15 ms·

Startups Once Showered with Cash Now Have to Work for It

132 points by marban 10y ago

paulpauper 10y ago
Unlike the 90s, It has never been easy to raise $, so this belief that companies are being showered with cash indiscriminately is wrong. Ycombinator is inundated with applications, for a modest amount of money at a fairly large chunk of equity, suggesting a market that has much more supply than demand. Many start-ups get much less than a million. What we're instead seeing is a flight to quality: the cream of the crop getting showered with cash but everything else fighting for scraps.
- Rylinks 10y ago
  Ycombinator is a poor example. The modest amount of money is not the important part of the program.
alecbaldwinlol 10y ago
Money that comes easily, goes easily. Where did the VCs get the money from [1][2]? If they didn't break a sweat, they won't hesitate to throw it around without asking questions about profitability. EDIT: People who are downvoting are trying to hide the truth of the market, whether it's a bubble or not, this is the source of the money and in turn, your livelihood ;) [1] Probably from banks who got it from the gov't who got it for cheap, right? [2] http://agilevc.com/blog/2014/10/29/where-do-venture-capital-dollars-actually-come-from/ http://agilevc.com/blog/2014/10/29/where-do-venture-capital-...
- epistasis 10y ago
  VC funds getting money from banks? I've not heard of that and your link doesn't support it. Unless the government connection you're trying to assert is that low interest rates drove more money into VC funds in order to seek higher returns.
  - hughw 10y ago
    From a 2014 WSJ article [1] : "Spanish banking giant Santander in July announced a $100 million venture capital fund to invest in fintech start-ups globally, and a few months ago HSBC allocated up to $200 million for investment in early-stage tech companies with the aim of improving its technology." [1] http://blogs.wsj.com/digits/2014/08/04/banks-lure-fintech-startups-with-venture-funds/?mg=id-wsj http://blogs.wsj.com/digits/2014/08/04/banks-lure-fintech-st...
    - morgante 10y ago
      These are literally drops in the ocean for banks and VC in general. Banks invest in VC the same way that auto manufacturers do: to suss out potential innovations and/or to have inside access to future disrupters. They don't do it for the returns.
  - merrywhether 10y ago
    > Unless the government connection you're trying to assert is that low interest rates drove more money into VC funds in order to seek higher returns. This is a constantly overlooked factor in what's been driving the VC climate for the past few years. "Cheap" money (in the form of low interest rates) pushes more money into riskier positions, and the VCs have to give that money to someone. It's no coincidence that the correction is coming at the same time as interest rates finally rising again.
    - SilasX 10y ago
      I get the theory there but it's never seemed realistic to me. What VC would actually change their mind about pulling the trigger on an equity by because of a fractional point change in the risk free rate? It just doesn't make sense.
      - rhizome 10y ago
        Are you saying that a change in interest rates doesn't have an effect on funding decisions? Because it seems like fractional interest rate changes would have (at least) a fractional effect on risk perception. Plus, are you accounting for tax benefits and other ancillary forces?
- bdcravens 10y ago
  The article and infographic you link to never mentions banks or the government, and the sources it references for VC funds don't suggest "money that comes easily". (pensions, corporations, endowments, etc - primary or secondary sources that came from working for money) That's why you're being downvoted. You're attempting to take a controversial position without any logical proof. The "truth of the market" doesn't support your conclusion.
