15 ms·

Dear Startups: Here’s How to Stay Alive

432 points by whbk 11y ago

ohadron 11y ago
Good read. Sounds like good advice in general, regardless of how hard it is to obtain capital.
- arielm 11y ago
  Totally agree. In a world that runs on money getting to profitability should not just be something you strive to get to but rather something you have. Until you do you shouldn't let anything else take away from your focus.
- c0l0 11y ago
  Funny - it sounds and awful lot like the absolutely uninspired, flat-out obvious to me, that, summed up in one word, reads "austerity". However, following this piece advice sure makes it cheaper for other parties to acquire parts of those [companies] that do :)
tarr11 11y ago
The cynical side of me wonders if all this is "helpful advice" from VCs is just designed to bring valuations down to earth.
- mathattack 11y ago
  I am a cynic about VCs "Talking their books" but this is a little different: - The stock market is off 20%. - Very few IPOs. - Many hot IPOs are under the offering price. - Most of the public market investors that have entered late in the game (Fidelity, etc) are marking down their positions, and holding off on new investments. Every solid company should have a "What would we need to do to get cashflow positive?" scenario. It may damage longterm valuation (cutting growth does that) but at least it gives the existing investors an option: "We can enter survival mode and do X, or you can fund us with Y, and we can do Z"
  - ojbyrne 11y ago
    Which stock market is off 20%? When I look at the Dow or S & P , I see a roughly 10-12% decline from its peak value. And after 2 days of up 2%, suddenly there's a headline saying "the bulls are back."
    - mathattack 11y ago
      NASDAQ's high to low was approximately 20%. After today's rally it's perhaps 16%? NASDAQ is the better index since that's the more likely liquidity source.
  - dismal2 11y ago
    so far, no IPOs this year!
- tdaltonc 11y ago
  Is there no objective way to tell if things are really cooling? Or for what types of startups things cooling?
  - rcarrigan87 11y ago
    I can see B-2-C apps, anything social, chat, or apps where the monetization strategy is primarily advertising revenue running into trouble raising money. Good B-2-B biz most likely still get funded.
  - nostrademons 11y ago
    There is no "objective way" when it comes markets, there is only what the market will give you. If the market will give you $450M for 5% of a product that doesn't work (a la Theranos), then objectively you're worth $9B, at least until you go bankrupt and then you're worth nothing. If the market is dead but you somehow manage to IPO anyway, save the company, and sell for $1.5B, you're worth $1.5B (a la LoudCloud/Opsware). If you want to find out what you're worth, try to raise money, and whatever you can get is your answer. This throws a lot of people for a loop who want one source of objective truth for everything. But markets don't work that way: they're just deals between individual people, which may or may not become public. If somebody else makes a deal that you think is absolutely crazy, it is objective truth for them but absolutely irrelevant to you. Personal finance works the same way. I know a few folks who were momentarily multi-millionaires during the dot-com boom; then valuations came crashing down and they were completely broke. We also tend to think of the value of a dollar (in cash) to be stable, but as anyone who lives in Zimbabwe can tell you, that's not a given.
    - rokhayakebe 11y ago
      So technically you can raise $1M for 0.1% of your startup and give the VC some crazy 20x liquidation preference. Now the market has you at $1B in valuation.
      - nostrademons 11y ago
        Exactly, and several unicorns are doing things exactly like that: http://blog.samaltman.com/the-tech-bust-of-2015 http://blog.samaltman.com/the-tech-bust-of-2015 I could drop the market cap of Google down to $3.4M right now. All I have to do is sell one of my shares for $0.01. The thing is, it would pop right back up again to $483B within a few milliseconds, and I'd just be out $690, so there's kinda no point to it. (Pedantic note, since I know there's gonna be someone in the financial industry that corrects me: no, I couldn't, technically. When I put in a sell order, it goes into the order book, and buyers are required by law to take the best offer, which is probably more than mine. I'd have to place my order at a time when there are no outstanding limit offers. This has actually happened during flash crashes and technical glitches, but is not a normal occurrence.) Privately traded companies are similar, but because there's less liquidity, the price doesn't necessarily correct on any reasonably time scale.
- gyardley 11y ago
  Oh, it's decent advice for right now. Of course, you probably need that decent advice because you listened to your VCs' previous decent advice in better economic conditions - "don't worry about profit, just grow grow grow as fast as you can." The cynical side of me thinks that it's this flip-flopping between two extremes that ends up disproportionately benefitting investors, and that entrepreneurs would be better served by always assuming economic conditions will change and preparing accordingly.
  - nostrademons 11y ago
    Nah, I figure that venture investors operate under conditions of extreme uncertainty, which means that they make decisions almost purely on emotion. That's what our emotional circuits are made for, after all: subconsciously aggregating a lot of signals so we can make decisions when there's not enough information to process it rationally. And yes, entrepreneurs are almost always better off ignoring everything an investor says and using their own data (which ought to be better than that of an investor's, otherwise why the hell are you founding a company?) to come to a conclusion. The "Mr. Market" allegory was published in 1949, but it's never been more apropos. Pretty much all venture capital operates on this principle; use it to your advantage: https://en.wikipedia.org/wiki/Mr._Market https://en.wikipedia.org/wiki/Mr._Market
    - aorloff 11y ago
      Kahneman and Tversky, Prospect Theory. Applies to investors, VCs, and ordinary people at the grocery store.
  - aorloff 11y ago
    Holy shit I was about to write a comment to say - YES!!! absolutely. And then its you. Well, you are still right, and its still what I was thinking.
- mindcrime 11y ago
  The cynical side of me wonders if all this is "helpful advice" from VCs is just designed to bring valuations down to earth. I'm not really into conspiracy theories as a rule, but I will admit to having a similar thought. At the last, I find myself wondering if advice from VC's - especially regarding something like valuation - doesn't inherently tend to be self-serving on their part. Remember, the objectives of a VC and the objectives of an entrepreneur aren't always aligned. That said, you can't really argue with this part: You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time.
  - tragic 11y ago
    > I'm not really into conspiracy theories as a rule, but I will admit to having a similar thought. Though I agree with the substance of your comment, I don't think it's a 'conspiracy theory' to expect a VC to have her percentage in mind. That's just capitalism.
  - lmm 11y ago
    That kind of company has no business taking VC money in the first place. A VC shouldn't want to invest in a company that doesn't need VC money, and I'm kind of surprised that they would want to encourage their portfolio to transition into that kind of company - such a company isn't going to be the "home run" that VCs make their money off.
    - mindcrime 11y ago
      such a company isn't going to be the "home run" that VCs make their money off. Two thoughts: 1. It might. But it might not do so in the time-frame that VC's typically expect. Since funds tend to be time-boxed, VC's generally need to see not just a specific return, but they need to see it by a certain point in time. The older a given fund is, the more pressure to "do it now". 2. That said, nothing says growth has to be a smooth curve (whether it's linear, exponential, or whatever). You could be on an exponential growth path, slow down to flat, or even shrink, due to external macro-economic factors, or strategy, or whatever, then ramp back up again later and "go exponential" when things change. and I'm kind of surprised that they would want to encourage their portfolio to transition into that kind of company 3. Well if the alternative is going out of business and resulting in a valuation of 0 for everybody involved, almost any alternative is better. I see it not as a call to give up on being a "home run" but as a call to batten down the hatches, hunker down, weather the storm, and then adapt as circumstances change.
