11y agoI was also at Intel in Hillsboro on a paid internship at this time. I recall a ton of projects across so many areas, with loose management. There was a guy in a QA group I worked in who just day traded.
- tmaly 11y agoI was in the Product Development Group working on the Itanium chipset at the time. I remember an older Engineer in the group that had written his own stock trading book. He only lost a dollar per share when the market went from 72 to 18
- koblas 11y agoWhat we're seeing an issue with valuations and investments. TechCrunch just did a really good piece on how a raise of $150M gave a $6B valuation with a preference that guaranteed a 20% return on investment to the Series E investors (at the cost to the early investors). http://techcrunch.com/2015/11/10/squares-s-1-of-ratchets-and-unicorn-valuations/ http://techcrunch.com/2015/11/10/squares-s-1-of-ratchets-and... So what we're seeing is that people are starting to re-think valuations in the face of these preferences.
- dgreensp 11y agoSam Altman has already explained why late-stage private valuations -- but not earlier-stage or public valuations -- are bubble-like right now: >To summarize: there does not appear to be a tech bubble in the public markets. There does not appear to be a bubble in early or mid stages of the private markets. There does appear to be a bubble in the late-stage private companies, but that’s because people are misunderstanding these financial instruments as equity. If you reclassify those rounds as debt, then it gets hard to say where exactly the bubble is. >At some point, I expect LPs to realize that buying debt in late-stage tech companies is not what they signed up for, and then prices in late-stage private companies will appear to correct. And I think that the entire public market is likely to go down—perhaps substantially—when interest rates materially move up, though that may be a long time away. But I expect public tech companies are likely to trade with the rest of the market and not underperform. http://blog.samaltman.com/the-tech-bust-of-2015 http://blog.samaltman.com/the-tech-bust-of-2015
- paragpatelone 11y agoThere is a bubble at the seed stage. There are tons of people (accredited investors) investing that stage and tons of incubators/accelerators to help introduce those startups to those investors. Platforms like Angel list are helping fund allot more companies at the seed stage by having syndicates. Now even non-accredited investors will be able to invest in startups[1]. So the seed stage is bubbling up. http://www.usnews.com/news/business/articles/2015/10/30/sec-opens-door-to-startup-investing-for-all http://www.usnews.com/news/business/articles/2015/10/30/sec-...
- exelius 11y agoIt's not really possible for there to be a bubble at the seed stage -- valuations at that stage are "paper" values because there's zero liquidity. Companies also tend not to stay in the seed stage for long enough to cause an asset bubble; they are either able to acquire follow-on funding (at which point they're no longer a "seed" company) or they aren't and they disappear. The seed stage is increasingly crowded, but IMO that's a good thing.
- deleted 11y ago[deleted]
- ForHackernews 11y agoOh thank god, finally. Maybe I'll be able to afford an apartment again.
- ForHackernews 11y agoOh thank god, finally. Maybe I'll be able to afford an apartment again.
- bsg75 11y agoIt would be a nice change if focus was on companies that produced a product or service with long term revenue prospects, instead of short term wildly high margins. The current state of highly educated people looking for get rich quick schemes (unicorns) is tiresome.
- axis967 11y agoI think there are far too many startups that focus solely on growth/reach. Build a sustainable business: revenue and more importantly gross margin are the key metrics that need to be thought about. While vcs want fast growth, it is often not in the best interest of common stockholders to jet ahead at the paces many of these companies go.
- debacle 11y agoWhile things might wind up bad for the next round of unicorns, things are likely to be better for startups overall once the trend of "To the moon!" dies down just slightly. Hopefully we can return to a world where an acquisition isn't seen as a failure.
- andy_ppp 11y agoI actually think the opposite, that we are in a period of history where all the software (and arguably businesses) people use day to day go from being crap to fantastic. A gold rush for good startups I think. The returns from sitting the right group of people in a room and getting them to make doing something a few orders of magnitude better than it was before is always going to be fantastic.
- thinkt4nk 11y ago> Dizzying Ride May Be Ending for Startups > may tap the breaks
- code4tee 11y agoThe only people that don't see a bubble at the moment are the people inside the bubbles. If your business has real revenue and real profit then there isn't much to worry about. If your business is valued on "hype" and theoretical valuations then you have reason to worry.
- nilkn 11y agoI'm so glad I work at a company right now that has never taken funding and is legitimately profitable. Hiring and expansion have been hard when you don't have access to far more cash than you could ever generate yourself, but it's hard to put a number on knowing that you won't be affected much by an industry downturn (doubly so since none of our customers are software companies).
- jacquesm 11y agoIn fact everybody else's downturn will be your opportunity.
- icelancer 11y agoYup. The only debt we have is a rotating LOC for physical inventory (we ship hard goods) of which we have 2x in cash on hand, but obviously debt service of inventory is more efficient than cash service of inventory. I read HN and other sites and I am just in shock of the fact people are creating... basically nothing sustainable and hoping it will somehow magically become sustainable? It boggles the mind.
- Tossrock 11y agoEven if a business has real revenue and real profit, there is still danger depending on the source of that revenue and profit. If there's a large downturn in the startup world, b2b/SaaS companies which profit from startups will suffer too. What will the effect to github/pagerduty be if 3/4ths of startups vaporize? "Not good", I would wager. Ultimately, it's about the source of the money. SaaS companies are higher up the "trophic chain" than than the startups that pay for their service, but VC money can still represent a substantial portion of their revenue, just passed through an intermediate company first.
- superuser2 11y agoIt's an interesting time to be a year from graduation in CS, that's for sure. Maybe the folks beating the STEM drum will finally shut up when CS sees employment comparable to underwater basket weaving.
- rchaud 11y agoThat assumes that CS grads will look for work exclusively in a technology role. The skill set of a CS major is applicable to roles well outside programming. Management consulting and financial services for instance recruit CS and EE grads by the bucket load. CS employment in startups may decrease in the event of a startup bust, but mature companies like Apple, Amazon, Microsoft, Google, IBM etc. aren't likely to drastically change their hiring patterns unless their own business have been materially impacted.
- superuser2 11y agoOh sure, people will still hire programmers, but I expect conditions to worsen dramatically. The rockstar making a $100k+ salary in a $1000 chair on top-of-the-line hardware with free meals at the office experience is very much an artifact of the startup bubble. Mature tech companies offer that to stay competitive, but I expect we'll see a return to salaries closer to $50k in grey cubicle Pointy Haired Boss environments when the bubble bursts.
- alphonse23 11y agoMy thoughts right now are: how will this reflect on Atlassian IPO?
- brianmcconnell 11y agoWhenever I hear the term "unicorn", I think of the Squatty Potty TV ads (they're funny!)
- vox_mollis 11y agoMeta: why on earth is this submission being flagged off the frontpage ?