- ChuckMcM 10y ago
  There are some great web sites on how venture capital works, I can recommend https://hbr.org/1998/11/how-venture-capital-works https://hbr.org/1998/11/how-venture-capital-works for the basic model (this was pre-dot-com bubble bursting so it got tweaked) and Fred Wilson's summary (http://avc.com/2014/05/vc-fund-economics/ http://avc.com/2014/05/vc-fund-economics/) is a good followup. edit: Wright->Wilson, thanks gist.
  - gist 10y ago
    > Fred Wright's summary You mean Fred Wilson.
- morgante 10y ago
  > People who are downvoting are trying to hide the truth of the market, whether it's a bubble or not, this is the source of the money and in turn, your livelihood ;) You are getting downvoted because while your point about money coming easily might be correct, your link for where money comes from directly contradicts your point. VC LPs are overwhelmingly people who (a) have a financial incentive to see good returns and (b) are qualified investors. They include family offices, mutual funds, and sovereign wealth funds. A big part of the latest outsized valuations are actually startups which route around VCs by directly taking investments from so-called "dumb money"—investors who might actually be pretty good at managing a basket of investments, but are not qualified or experienced enough to directly established suitable valuations for startups.
hammock 10y ago
How many startups are "underwater" now- they are unable to raise additional funding at their current/previous valuation?
- JBReefer 10y ago
  Also called a "down round"
  - bsbechtel 10y ago
    Which means the most recent investor's investment is underwater, but not necessarily the company as a whole.
    - endymi0n 10y ago
      That and usually all employees' stock options when talking liquidation preferences, with some of them knowing and some not. At that point prepare for talent bleed until either some very good plans and news or a long, slow death.
- ChuckMcM 10y ago
  You can't really answer that question until a startup goes to raise more money and can't get a favorable term sheet. So its kind of like the uncertainty principal. And startups, knowing that funding has been pulled back, are working harder to not have to even ask the question (they cut costs, try to boost revenue, extend the runway they have past this current period)
- realitycheckxxx 10y ago
  https://www.cbinsights.com/research-downround-tracker https://www.cbinsights.com/research-downround-tracker
Aelinsaar 10y ago
Good? I don't wish anyone working hardships, but being "Showered with cash" has created plenty of problems, and there is nothing at all wrong with working for it.
meddlepal 10y ago
It's just a pendulum. It wings both ways and right now it's swinging towards startup ideas and investment where the companies have solid business models rather than hopes and dreams.
carsongross 10y ago
This is bad news for bootstrapped startups. If cash stops being a cocaine-tier obsession for these guys, we might have to compete with them. Sad.
- manigandham 10y ago
  This is great news for bootstrapped companies which are likely used to running lean, might actually be profitable, and can outrun and outlast an inflated competitor. Major cashflow changes tend to be disastrous for most companies, it's just not that easy to realign everything. If you're up against a competitor that has raised a lot easy money and now needs to show results, you should be happy to see this.
  - x0x0 10y ago
    Perhaps. Or you can be stuck competing with a company that is pissing money into a hole and offering what appears to be a similar product for free. How are they ever going to become a functioning business w/ revenue > expenses? Underwear gnomes! Been there, done that, it sucked.
