11 ms·

Valley VCs Sit on Cash, Forcing Startups to Dial Back Ambition

144 points by digisth 11y ago

rl3 11y ago
In theory this won't affect the decision making process of top-tier VCs. A good invesment is a good investment regardless of the prevailing funding climate. In practice, I'm guessing if the LPs get cold feet, then VCs will be forced to triage their funding decisions accordingly. How much this matters given the sheer size of some funds, I'm not sure.
- pritianka 11y ago
  Agreed -> a good investment is a good investment regardless. The best startups often have raised in the worst of times.
delecti 11y ago
It's really weird how this article tries to frame the situation. It's almost like the startups feel entitled to the funding. The point of funding should really be to enable faster growth than they might otherwise have been able to achieve, but if a business can't at least survive without huge influxes of investments then is it really a business that they should be investing in in the first place?
- tariqali34 11y ago
  Many of these businesses may make better sense as "non-profits", out to improve the welfare of the general community and funded purely by donations. I'm not sure whether donors would appreciate writing fat checks for programmers/managers/etc., but it's clear that a "hockey stick" growth could lead to a immediate path to monetization (if people know your name, you can capitalize on it when you're doing fundraising drives).
  - cubano 11y ago
    Are you kidding me? Almost all VCs aren't interested in "non-profit" and "welfare of general community." They want hockey-stick ROI and unicorns. I know this may be the wrong forum to say this, but let's get real...VC are in it for the money, not to make a social impact, and the last thing most of them are interested in is playing welfare daddy to a bunch of tech nerds.
    - deleted 11y ago
      [deleted]
    - woah 11y ago
      I think you should re read what you commented on.
- wpietri 11y ago
  It's a reasonable question, but consider three things: One, part of the VC model is relatively frequent fundraising. You take some seed money, prove the model a bit, take an A round, prove it some more, etc. It's in nobody's interest to give all the money necessary to get to break-even at once; investors would rather make smaller bets, and founders want to sell as little equity as possible when uncertainty is high. Two, if your goal is to never actually need another round of funding, then you'll be very conservative in how you spend your money. Bolder competitors will spend money with the expectation of getting more soon, allowing them to outpace you. So there's a strong incentive to spend as fast as possible, trusting that you'll get good enough results to earn the next round of investment. Three, there are many interesting businesses that are only possible with huge investments. In the Internet world, Twitter and Facebook are good examples. Most ad-supported businesses really only work at scale; ditto network-effect businesses. For physical goods, Tesla's a good example: you have to sell a lot of cars to justify building a factory. Pharma, too; your second pill might cost $1 to produce, but that first pill can cost $2 billion. I agree there's a lot of entitlement in the industry, but I think some of it's reasonable here, in that when you talk to a VC firm, they'll sing you a great song about how they are there to support you, that they'll back you all the way, etc, etc. People who haven't experience a downturn can be genuinely shocked at how fast supposedly bold, independent investors suddenly all stampede in the same direction.
- JumpCrisscross 11y ago
  > if a business can't at least survive without huge influxes of investments then is it really a business that they should be investing in in the first place Many entrepreneurs have been trained to pursue growth over short-term sustainability. In a market defined by network effects, this makes sense. It also works where one has a shot at winning a significant majority of a research-driven industry's profits (e.g. Apple or SpaceX), thereby starving one's competition of R&D oxygen. Not all markets look like that. Furthermore, the cost of (and risk of losing) financing have not been properly worked into teams' growth-versus-profitability calculi. The time and resources it takes to adapt will kill some and slow others. After all is said and done, we'll have a healthier Valley culture.
- mindcrime 11y ago
  Here's the somewhat ironic "catch 22" to the whole thing: If you're a startup and you don't take VC funding, then you have the luxury of simply enjoying organic growth and funding expansion by re-investing profits into the company. Well, as long as you can do that in the face of competitive pressure. Strictly speaking, unless it's a "network effect" situation like a social network, you probably don't need to grow fast. Unless you take VC money. Then, the simple act of taking their money now means there is pressure to grow fast, but it comes from the investors and not from the market per-se. And this is because VC funds are time-boxed and, by definition, have to generate whatever return they're going to generate by a fixed point in time. And the older a fund is (eg, the nearer it is to the end of it's life) the greater the pressure. This is something I think more entrepreneurs should think long and hard about. Don't raise VC money just for the sake of doing it. Even if you can. Do it IF and only if it's the only (or at least surest) way to reach your goals. And always remember that the VC's interests do not necessarily align with the founders (at least not 100% so).
  - freyr 11y ago