- davidjgraph 11y ago
  When the market takes off again, I'm sure you'll see the flip-side posts from VCs, explaining how startups need to push for higher valuation and better terms, proving you wrong 8-).
  - mathattack 11y ago
    It depends on which side of the transaction they are. :-) New investors will keep pushing for lower prices, existing investors will talk up the values!
- draw_down 11y ago
  ... or there could be a bubble bursting. Contrarian takes aren't necessarily correct by the virtue of their contrarianism.
- musesum 11y ago
  If memory serves: Heidi Roizen had one of the best ROI track records during the Dot Bomb era, having exited most of her portfolio just before. Meanwhile, a friend mentioned that Benchmark had lost a whole fund. I don't have numbers in front of me and the Benchmark comment was hearsay -- so, please correct if I'm wrong. Point is: that some VCs were better at timing than others during a down cycle; I would pay very close attention to what Roizen has to say.
- davemel37 11y ago
  Their argument would be that this hurts their portfolio companies as well so they are not incentivized to drive prices down.
roymurdock 11y ago
You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time. If you don’t, you have to get money from someone else to keep going. And, as I just said, that’s going to be way harder now. I’m embarrassed writing this because it is so flipping simple, yet it is amazing to me how many entrepreneurs are still talking about their plans to the next round. What if there is no next round? Don’t you still want to survive? Yes, some companies are ‘moon shots’ (DFJ has a fair number of those in our portfolio) where this is simply not possible. But for the vast majority of startups, this should be possible. What is the point of calling them start ups anymore. Remove the high risk/high reward aspect and new companies are simply small businesses that receive small business loans from banks. A lot of the "wow" factor of the startup ecosystem was the mind boggling user growth/high valuation/massive losses phenomenon that a few companies weathered through to IPO and monetization. I think I saw someone advocating for better terminology on HN recently. I vote to call any close-to-profitable <2 yr old company a small business. Likewise, any portfolio that holds mostly safe small business loans and equity should simply be called a bank. Leave the unicorn/VC/startup lingo in the past, or use it to describe actual risk profiles, and things will be a lot less confusing.
- andreasklinger 11y ago
  i would love if a term for this kind of small businesses would establish given that more and more startups go niche + traction first and often are ok w/ staying there there is also the need for a different finance model imo
- Disruptive_Dave 11y ago
  I started writing this then got distracted. Everyone not only needs to collectively define what a "startup" is, but more importantly, don't blow sunshine up my ass by telling me to act like an SMB. Because I don't run into many investors who get excited about my company's reasonable P&L. There's a significant difference between a company running like a small biz and a hyper-growth-at-all-costs one. It would be quite helpful to know which investors are interested in each, all the BS put to the side. edit: I do realize (and hope) that the current financial environment helps to bring everyone back down to earth a bit.
arielm 11y ago
I think the startup world has become somewhat of a fork of how real companies should be built. Over the last few years companies have been investing into "scaling" and getting traction with no real revenue to substantiate any of the growth. That to me is backwards, and why those startups are fearing for their lives now. Companies should be built with revenue (and profit) in mind, and in most cases those are the ones that thrive and succeed.
- c0l0 11y ago
  That's exactly how the financial markets/businesses have become somewhat of a fork of how "real" markets/businesses should work over the last two or so decades. I've always perceived startups to be some kind of an extension of these (highly questionable) concepts and principles into the tech space. These days, it sems we're drawing closer to witness a clash of this weird, bubbly universe of its own with the real world as it were. The only real questions about it, I think, are: when _exactly_ will it happen, and what will the fallout look like?
- bkjelden 11y ago
  Scaling without revenue makes sense if you're in an industry with strong network externalities or large economies of scale. In those cases, expensive customer acquisition is okay because customers have a very high lifetime value. During the "unicorn boom", I think we all had this belief that network externalities were very common in tech - a belief driven by the rise of facebook, google, and others. But now we're realizing that maybe strong network externalities are just as rare in tech as they are in other industries - and a business without network effects that's losing money for growth is just a business that loses a lot of money. This NYT article from last week seemed to do a good job summing up the issue: http://www.nytimes.com/2016/02/13/business/dealbook/the-rise-and-fall-of-the-unicorn.html http://www.nytimes.com/2016/02/13/business/dealbook/the-rise...
  - drmcninjaturtle 11y ago
    Great points. I would add that during the "unicorn boom", we also had the belief that proprietary tech would protect the market position of a large, low-profit companies, giving them time to monetize. It now seems that we may have overvalued this effect. In fact, startups can grow quickly because new tech makes the first mover advantage tenuous; why should the effect that allowed us to climb the mountain now prevent others from doing the same?
jorgecurio 11y ago
> You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time. If you don’t, you have to get money from someone else to keep going. And, as I just said, that’s going to be way harder now. I’m embarrassed writing this because it is so flipping simple, yet it is amazing to me how many entrepreneurs are still talking about their plans to the next round. What if there is no next round? Don’t you still want to survive? Sort of reminds me of the conversation with a senior developer I had the first time I joined a startup and my first company lunch at my first job. Me: "So, we just spend whatever money the company makes" him: "Correct" Me: "what if the company is burning all the money it makes to grow as fast as possible, and they can't raise money anymore?" him: "that will never happen" Me: (concerned) "so the company is constantly breaking even" him: "sometimes" ME: (shocked) "so the company loses money some year, yet raises more money year after year so it can lose more money the following year than the last" him: (annoyed) "you studied economics haven't you? you dont get it? everyone knows this is how you do startups what did they teach you in that shithole?" (everyone else laughs) end scene. That was 4 years ago. I checked the glassdoor comments and boy I didn't think a 2.1 rating was possible on glassdoor because that would pretty much scare off anyone in the job market....and yup the company is going under exactly for the reasons I asked 4 years ago but was ridiculed at my 'ignorance' another one bites the dust for vancouver's brain drained tech scene. thank god I won't have to work here again in the near future.
- CPLX 11y ago
  Ah, memories. In 1999 I was working for a soon to be doomed music startup, and recall being at a lunch with the founder, who was even younger than me in my early 20's glory. He was quite impressed with himself having raised $1MM and hired a team of 20-30 or so of us. Me: [Suggesting we should consider a couple things that would give us some revenue, and be mindful of spending] Him: Listen, you're pushing it here. No offense to your economics degree but it's not like you've founded a business that's made more money than I have. Me: Of course I have. Him: When exactly did that happen? Me: I ran a profitable lawn service business. I don't know the exact figure but we netted thousands of dollars over the lifetime of the business, which is about half a million dollars more than this business, as far as I can tell. Him: [Grrk, change the subject...]
Ftuuky 11y ago