    - infinite8s 10y ago
      That's what is happening now. Once those companies run out if easy money they'll be forced to actually compete on value instead of just handing product away. Which is great news for bootstrapped companies that are used to functioning without bleeding cash.
- cylinder 10y ago
  Downturns favor smart people. I'd like a return to reality.
- joelrunyon 10y ago
  I think it's the opposite. The people that are used to easy VC money (without growth or a business model) will probably wash out of the ecosystem. I doubt they're going to reshape their business structure to be a bootstrapper competitive one.
swingbridge 10y ago
This is generally a good sign for the market. Not so good for bloated startups without a viable business model or cash positive finances (including probably the majority of the unicorns out there at the moment). For such firms it's about to be a bloodbath, but hard facts are that there's a lot of junk out there that got funded in loftier times and now needs to be flushed out of the system. For lean startups with a strong business model and profitability, or a clear and viable path to profitability, washing out the junk startups will only help.
- aswanson 10y ago
  Yup, same as it ever was. I remember back in 2001 saying to myself, "Good, all the bullshit is flushed out. Anything that survives this is real and should be invested in." Too bad I didnt put a few thousand into YHOO and AMZN back then: http://finance.yahoo.com/q/hp?s=AMZN&a=04&b=16&c=1997&d=04&e=21&f=2002&g=d http://finance.yahoo.com/q/hp?s=AMZN&a=04&b=16&c=1997&d=04&e...
  - paulpauper 10y ago
    AMZN and GOOG would have been great investments and still are
    - deleted 10y ago
      [deleted]
    - paulpauper 10y ago
      I know but it was founded in 1998 and survived.
      - lazaroclapp 10y ago
        Sure, but what he means is most normal people wouldn't have been able to invest in GOOG then.
    - SilasX 10y ago
      Google IPO wasn't till '04 though.
kordless 10y ago
> “Investors have materially more time to do diligence than before,” said Ben Ling, a partner at venture capital firm Khosla Ventures. In other words, "We're getting less deals to look at, so we're looking at the ones we have more closely."
- GCA10 10y ago
  Actually, it's the VCs' fear map that changes most radically. (Hire enough associates, and you can call 20 customers/prospects/former associates in an afternoon.) In boom times, VCs cut short their due diligence because if they dawdle or seem too skeptical, they won't get to be in the next Theranos round. In jittery times, VCs check everything because otherwise they will be in the next Theranos round. I saw an echo of this with mortgage appraisals. In the housing bubble, we got refinanced one time with an appraisal that didn't involve stepping inside the house. The appraiser just took two photos from the street and didn't even ask me if the home was habitable. After the housing finance crack-up, the next appraiser not only walked through every room, he clicked dozens of photos of everything from our smoke detectors to the straps holding on the hot-water heater. It was almost like having a crime-scene photographer pay us a visit.
blazespin 10y ago
tldr, The fed raised the funds rate.
- throwthisawy 10y ago
  http://i.imgur.com/i6ww9WK.gif http://i.imgur.com/i6ww9WK.gif
- Ankaios 10y ago
  That, plus it seems like in the last couple of years many people got more careful about estimating the values of privately-held companies. A $100 million investment for 10% of a company in its latest round doesn't indicate that it's worth $1 billion if there are liquidation preferences or other similar favorable terms. I might be misreading things, but I think that has made people more conservative about what scales of exits are eventually attainable.