    > unless it's a "network effect" situation like a social network, you probably don't need to grow fast. Uber seems like a weird example of this. It was said (and remains said) that they're operating in a winner-take-all space, and they expanded as if they were a social network. Despite the aggressive expansion and marketing, a majority of people I know in the Bay Area now use Lyft exculsively. The last few times I've said "I'll get an Uber," somebody's actually paused and said "Wait, why don't we take Lyft?" I'm not even sure why. When asked, they just reply that they don't like Uber for some non-specific reason. They're expanding around the world and into new products and concepts, but haven't even seemed to nail down a loyal customer base on their home turf. Anecdotally speaking.
    - flashman 11y ago
      Uber's version of achieving loyalty/lock-in is literally to run the competition into the ground and make sure their customers have no other options. That's a long way from achieving it by offering the best service, and I don't think driver/passenger ratings bridge the gap: it's the difference between encouraging or rewarding good behaviour, and subtly threatening people for breaking the rules.
- tosseraccount 11y ago
  "The point of funding should really be to enable faster growth" The point of funding is to generate a return. Hopefully more than you can get from CDs. Good investments are often a very long term proposition.
- InclinedPlane 11y ago
  The point of funding isn't just growth, it's to keep a business afloat during the times when there's not much revenue but still lots of work to do to build the core business.
- tryitnow 11y ago
  No, funding should not necessarily be used to enable faster growth. It can also be used for development, for refining product/market fit, etc. A lot of businesses would never be able to survive their early years without outside funding. Now, do a lot of flimsy startups feel entitled to funding? Yes. That is a problem.
hoodoof 11y ago
Investors market. Tighter conditions, preferences, ratchets.
- lvs 11y ago
  Words. Punctuation, plural nouns, haiku.
  - andy_ppp 11y ago
    This. Absolutely made my day! Thanks.
    - dwaltrip 11y ago
      Agreed. I can't explain why I found it so hilarious. But I cracked up pretty hard at it.
  - hoodoof 11y ago
    Sunshine. Invest. Rainbows. Unicorns. Heat. Fire. Cash burn. Bears. VC. Lower valuation. More Power. Liquidation preference, contentment. Entrepreneur. Panic. Sellout. Fantasy. Donkey, bulls, credit card. VC. Rich. Beach. Downturn, Upturn, Cycle. Ratchet, racehorse. Ramen, caviar, yacht, walk, laugh, cry.
gooserock 11y ago
> Valley VCs Sit on Cash, Forcing Startups to Dial Back Bullshit FTFY
- justinlardinois 11y ago
  This is amusing accurate. Wayyy too many startups, even YC funded ones, have products that are difficult to profit on, or worse, don't really have a market in the first place. For every "next Uber or Airbnb," there's hundreds of Shutdownifys.
  - BinaryIdiot 11y ago
    Yeah I never understood the idea around "we'll figure out monetization later!". Yeah maybe you will but you're operating a business. Shouldn't you, I don't know, have a good idea or 3 to do that out of the gate? Startup culture is weird sometimes.
    - _delirium 11y ago
      A common assumption, which is sometimes even right, is that getting a significant number of users is harder than monetization. Put differently, your startup is most likely to fail (in this view) because it doesn't produce something that anyone wants to use, not even for free. So the main goal up front should be to figure out how to make something people will use, and then figure out how to reach them. Succeeding at that, but then failing to monetize the product, is a real failure mode too, of course. But many VCs are betting that failing to get users at all is the biggest early risk, and that it's easier to solve monetization later (if you ever get users) than it is to work on the monetization plan up front, and then later try to solve the but-we-have-no-users problem. Part of this makes more sense if you're looking at it from the perspective of a VC betting on 100 companies, than from the perspective of a single company. The funnel they're looking for is: some subset of these companies will get a ton of users (hundreds of thousands, maybe millions), then a subset of those will be wildly profitable.
  - chetanahuja 11y ago
    "even YC funded ones" Hah... What makes you think YC funds significantly higher quality of startups overall compared to the general VC industry?
pritianka 11y ago
I've been in tech only 6 years and I am already bored of these cycles of VCs becoming frenetically exuberant followed by cautious times. Their advice to startups changes depending on what time it is. It's all so predictable yet people are surprised every time. Any entrepreneur building a business factors these in and approaches fund raising based on that knowledge. I don't even know the point of these articles any more.
- wpietri 11y ago
  > I don't even know the point of these articles any more. How else will the people who have been here less than 6 years get jaded? More usefully, it may be obvious that these things go in cycles, but knowing exactly where we are in the cycle is very valuable to anybody who is thinking about raising money, or who is working at a company that isn't yet self-sufficient.
  - ericd 11y ago
    Yeah, the frequency of these things is a sort of useful barometer for those not in the thick of raising money.
  - pritianka 11y ago
    Haha, yes. One issue I do notice though is that the articles lag behind reality by some months at least. So by the time the news hits, it's already a much progressed state.