What? One of the advice is to get cash flow positive with the money you already have. Isn't that basic knowledge? You can't spend more than you have and you only ask for other people's money when you don't need it. Idk, maybe this is an american thing, with all the capital you have but here (Portugal) you can't get series A funding without being at least cash flow positive, no way.
- floppydisk 11y ago
  The American VC market has been saturated and everyone with a spare dollar has been throwing cash into the market trying to find the next Google/Facebook/Twitter. A lot of institutional money started looking at the VC market as a way to maintain a 7-10% rate of return when traditional investment vehicles started going sideways. You could get funding for a portable neighborhood pony washing service if you built an iPhone app backed by an AWS service and called it Uber for Pony Washers (or some such)if you looked hard enough. As the article points out, this is changing. The boom part of the boom-bust equation is starting to flatline with IPOs happening less frequently and for less money and the institutional investors who get in later in the game to buy out the initial VCs being more gun shy about investing. Net result for the market? Startups need to focus on being a functioning business generating positive cash flow rather than a money pit that occasionally generates a lottery ticket. Not everyone will succeed, but the changing economic climate will push a lot of the fair weather pony washing app founders out and leave the more seriously business minded people which should result in a new wave of solid companies capable of handling more strenuous economic conditions.
- Swizec 11y ago
  Uber's financials leaked a few months ago. They lose millions of dollars per quarter. They were able to raise 10 billion dollars according to CrunchBase [1]. [1] https://www.crunchbase.com/organization/uber#/entity https://www.crunchbase.com/organization/uber#/entity
- rco8786 11y ago
  I'd venture to guess that the vast, vast majority of American startups that raise a series A are not cash flow positive.
carsongross 11y ago
"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result: happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result: misery." --Wilkins Micawber
jedicoffee 11y ago
Found the problem! "It is going to be hard (or impossible) for many of today’s startups to raise funds." You don't need to take on millions in debt to start a company.
- mindcrime 11y ago
  Strictly speaking, raising VC money isn't taking on debt. You're selling equity and if the company fails you don't - as a general rule - repay the investors anything. That said, I agree with your overall point about not needing to raise millions of dollars to start a company. That's one way of doing things, but hardly the only way. Another choice would be to just take a regular job and start your company as a nights and weekends side project (deal with any potential IP issues, of course), or do consulting in your area of business and gradually transition from a service company to a product company. I'm sure there are others.
  - jedicoffee 11y ago
    I agree, I may have been a bit open ended with my previous statement.
eldavido 11y ago
What goes unspoken is how tiny the overall effect of this will be. Yes, it will bring some concentrated pain to investors, CEOs, and employees of lots of companies. But how many people will be genuinely, life-alteringly affected by this? 1000? Maybe a few thousand? 1-2% of SF's population? By way of comparison Google has what, 50,000 employees? I keep having to remind myself that the big companies are the elephants in the room compensation-, real estate- and traffic-wise. They employ hundreds of thousands of people and pay billions of dollars annually in wages. As much as I'd like an affordable place to live, none of this will move the needle that much for the average Bay Area resident.
- timr 11y ago
  Google has ~60,000 employees worldwide. From various online sources, they have +/- a few thousand who live in San Francisco. Twitter and Yelp and Square and Dropbox and AirBnB and the other unicorns each employ somewhere in the mid hundreds to low thousands (e.g. 500-2,000) -- again, worldwide. The local numbers are lower. I don't know reliable this [1] is, but it suggests that there are ~50,000 tech employees total in SF, and the top 50 companies employ about 30,000 of those. So the big players have a lot of people, but it's not as dramatically skewed as you're thinking -- maybe 40% of tech employees work at smaller companies. That passes the smell test for me. Even assuming that the big players wouldn't lay anyone off (they would; they always do) That's more than enough to make an economic dent in a downturn. [1] http://www.bizjournals.com/sanfrancisco/blog/2014/02/jobs-at-tech-companies-google-twitter.html http://www.bizjournals.com/sanfrancisco/blog/2014/02/jobs-at...
  - dlandis 11y ago
    But even if a full 50% of the people working at small tech companies moved out of the city (10k by your count), how would that have any effect whatsoever on the economy? It would bring the population back to where it was about a year ago and employees of smaller companies aren't even among the highest paid.
    - lmm 11y ago
      Prices are determined by marginal buyers/sellers. And a lot of the economy is driven by expectation.
rpgmaker 11y ago
When a market like this turns, in order to survive, it is critical to redefine what success is going to look like for you – and your employees, and your investors, and your other stakeholders. Holding on to ‘old’ ideas about IPO dates, large exits and massive new up rounds can ultimately be demotivating to your team. . . Stop worrying about morale: Yes, you heard me right. I can’t tell you how many board meetings I’ve been in where the CEO is anguished over the impacts on morale that cost cutting or layoffs will bring about. With these prospects, I wonder how will these CEOs keep all those underpaid and highly skilled young laborers working for him/her now?
mindcrime 11y ago
On a related note, now's probably a good time to remind people of pg's famous "How Not To Die" essay, which is at least tangentially related to the topic at hand. http://www.paulgraham.com/die.html http://www.paulgraham.com/die.html
- code777777 11y ago
  Thanks, great read! His words from 2007 still ring true today. It was also nice to see how some of the startups turned out.
dsugarman 11y ago
>If you are in Silicon Valley and your customers are mostly well-paid consumers with no free time, or other venture-backed startups, well, I’d be worried. That's the most beautifully I've heard this thought articulated. I constantly hear people in SV talk publically talk about how they're living years in the future due to getting services from startups that haven't yet hit other markets. These people are very wealthy and very short on free time; they incorrectly assume the rest of the world is as well. The reason Uber became so successful was because it became cheaper than a cab in most major markets with world class service. You have to really dig deep to justify most other on demand startups having the ability to jump the shark and it's because they don't have a plebeian offering.
- lowglow 11y ago
  I've called these the 10% startups. They typically only serve people in the top ~10% of earners in the US.
  - AndrewKemendo 11y ago
    So basically any startup with an iOS only product (disclaimer our's is iOS only).
    - deleted 11y ago
      [deleted]
    - mineshaftgap 11y ago
      There are very good reasons besides demographics to start with iOS. Stability, consistency, lack of piracy etc.
    - zepto 11y ago
      Given that iOS has a 40%+ market share in the US, no.
      - georgemcbay 11y ago
mmaunder 11y ago