132 points by marban 10y ago

Unlike the 90s, It has never been easy to raise $, so this belief that companies are being showered with cash indiscriminately is wrong. Ycombinator is inundated with applications, for a modest amount of money at a fairly large chunk of equity, suggesting a market that has much more supply than demand. Many start-ups get much less than a million. What we're instead seeing is a flight to quality: the cream of the crop getting showered with cash but everything else fighting for scraps.

Rylinks 10y ago
Ycombinator is a poor example. The modest amount of money is not the important part of the program.

alecbaldwinlol 10y ago

Money that comes easily, goes easily. Where did the VCs get the money from [1][2]? If they didn't break a sweat, they won't hesitate to throw it around without asking questions about profitability. EDIT: People who are downvoting are trying to hide the truth of the market, whether it's a bubble or not, this is the source of the money and in turn, your livelihood ;) [1] Probably from banks who got it from the gov't who got it for cheap, right? [2] http://agilevc.com/blog/2014/10/29/where-do-venture-capital-dollars-actually-come-from/ http://agilevc.com/blog/2014/10/29/where-do-venture-capital-...

epistasis 10y ago
VC funds getting money from banks? I've not heard of that and your link doesn't support it. Unless the government connection you're trying to assert is that low interest rates drove more money into VC funds in order to seek higher returns.
- hughw 10y ago
  From a 2014 WSJ article [1] : "Spanish banking giant Santander in July announced a $100 million venture capital fund to invest in fintech start-ups globally, and a few months ago HSBC allocated up to $200 million for investment in early-stage tech companies with the aim of improving its technology." [1] http://blogs.wsj.com/digits/2014/08/04/banks-lure-fintech-startups-with-venture-funds/?mg=id-wsj http://blogs.wsj.com/digits/2014/08/04/banks-lure-fintech-st...
  - morgante 10y ago
    These are literally drops in the ocean for banks and VC in general. Banks invest in VC the same way that auto manufacturers do: to suss out potential innovations and/or to have inside access to future disrupters. They don't do it for the returns.
- merrywhether 10y ago
  > Unless the government connection you're trying to assert is that low interest rates drove more money into VC funds in order to seek higher returns. This is a constantly overlooked factor in what's been driving the VC climate for the past few years. "Cheap" money (in the form of low interest rates) pushes more money into riskier positions, and the VCs have to give that money to someone. It's no coincidence that the correction is coming at the same time as interest rates finally rising again.
  - SilasX 10y ago
    I get the theory there but it's never seemed realistic to me. What VC would actually change their mind about pulling the trigger on an equity by because of a fractional point change in the risk free rate? It just doesn't make sense.
    - rhizome 10y ago
      Are you saying that a change in interest rates doesn't have an effect on funding decisions? Because it seems like fractional interest rate changes would have (at least) a fractional effect on risk perception. Plus, are you accounting for tax benefits and other ancillary forces?
bdcravens 10y ago
The article and infographic you link to never mentions banks or the government, and the sources it references for VC funds don't suggest "money that comes easily". (pensions, corporations, endowments, etc - primary or secondary sources that came from working for money) That's why you're being downvoted. You're attempting to take a controversial position without any logical proof. The "truth of the market" doesn't support your conclusion.
ChuckMcM 10y ago
There are some great web sites on how venture capital works, I can recommend https://hbr.org/1998/11/how-venture-capital-works https://hbr.org/1998/11/how-venture-capital-works for the basic model (this was pre-dot-com bubble bursting so it got tweaked) and Fred Wilson's summary (http://avc.com/2014/05/vc-fund-economics/ http://avc.com/2014/05/vc-fund-economics/) is a good followup. edit: Wright->Wilson, thanks gist.
- gist 10y ago
  > Fred Wright's summary You mean Fred Wilson.
morgante 10y ago
> People who are downvoting are trying to hide the truth of the market, whether it's a bubble or not, this is the source of the money and in turn, your livelihood ;) You are getting downvoted because while your point about money coming easily might be correct, your link for where money comes from directly contradicts your point. VC LPs are overwhelmingly people who (a) have a financial incentive to see good returns and (b) are qualified investors. They include family offices, mutual funds, and sovereign wealth funds. A big part of the latest outsized valuations are actually startups which route around VCs by directly taking investments from so-called "dumb money"—investors who might actually be pretty good at managing a basket of investments, but are not qualified or experienced enough to directly established suitable valuations for startups.

hammock 10y ago

How many startups are "underwater" now- they are unable to raise additional funding at their current/previous valuation?

JBReefer 10y ago
Also called a "down round"
- bsbechtel 10y ago
  Which means the most recent investor's investment is underwater, but not necessarily the company as a whole.
  - endymi0n 10y ago
    That and usually all employees' stock options when talking liquidation preferences, with some of them knowing and some not. At that point prepare for talent bleed until either some very good plans and news or a long, slow death.
ChuckMcM 10y ago
You can't really answer that question until a startup goes to raise more money and can't get a favorable term sheet. So its kind of like the uncertainty principal. And startups, knowing that funding has been pulled back, are working harder to not have to even ask the question (they cut costs, try to boost revenue, extend the runway they have past this current period)
realitycheckxxx 10y ago
https://www.cbinsights.com/research-downround-tracker https://www.cbinsights.com/research-downround-tracker

Aelinsaar 10y ago

Good? I don't wish anyone working hardships, but being "Showered with cash" has created plenty of problems, and there is nothing at all wrong with working for it.

meddlepal 10y ago

It's just a pendulum. It wings both ways and right now it's swinging towards startup ideas and investment where the companies have solid business models rather than hopes and dreams.

carsongross 10y ago

This is bad news for bootstrapped startups. If cash stops being a cocaine-tier obsession for these guys, we might have to compete with them. Sad.