- ChuckMcM 11y ago
  Well as the saying goes, "It is always new to someone." :-) And that is largely true. Here in the second decade of the 21st century people are getting funded who were blissfully unaware children in the dot com crash, or the semi-conductor recession, or the great social is the new webvan pullback. A publication can get a lot of clicks and buzz from folks for who it is new, and so they report it as new. But the articles are all part of the system which trains and educates entrepreneurs. It provides examples and stories of people who bring to market real solutions, those who bring "fad" solutions, and those essentially bring "me too" type solutions. This system also trains investors, where each cycle has a few winners which spawns some additional limited partners (or general partners) in various VC firms who also look at how their money is spent and where its going. As much as it would be great, there isn't really a course of study you can take that will teach you this stuff, you kind of have to live through a cycle or two, absorbing all the experience you can. If you want to be able to really internalize and understand the stuff that someone like Danielle Morrill is talking about you need context, and the context comes from experience both in the good times and the bad times. So to answer your question about the point of these articles, it is the same reason they teach freshman Calculus or Composition. Everyone needs to know this stuff and every year there are new people trying to learn it. The message that value is always appreciated over hype is pretty timeless but sometimes it takes a couple of cycles to really understand and distinguish between the two.
spullara 11y ago
I think it is interesting that this article is critical of valuations changing over such large time spans when the public stock market often marks up and down stocks by a significant amount on a daily basis.
cm3 11y ago
Or they could diversify and invest in more projects with smaller sums, couldn't they? Would probably require more people to manage the increase of investments.
- cenal 11y ago
  Valuations are out of whack. They are smarter to sit back and let the unsustainable ventures die out and then invest in the viable ones after things level out. I mean, even a touch screen toaster that costs $1,500 got invested in. Who is going to pay $1500 for a touch screen toaster? http://www.juneoven.com http://www.juneoven.com
  - sjg007 11y ago
    It will sell. It's just the beginning of the IoT revolution.
    - audleman 11y ago
      I took a look and it is very nice, but $1500 for a toaster oven? Holy shit no.
      - wott 11y ago
        Eh, it is otherwise the same as a $50 oven but this one also burns money! It takes a 2.5 GHz quad core CPU to produce an awesomely accurate imitation of an analogue iron bell "Ting!", what did you think?
      - Symbiote 11y ago
        I've never seen a countertop oven, except as a "feature" of an expensive microwave. As I understand it, results for baking especially would be poor, as the oven has less air mass and less heat capacity. (At least, that's the reason my mum gave for not using the feature on her fancy microwave. She used to be a professional cook.)
        11y ago
bitwize 11y ago
Wait, what? VCs' valuation of their money exceeds their faith in your "unicorn" startup idea? Ohhhhhh nooooooooooo
estro 11y ago
It seems like these VC cycles are akin to a natural selection process for startups. Those with legitimate market fit and pricing schemes will have the highest fitness and thus survive; new startups will (hopefully although historically not so much) attempt to copy a similarly sustainable architecture. So in essence these cycles are beneficial to startup market health
tdaltonc 11y ago
In other news, "Suits Make a Comeback!"[0]. Investors can't just sit on money. They have to get returns, and that means that they have to put capital to work. [0] http://www.paulgraham.com/submarine.html http://www.paulgraham.com/submarine.html
- patmcguire 11y ago
  Macro-scale deflationary spirals happen in real economies, it's definitely a thing that can happen for investment in an industry. If there's a general belief that VCs can get more for less tomorrow, they'll wait, at which point they can probably get more for less the next day... Also, don't forget the money's all locked up for multiple years.
  - tdaltonc 11y ago
    True. And the textbook solution for a deflationary spiral is to increase inflation. VC's have to raise rounds that run for finite periods of time. At the end of the time the have to return the money with their big returns. That means that the money is like grain rotting in a granary. There is a looming data at which all of the money becomes useless the the VC's. That's one hell of an inflation rate. It would be hard for VC's to resist that level of inflationary pressure for long.
    - patmcguire 11y ago
      That's interesting, I hadn't thought of the funds being inflationary pressure. I don't know quite how to model that, in a totally rational world it's something like: expectation of yield within x-1 years for investments in year y+1 over expectation of yield within x years for investments year y And that's what portion of value waiting gets you. If the yield in that first year is negative, they're going to wait no matter what. 1x is better than (<1)x. Although then you get into how VCs get paid, mostly on the upswing... you're probably right. 1x gets no carried interest.
- olalonde 11y ago
  I don't get how this article is related to the essay you linked to. Do you mean that this article is likely a PR piece? Who would be paying for it?
ryporter 11y ago