So the above is obviously written through a VC lens. Through an entrepreneur's lens - who also survived the dot-com bust (at etoys.com) and has since run several failed and now successful businesses - I'd add the following: The most valuable advice in this post reminds me of Marc A's awesome blog entry. Quote: "Companies that have a retention problem usually have a winning problem. Or rather, a "not winning" problem." http://pmarchive.com/guide_to_big_companies_part2.html http://pmarchive.com/guide_to_big_companies_part2.html In my opinion winning is, ultimately, measured by how much cash you can generate. We stopped thinking about an exit a long time ago while in the deepest darkest part of the valley of the shadow of startup death. We were forced to do it because we ran out of money and no one cared about us. Then we started focusing completely on our customers and our income statement. As soon as we did that, amazing things started happening. Cash, in this case and in this climate, is king. Or net income to be specific. If you're able to generate large amounts of cash and keep a lot of it, not a heck of a lot else matters. From my perspective the only problems that really remain is giving your team a great quality of life and serving your customers. Cash takes away issues like the board bugging you, investors breathing down your neck or (worst case) wanting to play CEO, hiring problems, retention problems, funding, what business are we in problems, product problems (you're obviously killing it, so do more of that!), exec hires, issues with rebellious execs (you're killing it, so you're implicitly right) etc. When you "go for growth" (numbers growth, not revenue) you give up all of the above and put yourself as a CEO or exec in a precarious position. Your arguments are no longer that defendable because growth means jack shit unless it generates cash or will very clearly ultimately generate cash. Think about the CEO of Giphy who just raised something like $50M at something like a $300M valuation. It's like my wife and co-founder says: Doing that you turn a cash problem into a much bigger cash problem. I'd add that you also now have less equity and less influence. For the investors it's awesome - the biz will likely bulk up on talent and worst case will exit as a talent acquisition at $2M per engineer and the investors (who get paid first) will recover perhaps everything that way with little left over. If I was early stage in this environment I'd do the following: Stop dreaming about a Deus ex Machina that will reach down and save your sorry ass. Stop fantasizing about acquisitions. If you don't you're going to inadvertently turn acquirers into your target market instead of your real customers. And humans aren't good at focusing on two goals at once. Then do absolutely everything you can to generate sustainable cash. Usually this means (if you're early stage) discovering who your customers are and what business you're in or (if you're later stage) serving the heck out of your customers and making sure that what you provide is worth more than each dollar they spend to acquire it. Then do more of that. If you're successful doing this, rather than raising money, you'll notice that the really big scary problems simply go away.
aledalgrande 11y ago
This is based on the "Techcrunch" concept that being successful and continuing business for a startup depends heavily on external funds. That couldn't be farther from the truth, for a real startup with a real business. Maybe growth will not be as fast without VC funds, but I don't think real businesses will notice shrinking investments. Correct me if I'm wrong.
- nostrademons 11y ago
  They won't. They might notice shrinking revenues if some of their customers were VC-funded startups or other people in that ecosystem, but the decline of funding is at worst irrelevant and at best good for them. (Less funding means less competition.) But then, since it's irrelevant, bootstrappers have little incentive to comment here, other than a few folks for whom HN has become a habit. From where I sit the bootstrap startup world is actually significantly larger than the VC world, but the incentives are different: it is not to a bootstrapper's advantage to publish what they're doing to people other than their customers.
  - aledalgrande 11y ago
    >> it is not to a bootstrapper's advantage to publish what they're doing to people other than their customers Good point.
- CamatHN 11y ago
  Usually startups, defined roughly as young companies with extremely high growth creating something new, to start off with are running at a negative cash flow to sustain their growth or development and plan to capitalise on the position later. These companies would struggle to operate with positive cashflows as their products/services and growth hasn't matured to allow for it yet. Perhaps they are building their product and/or are still in the early stages of iterating on their idea. Just because they have a decent business doesn't mean straight away they can consolidate right away on their business in terms of running a profit. A lot of decent future businesses could die if startups are forced to consolidate. However in instances this may be a wake up call to keep them accountable to the financials of their business.
arihant 11y ago
>If you are in Silicon Valley and your customers are mostly well-paid consumers with no free time, or other venture-backed startups, well, I’d be worried. This is the most shallow statement I have read this year. The needs of the rich today would be needs of less rich tomorrow. The author clearly missed out on the whole American dream concept. I'm sure some people felt the same way about refrigerator and cars. You'd almost never create a market segment starting with the bottom end. Almost every product you touch, including the very screen you're staring at, was once made for the 1%. And almost always the version for the 1% is expensive, won't see a version 2, and is a one time sale. It doesn't matter if your initial rich/busy customers are going out of business. If you found a need you're fulfilling, you will with a fairly high probability will continue to find customers through the generation. Dot com bust did not kill Network Solutions/Verisign. Very, very important.
deleted 11y ago
[deleted]
julianozen 11y ago
what a time to be alive
julianozen 11y ago
What a time to be alive
outworlder 11y ago
> It is going to be hard (or impossible) for many of today’s startups to raise funds. So, just like it is in most of the world, then?
matchagaucho 11y ago
DFJ has had some great exits over the years. But looking at their current active portfolio, they're a little exposed.... and certainly not investing in any early rounds. It's not surprising to hear they plan to slow down investing. But that's not necessarily a reflection of the overall market. http://dfjgrowth.com/portfolio http://dfjgrowth.com/portfolio
- tim333 11y ago
  Yeah I was wondering if overall funding has dropped that much.
deleted 11y ago
[deleted]
honksillet 11y ago
Dear VCs, You made a lot of bad investments. Prepare to take a loss.
melted 11y ago
A VC taking the valuations down and encouraging the companies to become profitable sooner, to get a fatter slice of a tastier pie when founders come begging for money. News at 11.
codingdave 11y ago
Even shorter version of how to stay alive - model your business around some transaction that brings in more revenue than its costs to provide.
lsiebert 11y ago
I think people are ignoring the huge cash reserves that Google and Apple, among others, have. I fully expect more acquisitions if VC funding drops out.
jmspring 11y ago
The whole bit about "don't worry about morale"... Some engineers are replaceable, not all. If things get bad and you lose early/key people, there is a non-negligible hit. But, I think Ben and Mark at A2Z outlined a strategy harkening back to the last big hit -- build up the reserves in the bunker. If you think things will be bumpy for X-months out and you aren't cash flow positive, get the requisite amount in the bank ASAP.
selvan 11y ago
During late nineties, my startup was providing technology consulting/development service to other dot-com startups. Demand for our consulting service was so high that our company resort to auction kind of process to select customers. Then dot-com bust happened, 97% of our customers had gone out of business, quickly, very quickly. Obviously, our company fortunes dwindled and never recovered from that.
gizi 11y ago
"The sky is falling ..." No, it isn't. All there is, is that there seems to be less appetite for endlessly unprofitable ventures that get away with dismissing the idea that they should be bringing in more cash than they spend within a reasonable time frame. Furthermore, is the entire VC scene actually needed? Lots of startups do not make use of their services and are doing absolutely fine ...
ar7hur 11y ago
This is very similar to the infamous "RIP Good Times" presentation Sequoia shared in 2008 http://www.slideshare.net/eldon/sequoia-capital-on-startups-and-the-economic-downturn-presentation?type=powerpoint http://www.slideshare.net/eldon/sequoia-capital-on-startups-...
zan2434 11y ago
Based on the rest of the comments here deriding the growth over revenue strategy I think it's very important to bring up that risk is proportional to reward, and by definition any business that can be cash flow positive early on is unlikely to be very risky - and thereby not really what VCs are in this business for.