manigandham 10y ago
This is great news for bootstrapped companies which are likely used to running lean, might actually be profitable, and can outrun and outlast an inflated competitor. Major cashflow changes tend to be disastrous for most companies, it's just not that easy to realign everything. If you're up against a competitor that has raised a lot easy money and now needs to show results, you should be happy to see this.
- x0x0 10y ago
  Perhaps. Or you can be stuck competing with a company that is pissing money into a hole and offering what appears to be a similar product for free. How are they ever going to become a functioning business w/ revenue > expenses? Underwear gnomes! Been there, done that, it sucked.
  - infinite8s 10y ago
    That's what is happening now. Once those companies run out if easy money they'll be forced to actually compete on value instead of just handing product away. Which is great news for bootstrapped companies that are used to functioning without bleeding cash.
cylinder 10y ago
Downturns favor smart people. I'd like a return to reality.
joelrunyon 10y ago
I think it's the opposite. The people that are used to easy VC money (without growth or a business model) will probably wash out of the ecosystem. I doubt they're going to reshape their business structure to be a bootstrapper competitive one.

swingbridge 10y ago

This is generally a good sign for the market. Not so good for bloated startups without a viable business model or cash positive finances (including probably the majority of the unicorns out there at the moment). For such firms it's about to be a bloodbath, but hard facts are that there's a lot of junk out there that got funded in loftier times and now needs to be flushed out of the system. For lean startups with a strong business model and profitability, or a clear and viable path to profitability, washing out the junk startups will only help.

aswanson 10y ago
Yup, same as it ever was. I remember back in 2001 saying to myself, "Good, all the bullshit is flushed out. Anything that survives this is real and should be invested in." Too bad I didnt put a few thousand into YHOO and AMZN back then: http://finance.yahoo.com/q/hp?s=AMZN&a=04&b=16&c=1997&d=04&e=21&f=2002&g=d http://finance.yahoo.com/q/hp?s=AMZN&a=04&b=16&c=1997&d=04&e...
- paulpauper 10y ago
  AMZN and GOOG would have been great investments and still are
  - deleted 10y ago
    [deleted]
  - paulpauper 10y ago
    I know but it was founded in 1998 and survived.
    - lazaroclapp 10y ago
      Sure, but what he means is most normal people wouldn't have been able to invest in GOOG then.
  - SilasX 10y ago
    Google IPO wasn't till '04 though.

kordless 10y ago

> “Investors have materially more time to do diligence than before,” said Ben Ling, a partner at venture capital firm Khosla Ventures. In other words, "We're getting less deals to look at, so we're looking at the ones we have more closely."

GCA10 10y ago
Actually, it's the VCs' fear map that changes most radically. (Hire enough associates, and you can call 20 customers/prospects/former associates in an afternoon.) In boom times, VCs cut short their due diligence because if they dawdle or seem too skeptical, they won't get to be in the next Theranos round. In jittery times, VCs check everything because otherwise they will be in the next Theranos round. I saw an echo of this with mortgage appraisals. In the housing bubble, we got refinanced one time with an appraisal that didn't involve stepping inside the house. The appraiser just took two photos from the street and didn't even ask me if the home was habitable. After the housing finance crack-up, the next appraiser not only walked through every room, he clicked dozens of photos of everything from our smoke detectors to the straps holding on the hot-water heater. It was almost like having a crime-scene photographer pay us a visit.

blazespin 10y ago

tldr, The fed raised the funds rate.

throwthisawy 10y ago
http://i.imgur.com/i6ww9WK.gif http://i.imgur.com/i6ww9WK.gif
Ankaios 10y ago
That, plus it seems like in the last couple of years many people got more careful about estimating the values of privately-held companies. A $100 million investment for 10% of a company in its latest round doesn't indicate that it's worth $1 billion if there are liquidation preferences or other similar favorable terms. I might be misreading things, but I think that has made people more conservative about what scales of exits are eventually attainable.