The Mike Volpi quote is curious: “Right now, we don’t really know what things are worth...When you don’t know what something’s worth, you don’t know whether you are getting a good deal or a bad deal, so the obvious thing to do is, not much.” When you invest in startups (with the exception of late-stage, pre-IPO investing) you never really know what things are worth. The business model of VCs is to make a bunch of high-risk bets, most of which will fail, in order to get a couple of big winners. What's really happening is that VCs aren't willing to invest at valuations that companies expect based on recent history. This is similar to housing bust, when home owners refused to sell because they continued to believe that their homes were worth what they were before the financial crisis.
- Disruptive_Dave 11y ago
  Came here to say this. It's a copout. They didn't know what things are worth a year ago either, particularly early stage cos.
financedfuture 11y ago
>For most firms this is a pause, a reset —not a meltdown Well, isn't that just a nicer way to put this?
financedfuture 11y ago
>For most firms this is a pause, a reset —not a meltdown Well, isn't that just a nicer way to put this?
khalloud 11y ago
If we look at this from a risk-reward perspective and define 10 as the maximum reward for the maximum amount of risk then we have the entrepreneur who is a 10 for obvious reasons, an Angel who invests in the entrepreneur (maybe not the idea really because it might pivot a few times) maybe at an 8, then VCs at 7, bigger institutional investors at 5, and so on and so forth until the average teacher in Michigan who's pension allocates .001% of AUMs to VC at maybe .5 it becomes clear that if that structure becomes unbalanced the overall value creation cycle starts to become disfigured. In other words everyone tends to forget what's really important. For example if an entrepreneur doesn't feel that there is a great deal of risk to their personal livelihood as well as a great deal of reward for taking that risk and an inherent difficulty of having to earn every single cent (i.e. if they assume they can find easy money) then they are probably less likely to dig as deep as they can to come up with ingenious solutions to problems which is really the core of the whole tech startup scene. And then we can back trace that all the way back to the teacher in Michigan who might think that they are better off giving their money directly to someone who is a "VC" in SV. Basically the whole risk-reward equation becomes unbalanced. As a result when S#$$ hits the fan for them, everyone who doesn't really understand that model/equation will slow down. But my theory is that the ones that actually stick to the fundamental rules will keep plugging along with a small grin on their faces because they are glad that they are the ones who actually start to lead again and create value with a lot less BS!
- deleted 11y ago
  [deleted]
s_q_b 11y ago
Their service here in Washington, D.C. is awful. I used to love Uber, evangelized it to friends, was even the first to show Sanju Bansal how it worked when we were at a gala. Everyone else was fumbling for their S-Class keys while our twin black Navigator vehicles proceeded to pick us up at the entrance. That, to me, was the Zenith of Uber. The entire VC set of the city was waiting for cars and drivers gridlocked in the garage and lot, while some kid with an app summoned two fully appointed SUVs as if from nowhere. I wore Uber shades, tried the various promotions. I was thrilled, absolutely certain that they were one partnership away from Google to automate city transport and leapfrog our ailing transport grid. Then something changed. The lines between Uber and UberX blurred, and UberX drivers changed from well-dressed folks owner-operating, or working for car fleets, to guys with Jack Daniels hats, ponytails, and (this is literal) body odor. Uber decreased in quality, both in fleet and drivers. Ubers used to be spit-polished tire-black shined towncars, and the drivers were excellent. Never an open door missed, a bottle of water offered, mints stocked, radio preference, and an AC at a comfortable temperature, which the driver would immediately offers to adjust. It wasn't just the network that made Uber. It was the service. It literally outclassed the transportation of millionaires, with service options of the Four Seasons at the price of a Motel 6. The service has now become so bad, that power users are like sailors following the rats off a sinking ship. Then it's disclosed that one of the main showrunners has been spending all his time on some fucking branding project? And when it's finally released, the material he produced looks like it was created by a sentient bag of cocaine. "We're particles that unite to form atoms, to something... something... interaction between meatspace and cyberspace.... unity, and particles and shit. Yo, you gonna hit that?" Are you serious? In summation: No moat, no network effect. It was nice of you to pave the way for self-driving car fleets, but unless you reorganize management from the bottom of the floor up, your balloon's about to deflate faster than Napster. Peace guys. *Full disclaimer: I did turn down a second round interview at Uber due to their policies regarding the Americans with Disabilities Act. My consulting rate is $500/hr, and I'd consider fixing this mess with the ADA for half that. I wish I had the opportunity to speak to your board for five minutes about the damage their ADA policies are causing. Imagine a girl, unable to move unassisted, alone in the snow, as her driver throws her wheelchair to the curb screaming at how he doesn't accept people "like her."
- deleted 11y ago