432 points by whbk 11y ago

ohadron 11y ago

Good read. Sounds like good advice in general, regardless of how hard it is to obtain capital.

arielm 11y ago
Totally agree. In a world that runs on money getting to profitability should not just be something you strive to get to but rather something you have. Until you do you shouldn't let anything else take away from your focus.
c0l0 11y ago
Funny - it sounds and awful lot like the absolutely uninspired, flat-out obvious to me, that, summed up in one word, reads "austerity". However, following this piece advice sure makes it cheaper for other parties to acquire parts of those [companies] that do :)

tarr11 11y ago

The cynical side of me wonders if all this is "helpful advice" from VCs is just designed to bring valuations down to earth.

mathattack 11y ago
I am a cynic about VCs "Talking their books" but this is a little different: - The stock market is off 20%. - Very few IPOs. - Many hot IPOs are under the offering price. - Most of the public market investors that have entered late in the game (Fidelity, etc) are marking down their positions, and holding off on new investments. Every solid company should have a "What would we need to do to get cashflow positive?" scenario. It may damage longterm valuation (cutting growth does that) but at least it gives the existing investors an option: "We can enter survival mode and do X, or you can fund us with Y, and we can do Z"
- ojbyrne 11y ago
  Which stock market is off 20%? When I look at the Dow or S & P , I see a roughly 10-12% decline from its peak value. And after 2 days of up 2%, suddenly there's a headline saying "the bulls are back."
  - mathattack 11y ago
    NASDAQ's high to low was approximately 20%. After today's rally it's perhaps 16%? NASDAQ is the better index since that's the more likely liquidity source.
- dismal2 11y ago
  so far, no IPOs this year!
tdaltonc 11y ago
Is there no objective way to tell if things are really cooling? Or for what types of startups things cooling?
- rcarrigan87 11y ago
  I can see B-2-C apps, anything social, chat, or apps where the monetization strategy is primarily advertising revenue running into trouble raising money. Good B-2-B biz most likely still get funded.
- nostrademons 11y ago
  There is no "objective way" when it comes markets, there is only what the market will give you. If the market will give you $450M for 5% of a product that doesn't work (a la Theranos), then objectively you're worth $9B, at least until you go bankrupt and then you're worth nothing. If the market is dead but you somehow manage to IPO anyway, save the company, and sell for $1.5B, you're worth $1.5B (a la LoudCloud/Opsware). If you want to find out what you're worth, try to raise money, and whatever you can get is your answer. This throws a lot of people for a loop who want one source of objective truth for everything. But markets don't work that way: they're just deals between individual people, which may or may not become public. If somebody else makes a deal that you think is absolutely crazy, it is objective truth for them but absolutely irrelevant to you. Personal finance works the same way. I know a few folks who were momentarily multi-millionaires during the dot-com boom; then valuations came crashing down and they were completely broke. We also tend to think of the value of a dollar (in cash) to be stable, but as anyone who lives in Zimbabwe can tell you, that's not a given.
  - rokhayakebe 11y ago
    So technically you can raise $1M for 0.1% of your startup and give the VC some crazy 20x liquidation preference. Now the market has you at $1B in valuation.
    - nostrademons 11y ago
      Exactly, and several unicorns are doing things exactly like that: http://blog.samaltman.com/the-tech-bust-of-2015 http://blog.samaltman.com/the-tech-bust-of-2015 I could drop the market cap of Google down to $3.4M right now. All I have to do is sell one of my shares for $0.01. The thing is, it would pop right back up again to $483B within a few milliseconds, and I'd just be out $690, so there's kinda no point to it. (Pedantic note, since I know there's gonna be someone in the financial industry that corrects me: no, I couldn't, technically. When I put in a sell order, it goes into the order book, and buyers are required by law to take the best offer, which is probably more than mine. I'd have to place my order at a time when there are no outstanding limit offers. This has actually happened during flash crashes and technical glitches, but is not a normal occurrence.) Privately traded companies are similar, but because there's less liquidity, the price doesn't necessarily correct on any reasonably time scale.
gyardley 11y ago
Oh, it's decent advice for right now. Of course, you probably need that decent advice because you listened to your VCs' previous decent advice in better economic conditions - "don't worry about profit, just grow grow grow as fast as you can." The cynical side of me thinks that it's this flip-flopping between two extremes that ends up disproportionately benefitting investors, and that entrepreneurs would be better served by always assuming economic conditions will change and preparing accordingly.
- nostrademons 11y ago
  Nah, I figure that venture investors operate under conditions of extreme uncertainty, which means that they make decisions almost purely on emotion. That's what our emotional circuits are made for, after all: subconsciously aggregating a lot of signals so we can make decisions when there's not enough information to process it rationally. And yes, entrepreneurs are almost always better off ignoring everything an investor says and using their own data (which ought to be better than that of an investor's, otherwise why the hell are you founding a company?) to come to a conclusion. The "Mr. Market" allegory was published in 1949, but it's never been more apropos. Pretty much all venture capital operates on this principle; use it to your advantage: https://en.wikipedia.org/wiki/Mr._Market https://en.wikipedia.org/wiki/Mr._Market
  - aorloff 11y ago
    Kahneman and Tversky, Prospect Theory. Applies to investors, VCs, and ordinary people at the grocery store.
- aorloff 11y ago
  Holy shit I was about to write a comment to say - YES!!! absolutely. And then its you. Well, you are still right, and its still what I was thinking.
mindcrime 11y ago
The cynical side of me wonders if all this is "helpful advice" from VCs is just designed to bring valuations down to earth. I'm not really into conspiracy theories as a rule, but I will admit to having a similar thought. At the last, I find myself wondering if advice from VC's - especially regarding something like valuation - doesn't inherently tend to be self-serving on their part. Remember, the objectives of a VC and the objectives of an entrepreneur aren't always aligned. That said, you can't really argue with this part: You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time.
- tragic 11y ago
  > I'm not really into conspiracy theories as a rule, but I will admit to having a similar thought. Though I agree with the substance of your comment, I don't think it's a 'conspiracy theory' to expect a VC to have her percentage in mind. That's just capitalism.
- lmm 11y ago
  That kind of company has no business taking VC money in the first place. A VC shouldn't want to invest in a company that doesn't need VC money, and I'm kind of surprised that they would want to encourage their portfolio to transition into that kind of company - such a company isn't going to be the "home run" that VCs make their money off.
  - mindcrime 11y ago
    such a company isn't going to be the "home run" that VCs make their money off. Two thoughts: 1. It might. But it might not do so in the time-frame that VC's typically expect. Since funds tend to be time-boxed, VC's generally need to see not just a specific return, but they need to see it by a certain point in time. The older a given fund is, the more pressure to "do it now". 2. That said, nothing says growth has to be a smooth curve (whether it's linear, exponential, or whatever). You could be on an exponential growth path, slow down to flat, or even shrink, due to external macro-economic factors, or strategy, or whatever, then ramp back up again later and "go exponential" when things change. and I'm kind of surprised that they would want to encourage their portfolio to transition into that kind of company 3. Well if the alternative is going out of business and resulting in a valuation of 0 for everybody involved, almost any alternative is better. I see it not as a call to give up on being a "home run" but as a call to batten down the hatches, hunker down, weather the storm, and then adapt as circumstances change.
davidjgraph 11y ago
When the market takes off again, I'm sure you'll see the flip-side posts from VCs, explaining how startups need to push for higher valuation and better terms, proving you wrong 8-).
- mathattack 11y ago
  It depends on which side of the transaction they are. :-) New investors will keep pushing for lower prices, existing investors will talk up the values!
draw_down 11y ago
... or there could be a bubble bursting. Contrarian takes aren't necessarily correct by the virtue of their contrarianism.
musesum 11y ago
If memory serves: Heidi Roizen had one of the best ROI track records during the Dot Bomb era, having exited most of her portfolio just before. Meanwhile, a friend mentioned that Benchmark had lost a whole fund. I don't have numbers in front of me and the Benchmark comment was hearsay -- so, please correct if I'm wrong. Point is: that some VCs were better at timing than others during a down cycle; I would pay very close attention to what Roizen has to say.
davemel37 11y ago
Their argument would be that this hurts their portfolio companies as well so they are not incentivized to drive prices down.

