5 ms·

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.
  - kevan 11y ago
    Yep, 37 signals recently did something like that [1] [1] https://signalvnoise.com/posts/1941-press-release-37signals-valuation-tops-100-billion-after-bold-vc-investment https://signalvnoise.com/posts/1941-press-release-37signals-...
- tragic 11y ago
  I don't really buy this, simply because actual investors do not think this way. On public markets at least, there is some expectation that a stock price will have some relationship to expected future earnings. When the price is out of whack with those future earnings, the stock is under- or over-valued - and I would say that this is objectively true even when there is no way of knowing. Of course, there very often is a way of at least taking an intelligent guess, which is why Warren Buffett is so goddamn rich, for one. Otherwise, we are left believing obvious absurdities: for example, somebody who bought Bear Stearns at $60 on March 13 2008 got just as good a deal as somebody who bought Bear at $3 on March 17; Bernie Madoff's fund management services were worth every penny until his arrest; etc. There is nothing 'subjective' about either Bear's hiding of the worthlessness of its subprime books or the fraudulence of Madoff's scheme.
cubano 11y ago
This seems pretty objective, to me at least. [1] "The latest data from PitchBook show that VC investing in U.S. companies dipped to $9.3 billion in the first quarter of 2016, down from $17.6 billion in the fourth quarter. "There's significant uncertainty in the market right now and (we) would advise companies looking to raise capital to close quick and — while financing is available — maybe close on more capital than is necessary to be prudent in this environment," said PitchBook analyst Garrett Black. " [1]http://www.cnbc.com/2016/02/09/silicon-valleys-reality-the-party-is-over.html http://www.cnbc.com/2016/02/09/silicon-valleys-reality-the-p...
- malisper 11y ago
  > VC investing in U.S. companies dipped to $9.3 billion in the first quarter of 2016, down from $17.6 billion in the fourth quarter. How is the first quarter of 2016 measured? We're only half way through it.
  - deleted 11y ago
    [deleted]
  - cubano 11y ago
    That is an excellent point, and of course you are correct.

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.
- kevan 11y ago
  Yep, 37 signals recently did something like that [1] [1] https://signalvnoise.com/posts/1941-press-release-37signals-valuation-tops-100-billion-after-bold-vc-investment https://signalvnoise.com/posts/1941-press-release-37signals-...
tragic 11y ago
I don't really buy this, simply because actual investors do not think this way. On public markets at least, there is some expectation that a stock price will have some relationship to expected future earnings. When the price is out of whack with those future earnings, the stock is under- or over-valued - and I would say that this is objectively true even when there is no way of knowing. Of course, there very often is a way of at least taking an intelligent guess, which is why Warren Buffett is so goddamn rich, for one. Otherwise, we are left believing obvious absurdities: for example, somebody who bought Bear Stearns at $60 on March 13 2008 got just as good a deal as somebody who bought Bear at $3 on March 17; Bernie Madoff's fund management services were worth every penny until his arrest; etc. There is nothing 'subjective' about either Bear's hiding of the worthlessness of its subprime books or the fraudulence of Madoff's scheme.

cubano 11y ago

This seems pretty objective, to me at least. [1] "The latest data from PitchBook show that VC investing in U.S. companies dipped to $9.3 billion in the first quarter of 2016, down from $17.6 billion in the fourth quarter. "There's significant uncertainty in the market right now and (we) would advise companies looking to raise capital to close quick and — while financing is available — maybe close on more capital than is necessary to be prudent in this environment," said PitchBook analyst Garrett Black. " [1]http://www.cnbc.com/2016/02/09/silicon-valleys-reality-the-party-is-over.html http://www.cnbc.com/2016/02/09/silicon-valleys-reality-the-p...

malisper 11y ago
> VC investing in U.S. companies dipped to $9.3 billion in the first quarter of 2016, down from $17.6 billion in the fourth quarter. How is the first quarter of 2016 measured? We're only half way through it.
- deleted 11y ago
  [deleted]
- cubano 11y ago
  That is an excellent point, and of course you are correct.