144 points by digisth 11y ago

rl3 11y ago

In theory this won't affect the decision making process of top-tier VCs. A good invesment is a good investment regardless of the prevailing funding climate. In practice, I'm guessing if the LPs get cold feet, then VCs will be forced to triage their funding decisions accordingly. How much this matters given the sheer size of some funds, I'm not sure.

pritianka 11y ago
Agreed -> a good investment is a good investment regardless. The best startups often have raised in the worst of times.

delecti 11y ago

It's really weird how this article tries to frame the situation. It's almost like the startups feel entitled to the funding. The point of funding should really be to enable faster growth than they might otherwise have been able to achieve, but if a business can't at least survive without huge influxes of investments then is it really a business that they should be investing in in the first place?

tariqali34 11y ago
Many of these businesses may make better sense as "non-profits", out to improve the welfare of the general community and funded purely by donations. I'm not sure whether donors would appreciate writing fat checks for programmers/managers/etc., but it's clear that a "hockey stick" growth could lead to a immediate path to monetization (if people know your name, you can capitalize on it when you're doing fundraising drives).
- cubano 11y ago
  Are you kidding me? Almost all VCs aren't interested in "non-profit" and "welfare of general community." They want hockey-stick ROI and unicorns. I know this may be the wrong forum to say this, but let's get real...VC are in it for the money, not to make a social impact, and the last thing most of them are interested in is playing welfare daddy to a bunch of tech nerds.
  - deleted 11y ago
    [deleted]
  - woah 11y ago
    I think you should re read what you commented on.
wpietri 11y ago
It's a reasonable question, but consider three things: One, part of the VC model is relatively frequent fundraising. You take some seed money, prove the model a bit, take an A round, prove it some more, etc. It's in nobody's interest to give all the money necessary to get to break-even at once; investors would rather make smaller bets, and founders want to sell as little equity as possible when uncertainty is high. Two, if your goal is to never actually need another round of funding, then you'll be very conservative in how you spend your money. Bolder competitors will spend money with the expectation of getting more soon, allowing them to outpace you. So there's a strong incentive to spend as fast as possible, trusting that you'll get good enough results to earn the next round of investment. Three, there are many interesting businesses that are only possible with huge investments. In the Internet world, Twitter and Facebook are good examples. Most ad-supported businesses really only work at scale; ditto network-effect businesses. For physical goods, Tesla's a good example: you have to sell a lot of cars to justify building a factory. Pharma, too; your second pill might cost $1 to produce, but that first pill can cost $2 billion. I agree there's a lot of entitlement in the industry, but I think some of it's reasonable here, in that when you talk to a VC firm, they'll sing you a great song about how they are there to support you, that they'll back you all the way, etc, etc. People who haven't experience a downturn can be genuinely shocked at how fast supposedly bold, independent investors suddenly all stampede in the same direction.
JumpCrisscross 11y ago
> if a business can't at least survive without huge influxes of investments then is it really a business that they should be investing in in the first place Many entrepreneurs have been trained to pursue growth over short-term sustainability. In a market defined by network effects, this makes sense. It also works where one has a shot at winning a significant majority of a research-driven industry's profits (e.g. Apple or SpaceX), thereby starving one's competition of R&D oxygen. Not all markets look like that. Furthermore, the cost of (and risk of losing) financing have not been properly worked into teams' growth-versus-profitability calculi. The time and resources it takes to adapt will kill some and slow others. After all is said and done, we'll have a healthier Valley culture.
mindcrime 11y ago
Here's the somewhat ironic "catch 22" to the whole thing: If you're a startup and you don't take VC funding, then you have the luxury of simply enjoying organic growth and funding expansion by re-investing profits into the company. Well, as long as you can do that in the face of competitive pressure. Strictly speaking, unless it's a "network effect" situation like a social network, you probably don't need to grow fast. Unless you take VC money. Then, the simple act of taking their money now means there is pressure to grow fast, but it comes from the investors and not from the market per-se. And this is because VC funds are time-boxed and, by definition, have to generate whatever return they're going to generate by a fixed point in time. And the older a fund is (eg, the nearer it is to the end of it's life) the greater the pressure. This is something I think more entrepreneurs should think long and hard about. Don't raise VC money just for the sake of doing it. Even if you can. Do it IF and only if it's the only (or at least surest) way to reach your goals. And always remember that the VC's interests do not necessarily align with the founders (at least not 100% so).
- freyr 11y ago
  > unless it's a "network effect" situation like a social network, you probably don't need to grow fast. Uber seems like a weird example of this. It was said (and remains said) that they're operating in a winner-take-all space, and they expanded as if they were a social network. Despite the aggressive expansion and marketing, a majority of people I know in the Bay Area now use Lyft exculsively. The last few times I've said "I'll get an Uber," somebody's actually paused and said "Wait, why don't we take Lyft?" I'm not even sure why. When asked, they just reply that they don't like Uber for some non-specific reason. They're expanding around the world and into new products and concepts, but haven't even seemed to nail down a loyal customer base on their home turf. Anecdotally speaking.
  - flashman 11y ago
    Uber's version of achieving loyalty/lock-in is literally to run the competition into the ground and make sure their customers have no other options. That's a long way from achieving it by offering the best service, and I don't think driver/passenger ratings bridge the gap: it's the difference between encouraging or rewarding good behaviour, and subtly threatening people for breaking the rules.
tosseraccount 11y ago
"The point of funding should really be to enable faster growth" The point of funding is to generate a return. Hopefully more than you can get from CDs. Good investments are often a very long term proposition.
InclinedPlane 11y ago
The point of funding isn't just growth, it's to keep a business afloat during the times when there's not much revenue but still lots of work to do to build the core business.
tryitnow 11y ago
No, funding should not necessarily be used to enable faster growth. It can also be used for development, for refining product/market fit, etc. A lot of businesses would never be able to survive their early years without outside funding. Now, do a lot of flimsy startups feel entitled to funding? Yes. That is a problem.