roymurdock 11y ago

You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time. If you don’t, you have to get money from someone else to keep going. And, as I just said, that’s going to be way harder now. I’m embarrassed writing this because it is so flipping simple, yet it is amazing to me how many entrepreneurs are still talking about their plans to the next round. What if there is no next round? Don’t you still want to survive? Yes, some companies are ‘moon shots’ (DFJ has a fair number of those in our portfolio) where this is simply not possible. But for the vast majority of startups, this should be possible. What is the point of calling them start ups anymore. Remove the high risk/high reward aspect and new companies are simply small businesses that receive small business loans from banks. A lot of the "wow" factor of the startup ecosystem was the mind boggling user growth/high valuation/massive losses phenomenon that a few companies weathered through to IPO and monetization. I think I saw someone advocating for better terminology on HN recently. I vote to call any close-to-profitable <2 yr old company a small business. Likewise, any portfolio that holds mostly safe small business loans and equity should simply be called a bank. Leave the unicorn/VC/startup lingo in the past, or use it to describe actual risk profiles, and things will be a lot less confusing.

andreasklinger 11y ago
i would love if a term for this kind of small businesses would establish given that more and more startups go niche + traction first and often are ok w/ staying there there is also the need for a different finance model imo
Disruptive_Dave 11y ago
I started writing this then got distracted. Everyone not only needs to collectively define what a "startup" is, but more importantly, don't blow sunshine up my ass by telling me to act like an SMB. Because I don't run into many investors who get excited about my company's reasonable P&L. There's a significant difference between a company running like a small biz and a hyper-growth-at-all-costs one. It would be quite helpful to know which investors are interested in each, all the BS put to the side. edit: I do realize (and hope) that the current financial environment helps to bring everyone back down to earth a bit.

arielm 11y ago

I think the startup world has become somewhat of a fork of how real companies should be built. Over the last few years companies have been investing into "scaling" and getting traction with no real revenue to substantiate any of the growth. That to me is backwards, and why those startups are fearing for their lives now. Companies should be built with revenue (and profit) in mind, and in most cases those are the ones that thrive and succeed.

c0l0 11y ago
That's exactly how the financial markets/businesses have become somewhat of a fork of how "real" markets/businesses should work over the last two or so decades. I've always perceived startups to be some kind of an extension of these (highly questionable) concepts and principles into the tech space. These days, it sems we're drawing closer to witness a clash of this weird, bubbly universe of its own with the real world as it were. The only real questions about it, I think, are: when _exactly_ will it happen, and what will the fallout look like?
bkjelden 11y ago
Scaling without revenue makes sense if you're in an industry with strong network externalities or large economies of scale. In those cases, expensive customer acquisition is okay because customers have a very high lifetime value. During the "unicorn boom", I think we all had this belief that network externalities were very common in tech - a belief driven by the rise of facebook, google, and others. But now we're realizing that maybe strong network externalities are just as rare in tech as they are in other industries - and a business without network effects that's losing money for growth is just a business that loses a lot of money. This NYT article from last week seemed to do a good job summing up the issue: http://www.nytimes.com/2016/02/13/business/dealbook/the-rise-and-fall-of-the-unicorn.html http://www.nytimes.com/2016/02/13/business/dealbook/the-rise...
- drmcninjaturtle 11y ago
  Great points. I would add that during the "unicorn boom", we also had the belief that proprietary tech would protect the market position of a large, low-profit companies, giving them time to monetize. It now seems that we may have overvalued this effect. In fact, startups can grow quickly because new tech makes the first mover advantage tenuous; why should the effect that allowed us to climb the mountain now prevent others from doing the same?

jorgecurio 11y ago

> You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time. If you don’t, you have to get money from someone else to keep going. And, as I just said, that’s going to be way harder now. I’m embarrassed writing this because it is so flipping simple, yet it is amazing to me how many entrepreneurs are still talking about their plans to the next round. What if there is no next round? Don’t you still want to survive? Sort of reminds me of the conversation with a senior developer I had the first time I joined a startup and my first company lunch at my first job. Me: "So, we just spend whatever money the company makes" him: "Correct" Me: "what if the company is burning all the money it makes to grow as fast as possible, and they can't raise money anymore?" him: "that will never happen" Me: (concerned) "so the company is constantly breaking even" him: "sometimes" ME: (shocked) "so the company loses money some year, yet raises more money year after year so it can lose more money the following year than the last" him: (annoyed) "you studied economics haven't you? you dont get it? everyone knows this is how you do startups what did they teach you in that shithole?" (everyone else laughs) end scene. That was 4 years ago. I checked the glassdoor comments and boy I didn't think a 2.1 rating was possible on glassdoor because that would pretty much scare off anyone in the job market....and yup the company is going under exactly for the reasons I asked 4 years ago but was ridiculed at my 'ignorance' another one bites the dust for vancouver's brain drained tech scene. thank god I won't have to work here again in the near future.

CPLX 11y ago
Ah, memories. In 1999 I was working for a soon to be doomed music startup, and recall being at a lunch with the founder, who was even younger than me in my early 20's glory. He was quite impressed with himself having raised $1MM and hired a team of 20-30 or so of us. Me: [Suggesting we should consider a couple things that would give us some revenue, and be mindful of spending] Him: Listen, you're pushing it here. No offense to your economics degree but it's not like you've founded a business that's made more money than I have. Me: Of course I have. Him: When exactly did that happen? Me: I ran a profitable lawn service business. I don't know the exact figure but we netted thousands of dollars over the lifetime of the business, which is about half a million dollars more than this business, as far as I can tell. Him: [Grrk, change the subject...]