hoodoof 11y ago

Investors market. Tighter conditions, preferences, ratchets.

lvs 11y ago
Words. Punctuation, plural nouns, haiku.
- andy_ppp 11y ago
  This. Absolutely made my day! Thanks.
  - dwaltrip 11y ago
    Agreed. I can't explain why I found it so hilarious. But I cracked up pretty hard at it.
- hoodoof 11y ago
  Sunshine. Invest. Rainbows. Unicorns. Heat. Fire. Cash burn. Bears. VC. Lower valuation. More Power. Liquidation preference, contentment. Entrepreneur. Panic. Sellout. Fantasy. Donkey, bulls, credit card. VC. Rich. Beach. Downturn, Upturn, Cycle. Ratchet, racehorse. Ramen, caviar, yacht, walk, laugh, cry.

gooserock 11y ago

> Valley VCs Sit on Cash, Forcing Startups to Dial Back Bullshit FTFY

justinlardinois 11y ago
This is amusing accurate. Wayyy too many startups, even YC funded ones, have products that are difficult to profit on, or worse, don't really have a market in the first place. For every "next Uber or Airbnb," there's hundreds of Shutdownifys.
- BinaryIdiot 11y ago
  Yeah I never understood the idea around "we'll figure out monetization later!". Yeah maybe you will but you're operating a business. Shouldn't you, I don't know, have a good idea or 3 to do that out of the gate? Startup culture is weird sometimes.
  - _delirium 11y ago
    A common assumption, which is sometimes even right, is that getting a significant number of users is harder than monetization. Put differently, your startup is most likely to fail (in this view) because it doesn't produce something that anyone wants to use, not even for free. So the main goal up front should be to figure out how to make something people will use, and then figure out how to reach them. Succeeding at that, but then failing to monetize the product, is a real failure mode too, of course. But many VCs are betting that failing to get users at all is the biggest early risk, and that it's easier to solve monetization later (if you ever get users) than it is to work on the monetization plan up front, and then later try to solve the but-we-have-no-users problem. Part of this makes more sense if you're looking at it from the perspective of a VC betting on 100 companies, than from the perspective of a single company. The funnel they're looking for is: some subset of these companies will get a ton of users (hundreds of thousands, maybe millions), then a subset of those will be wildly profitable.
- chetanahuja 11y ago
  "even YC funded ones" Hah... What makes you think YC funds significantly higher quality of startups overall compared to the general VC industry?

pritianka 11y ago

I've been in tech only 6 years and I am already bored of these cycles of VCs becoming frenetically exuberant followed by cautious times. Their advice to startups changes depending on what time it is. It's all so predictable yet people are surprised every time. Any entrepreneur building a business factors these in and approaches fund raising based on that knowledge. I don't even know the point of these articles any more.

wpietri 11y ago
> I don't even know the point of these articles any more. How else will the people who have been here less than 6 years get jaded? More usefully, it may be obvious that these things go in cycles, but knowing exactly where we are in the cycle is very valuable to anybody who is thinking about raising money, or who is working at a company that isn't yet self-sufficient.
- ericd 11y ago
  Yeah, the frequency of these things is a sort of useful barometer for those not in the thick of raising money.
- pritianka 11y ago
  Haha, yes. One issue I do notice though is that the articles lag behind reality by some months at least. So by the time the news hits, it's already a much progressed state.
ChuckMcM 11y ago
Well as the saying goes, "It is always new to someone." :-) And that is largely true. Here in the second decade of the 21st century people are getting funded who were blissfully unaware children in the dot com crash, or the semi-conductor recession, or the great social is the new webvan pullback. A publication can get a lot of clicks and buzz from folks for who it is new, and so they report it as new. But the articles are all part of the system which trains and educates entrepreneurs. It provides examples and stories of people who bring to market real solutions, those who bring "fad" solutions, and those essentially bring "me too" type solutions. This system also trains investors, where each cycle has a few winners which spawns some additional limited partners (or general partners) in various VC firms who also look at how their money is spent and where its going. As much as it would be great, there isn't really a course of study you can take that will teach you this stuff, you kind of have to live through a cycle or two, absorbing all the experience you can. If you want to be able to really internalize and understand the stuff that someone like Danielle Morrill is talking about you need context, and the context comes from experience both in the good times and the bad times. So to answer your question about the point of these articles, it is the same reason they teach freshman Calculus or Composition. Everyone needs to know this stuff and every year there are new people trying to learn it. The message that value is always appreciated over hype is pretty timeless but sometimes it takes a couple of cycles to really understand and distinguish between the two.

spullara 11y ago

I think it is interesting that this article is critical of valuations changing over such large time spans when the public stock market often marks up and down stocks by a significant amount on a daily basis.

cm3 11y ago

Or they could diversify and invest in more projects with smaller sums, couldn't they? Would probably require more people to manage the increase of investments.

cenal 11y ago
Valuations are out of whack. They are smarter to sit back and let the unsustainable ventures die out and then invest in the viable ones after things level out. I mean, even a touch screen toaster that costs $1,500 got invested in. Who is going to pay $1500 for a touch screen toaster? http://www.juneoven.com http://www.juneoven.com
- sjg007 11y ago
  It will sell. It's just the beginning of the IoT revolution.
  - audleman 11y ago
    I took a look and it is very nice, but $1500 for a toaster oven? Holy shit no.
    - wott 11y ago
      Eh, it is otherwise the same as a $50 oven but this one also burns money! It takes a 2.5 GHz quad core CPU to produce an awesomely accurate imitation of an analogue iron bell "Ting!", what did you think?
    - Symbiote 11y ago
      I've never seen a countertop oven, except as a "feature" of an expensive microwave. As I understand it, results for baking especially would be poor, as the oven has less air mass and less heat capacity. (At least, that's the reason my mum gave for not using the feature on her fancy microwave. She used to be a professional cook.)
      - 11y ago

bitwize 11y ago

Wait, what? VCs' valuation of their money exceeds their faith in your "unicorn" startup idea? Ohhhhhh nooooooooooo

estro 11y ago

It seems like these VC cycles are akin to a natural selection process for startups. Those with legitimate market fit and pricing schemes will have the highest fitness and thus survive; new startups will (hopefully although historically not so much) attempt to copy a similarly sustainable architecture. So in essence these cycles are beneficial to startup market health

tdaltonc 11y ago

In other news, "Suits Make a Comeback!"[0]. Investors can't just sit on money. They have to get returns, and that means that they have to put capital to work. [0] http://www.paulgraham.com/submarine.html http://www.paulgraham.com/submarine.html

patmcguire 11y ago
Macro-scale deflationary spirals happen in real economies, it's definitely a thing that can happen for investment in an industry. If there's a general belief that VCs can get more for less tomorrow, they'll wait, at which point they can probably get more for less the next day... Also, don't forget the money's all locked up for multiple years.
- tdaltonc 11y ago
  True. And the textbook solution for a deflationary spiral is to increase inflation. VC's have to raise rounds that run for finite periods of time. At the end of the time the have to return the money with their big returns. That means that the money is like grain rotting in a granary. There is a looming data at which all of the money becomes useless the the VC's. That's one hell of an inflation rate. It would be hard for VC's to resist that level of inflationary pressure for long.
  - patmcguire 11y ago
    That's interesting, I hadn't thought of the funds being inflationary pressure. I don't know quite how to model that, in a totally rational world it's something like: expectation of yield within x-1 years for investments in year y+1 over expectation of yield within x years for investments year y And that's what portion of value waiting gets you. If the yield in that first year is negative, they're going to wait no matter what. 1x is better than (<1)x. Although then you get into how VCs get paid, mostly on the upswing... you're probably right. 1x gets no carried interest.
olalonde 11y ago
I don't get how this article is related to the essay you linked to. Do you mean that this article is likely a PR piece? Who would be paying for it?

ryporter 11y ago

The Mike Volpi quote is curious: “Right now, we don’t really know what things are worth...When you don’t know what something’s worth, you don’t know whether you are getting a good deal or a bad deal, so the obvious thing to do is, not much.” When you invest in startups (with the exception of late-stage, pre-IPO investing) you never really know what things are worth. The business model of VCs is to make a bunch of high-risk bets, most of which will fail, in order to get a couple of big winners. What's really happening is that VCs aren't willing to invest at valuations that companies expect based on recent history. This is similar to housing bust, when home owners refused to sell because they continued to believe that their homes were worth what they were before the financial crisis.