Ftuuky 11y ago

What? One of the advice is to get cash flow positive with the money you already have. Isn't that basic knowledge? You can't spend more than you have and you only ask for other people's money when you don't need it. Idk, maybe this is an american thing, with all the capital you have but here (Portugal) you can't get series A funding without being at least cash flow positive, no way.

floppydisk 11y ago
The American VC market has been saturated and everyone with a spare dollar has been throwing cash into the market trying to find the next Google/Facebook/Twitter. A lot of institutional money started looking at the VC market as a way to maintain a 7-10% rate of return when traditional investment vehicles started going sideways. You could get funding for a portable neighborhood pony washing service if you built an iPhone app backed by an AWS service and called it Uber for Pony Washers (or some such)if you looked hard enough. As the article points out, this is changing. The boom part of the boom-bust equation is starting to flatline with IPOs happening less frequently and for less money and the institutional investors who get in later in the game to buy out the initial VCs being more gun shy about investing. Net result for the market? Startups need to focus on being a functioning business generating positive cash flow rather than a money pit that occasionally generates a lottery ticket. Not everyone will succeed, but the changing economic climate will push a lot of the fair weather pony washing app founders out and leave the more seriously business minded people which should result in a new wave of solid companies capable of handling more strenuous economic conditions.
Swizec 11y ago
Uber's financials leaked a few months ago. They lose millions of dollars per quarter. They were able to raise 10 billion dollars according to CrunchBase [1]. [1] https://www.crunchbase.com/organization/uber#/entity https://www.crunchbase.com/organization/uber#/entity
rco8786 11y ago
I'd venture to guess that the vast, vast majority of American startups that raise a series A are not cash flow positive.

carsongross 11y ago

"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result: happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result: misery." --Wilkins Micawber

jedicoffee 11y ago

Found the problem! "It is going to be hard (or impossible) for many of today’s startups to raise funds." You don't need to take on millions in debt to start a company.

mindcrime 11y ago
Strictly speaking, raising VC money isn't taking on debt. You're selling equity and if the company fails you don't - as a general rule - repay the investors anything. That said, I agree with your overall point about not needing to raise millions of dollars to start a company. That's one way of doing things, but hardly the only way. Another choice would be to just take a regular job and start your company as a nights and weekends side project (deal with any potential IP issues, of course), or do consulting in your area of business and gradually transition from a service company to a product company. I'm sure there are others.
- jedicoffee 11y ago
  I agree, I may have been a bit open ended with my previous statement.

eldavido 11y ago

What goes unspoken is how tiny the overall effect of this will be. Yes, it will bring some concentrated pain to investors, CEOs, and employees of lots of companies. But how many people will be genuinely, life-alteringly affected by this? 1000? Maybe a few thousand? 1-2% of SF's population? By way of comparison Google has what, 50,000 employees? I keep having to remind myself that the big companies are the elephants in the room compensation-, real estate- and traffic-wise. They employ hundreds of thousands of people and pay billions of dollars annually in wages. As much as I'd like an affordable place to live, none of this will move the needle that much for the average Bay Area resident.

timr 11y ago
Google has ~60,000 employees worldwide. From various online sources, they have +/- a few thousand who live in San Francisco. Twitter and Yelp and Square and Dropbox and AirBnB and the other unicorns each employ somewhere in the mid hundreds to low thousands (e.g. 500-2,000) -- again, worldwide. The local numbers are lower. I don't know reliable this [1] is, but it suggests that there are ~50,000 tech employees total in SF, and the top 50 companies employ about 30,000 of those. So the big players have a lot of people, but it's not as dramatically skewed as you're thinking -- maybe 40% of tech employees work at smaller companies. That passes the smell test for me. Even assuming that the big players wouldn't lay anyone off (they would; they always do) That's more than enough to make an economic dent in a downturn. [1] http://www.bizjournals.com/sanfrancisco/blog/2014/02/jobs-at-tech-companies-google-twitter.html http://www.bizjournals.com/sanfrancisco/blog/2014/02/jobs-at...
- dlandis 11y ago
  But even if a full 50% of the people working at small tech companies moved out of the city (10k by your count), how would that have any effect whatsoever on the economy? It would bring the population back to where it was about a year ago and employees of smaller companies aren't even among the highest paid.
  - lmm 11y ago
    Prices are determined by marginal buyers/sellers. And a lot of the economy is driven by expectation.

rpgmaker 11y ago

When a market like this turns, in order to survive, it is critical to redefine what success is going to look like for you – and your employees, and your investors, and your other stakeholders. Holding on to ‘old’ ideas about IPO dates, large exits and massive new up rounds can ultimately be demotivating to your team. . . Stop worrying about morale: Yes, you heard me right. I can’t tell you how many board meetings I’ve been in where the CEO is anguished over the impacts on morale that cost cutting or layoffs will bring about. With these prospects, I wonder how will these CEOs keep all those underpaid and highly skilled young laborers working for him/her now?

mindcrime 11y ago

On a related note, now's probably a good time to remind people of pg's famous "How Not To Die" essay, which is at least tangentially related to the topic at hand. http://www.paulgraham.com/die.html http://www.paulgraham.com/die.html

code777777 11y ago
Thanks, great read! His words from 2007 still ring true today. It was also nice to see how some of the startups turned out.

dsugarman 11y ago

>If you are in Silicon Valley and your customers are mostly well-paid consumers with no free time, or other venture-backed startups, well, I’d be worried. That's the most beautifully I've heard this thought articulated. I constantly hear people in SV talk publically talk about how they're living years in the future due to getting services from startups that haven't yet hit other markets. These people are very wealthy and very short on free time; they incorrectly assume the rest of the world is as well. The reason Uber became so successful was because it became cheaper than a cab in most major markets with world class service. You have to really dig deep to justify most other on demand startups having the ability to jump the shark and it's because they don't have a plebeian offering.

lowglow 11y ago
I've called these the 10% startups. They typically only serve people in the top ~10% of earners in the US.
- AndrewKemendo 11y ago
  So basically any startup with an iOS only product (disclaimer our's is iOS only).
  - deleted 11y ago
    [deleted]
  - mineshaftgap 11y ago
    There are very good reasons besides demographics to start with iOS. Stability, consistency, lack of piracy etc.
  - zepto 11y ago
    Given that iOS has a 40%+ market share in the US, no.
    - georgemcbay 11y ago