Disruptive_Dave 11y ago
Came here to say this. It's a copout. They didn't know what things are worth a year ago either, particularly early stage cos.

financedfuture 11y ago

>For most firms this is a pause, a reset —not a meltdown Well, isn't that just a nicer way to put this?

financedfuture 11y ago

>For most firms this is a pause, a reset —not a meltdown Well, isn't that just a nicer way to put this?

khalloud 11y ago

If we look at this from a risk-reward perspective and define 10 as the maximum reward for the maximum amount of risk then we have the entrepreneur who is a 10 for obvious reasons, an Angel who invests in the entrepreneur (maybe not the idea really because it might pivot a few times) maybe at an 8, then VCs at 7, bigger institutional investors at 5, and so on and so forth until the average teacher in Michigan who's pension allocates .001% of AUMs to VC at maybe .5 it becomes clear that if that structure becomes unbalanced the overall value creation cycle starts to become disfigured. In other words everyone tends to forget what's really important. For example if an entrepreneur doesn't feel that there is a great deal of risk to their personal livelihood as well as a great deal of reward for taking that risk and an inherent difficulty of having to earn every single cent (i.e. if they assume they can find easy money) then they are probably less likely to dig as deep as they can to come up with ingenious solutions to problems which is really the core of the whole tech startup scene. And then we can back trace that all the way back to the teacher in Michigan who might think that they are better off giving their money directly to someone who is a "VC" in SV. Basically the whole risk-reward equation becomes unbalanced. As a result when S#$$ hits the fan for them, everyone who doesn't really understand that model/equation will slow down. But my theory is that the ones that actually stick to the fundamental rules will keep plugging along with a small grin on their faces because they are glad that they are the ones who actually start to lead again and create value with a lot less BS!

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s_q_b 11y ago

Their service here in Washington, D.C. is awful. I used to love Uber, evangelized it to friends, was even the first to show Sanju Bansal how it worked when we were at a gala. Everyone else was fumbling for their S-Class keys while our twin black Navigator vehicles proceeded to pick us up at the entrance. That, to me, was the Zenith of Uber. The entire VC set of the city was waiting for cars and drivers gridlocked in the garage and lot, while some kid with an app summoned two fully appointed SUVs as if from nowhere. I wore Uber shades, tried the various promotions. I was thrilled, absolutely certain that they were one partnership away from Google to automate city transport and leapfrog our ailing transport grid. Then something changed. The lines between Uber and UberX blurred, and UberX drivers changed from well-dressed folks owner-operating, or working for car fleets, to guys with Jack Daniels hats, ponytails, and (this is literal) body odor. Uber decreased in quality, both in fleet and drivers. Ubers used to be spit-polished tire-black shined towncars, and the drivers were excellent. Never an open door missed, a bottle of water offered, mints stocked, radio preference, and an AC at a comfortable temperature, which the driver would immediately offers to adjust. It wasn't just the network that made Uber. It was the service. It literally outclassed the transportation of millionaires, with service options of the Four Seasons at the price of a Motel 6. The service has now become so bad, that power users are like sailors following the rats off a sinking ship. Then it's disclosed that one of the main showrunners has been spending all his time on some fucking branding project? And when it's finally released, the material he produced looks like it was created by a sentient bag of cocaine. "We're particles that unite to form atoms, to something... something... interaction between meatspace and cyberspace.... unity, and particles and shit. Yo, you gonna hit that?" Are you serious? In summation: No moat, no network effect. It was nice of you to pave the way for self-driving car fleets, but unless you reorganize management from the bottom of the floor up, your balloon's about to deflate faster than Napster. Peace guys. *Full disclaimer: I did turn down a second round interview at Uber due to their policies regarding the Americans with Disabilities Act. My consulting rate is $500/hr, and I'd consider fixing this mess with the ADA for half that. I wish I had the opportunity to speak to your board for five minutes about the damage their ADA policies are causing. Imagine a girl, unable to move unassisted, alone in the snow, as her driver throws her wheelchair to the curb screaming at how he doesn't accept people "like her."

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