mmaunder 11y ago

So the above is obviously written through a VC lens. Through an entrepreneur's lens - who also survived the dot-com bust (at etoys.com) and has since run several failed and now successful businesses - I'd add the following: The most valuable advice in this post reminds me of Marc A's awesome blog entry. Quote: "Companies that have a retention problem usually have a winning problem. Or rather, a "not winning" problem." http://pmarchive.com/guide_to_big_companies_part2.html http://pmarchive.com/guide_to_big_companies_part2.html In my opinion winning is, ultimately, measured by how much cash you can generate. We stopped thinking about an exit a long time ago while in the deepest darkest part of the valley of the shadow of startup death. We were forced to do it because we ran out of money and no one cared about us. Then we started focusing completely on our customers and our income statement. As soon as we did that, amazing things started happening. Cash, in this case and in this climate, is king. Or net income to be specific. If you're able to generate large amounts of cash and keep a lot of it, not a heck of a lot else matters. From my perspective the only problems that really remain is giving your team a great quality of life and serving your customers. Cash takes away issues like the board bugging you, investors breathing down your neck or (worst case) wanting to play CEO, hiring problems, retention problems, funding, what business are we in problems, product problems (you're obviously killing it, so do more of that!), exec hires, issues with rebellious execs (you're killing it, so you're implicitly right) etc. When you "go for growth" (numbers growth, not revenue) you give up all of the above and put yourself as a CEO or exec in a precarious position. Your arguments are no longer that defendable because growth means jack shit unless it generates cash or will very clearly ultimately generate cash. Think about the CEO of Giphy who just raised something like $50M at something like a $300M valuation. It's like my wife and co-founder says: Doing that you turn a cash problem into a much bigger cash problem. I'd add that you also now have less equity and less influence. For the investors it's awesome - the biz will likely bulk up on talent and worst case will exit as a talent acquisition at $2M per engineer and the investors (who get paid first) will recover perhaps everything that way with little left over. If I was early stage in this environment I'd do the following: Stop dreaming about a Deus ex Machina that will reach down and save your sorry ass. Stop fantasizing about acquisitions. If you don't you're going to inadvertently turn acquirers into your target market instead of your real customers. And humans aren't good at focusing on two goals at once. Then do absolutely everything you can to generate sustainable cash. Usually this means (if you're early stage) discovering who your customers are and what business you're in or (if you're later stage) serving the heck out of your customers and making sure that what you provide is worth more than each dollar they spend to acquire it. Then do more of that. If you're successful doing this, rather than raising money, you'll notice that the really big scary problems simply go away.

aledalgrande 11y ago

This is based on the "Techcrunch" concept that being successful and continuing business for a startup depends heavily on external funds. That couldn't be farther from the truth, for a real startup with a real business. Maybe growth will not be as fast without VC funds, but I don't think real businesses will notice shrinking investments. Correct me if I'm wrong.

nostrademons 11y ago
They won't. They might notice shrinking revenues if some of their customers were VC-funded startups or other people in that ecosystem, but the decline of funding is at worst irrelevant and at best good for them. (Less funding means less competition.) But then, since it's irrelevant, bootstrappers have little incentive to comment here, other than a few folks for whom HN has become a habit. From where I sit the bootstrap startup world is actually significantly larger than the VC world, but the incentives are different: it is not to a bootstrapper's advantage to publish what they're doing to people other than their customers.
- aledalgrande 11y ago
  >> it is not to a bootstrapper's advantage to publish what they're doing to people other than their customers Good point.
CamatHN 11y ago
Usually startups, defined roughly as young companies with extremely high growth creating something new, to start off with are running at a negative cash flow to sustain their growth or development and plan to capitalise on the position later. These companies would struggle to operate with positive cashflows as their products/services and growth hasn't matured to allow for it yet. Perhaps they are building their product and/or are still in the early stages of iterating on their idea. Just because they have a decent business doesn't mean straight away they can consolidate right away on their business in terms of running a profit. A lot of decent future businesses could die if startups are forced to consolidate. However in instances this may be a wake up call to keep them accountable to the financials of their business.

arihant 11y ago

>If you are in Silicon Valley and your customers are mostly well-paid consumers with no free time, or other venture-backed startups, well, I’d be worried. This is the most shallow statement I have read this year. The needs of the rich today would be needs of less rich tomorrow. The author clearly missed out on the whole American dream concept. I'm sure some people felt the same way about refrigerator and cars. You'd almost never create a market segment starting with the bottom end. Almost every product you touch, including the very screen you're staring at, was once made for the 1%. And almost always the version for the 1% is expensive, won't see a version 2, and is a one time sale. It doesn't matter if your initial rich/busy customers are going out of business. If you found a need you're fulfilling, you will with a fairly high probability will continue to find customers through the generation. Dot com bust did not kill Network Solutions/Verisign. Very, very important.

deleted 11y ago

[deleted]

julianozen 11y ago

what a time to be alive

julianozen 11y ago

What a time to be alive

outworlder 11y ago

> It is going to be hard (or impossible) for many of today’s startups to raise funds. So, just like it is in most of the world, then?

matchagaucho 11y ago

DFJ has had some great exits over the years. But looking at their current active portfolio, they're a little exposed.... and certainly not investing in any early rounds. It's not surprising to hear they plan to slow down investing. But that's not necessarily a reflection of the overall market. http://dfjgrowth.com/portfolio http://dfjgrowth.com/portfolio

tim333 11y ago
Yeah I was wondering if overall funding has dropped that much.

deleted 11y ago

[deleted]

honksillet 11y ago

Dear VCs, You made a lot of bad investments. Prepare to take a loss.

melted 11y ago

A VC taking the valuations down and encouraging the companies to become profitable sooner, to get a fatter slice of a tastier pie when founders come begging for money. News at 11.

codingdave 11y ago

Even shorter version of how to stay alive - model your business around some transaction that brings in more revenue than its costs to provide.

lsiebert 11y ago

I think people are ignoring the huge cash reserves that Google and Apple, among others, have. I fully expect more acquisitions if VC funding drops out.

jmspring 11y ago

The whole bit about "don't worry about morale"... Some engineers are replaceable, not all. If things get bad and you lose early/key people, there is a non-negligible hit. But, I think Ben and Mark at A2Z outlined a strategy harkening back to the last big hit -- build up the reserves in the bunker. If you think things will be bumpy for X-months out and you aren't cash flow positive, get the requisite amount in the bank ASAP.

selvan 11y ago

During late nineties, my startup was providing technology consulting/development service to other dot-com startups. Demand for our consulting service was so high that our company resort to auction kind of process to select customers. Then dot-com bust happened, 97% of our customers had gone out of business, quickly, very quickly. Obviously, our company fortunes dwindled and never recovered from that.

gizi 11y ago

"The sky is falling ..." No, it isn't. All there is, is that there seems to be less appetite for endlessly unprofitable ventures that get away with dismissing the idea that they should be bringing in more cash than they spend within a reasonable time frame. Furthermore, is the entire VC scene actually needed? Lots of startups do not make use of their services and are doing absolutely fine ...

ar7hur 11y ago

This is very similar to the infamous "RIP Good Times" presentation Sequoia shared in 2008 http://www.slideshare.net/eldon/sequoia-capital-on-startups-and-the-economic-downturn-presentation?type=powerpoint http://www.slideshare.net/eldon/sequoia-capital-on-startups-...

zan2434 11y ago

Based on the rest of the comments here deriding the growth over revenue strategy I think it's very important to bring up that risk is proportional to reward, and by definition any business that can be cash flow positive early on is unlikely to be very risky - and thereby not really what VCs are in this business for.