18 ms·

Steve Blank: 'VCs Won't Admit They're in a Ponzi Scheme'

200 points by jackgavigan 10y ago

Aelinsaar 10y ago
I think "Ponzi Scheme" is both too harsh, and too generous.
- arcanus 10y ago
  Triangle opportunity?
  - Aelinsaar 10y ago
    ...lol! Now really, how many places online can you go to get a humorous ESOS reference? Thanks HN :)
  - ryguytilidie 10y ago
    Conjoined triangles of opportunity.
    - jcomis 10y ago
      They teach that in business schools now
  - smacktoward 10y ago
    A triangle is just a rectangle that's been DISRUPTED!
    - TaylorGood 10y ago
      Until it becomes a Conjoined Triangles of Success! http://store.hbo.com/silicon-valley-conjoined-triangles-of-success-poster-11-x-17/detail.php?p=1006001&v=silicon-valley-accessories http://store.hbo.com/silicon-valley-conjoined-triangles-of-s...
      - exadeci 10y ago
        It's kinda sad that what they show in this show is not comedy but the reality of the Silicon Valley
api 10y ago
I think it's possible to draw a line between angel/VC with sane valuations and the "unicorn" phenomenon. The former does not seem to be in a bubble per se, though we have seen a cool down. A "hot" market is not a "bubble" and a cool down is not a "crash." Bubbles are violent and insane and that's not what we've seen in seed/series A. The latter may well be a bubble. What I'm hearing about right now is that it's getting a lot harder to raise money in later stages if you don't have great revenue numbers and real revenue growth. Earlier stages have cooled a bit but not catastrophically.
- stcredzero 10y ago
  A "hot" market is not a "bubble" and a cool down is not a "crash." Then instead of a bubble, how about a "Foam?" It occurred to me about a year ago that an "ecosystem" where you had a lot of startup companies serving the needs of other startup companies would be the perfect place for one to pump-up the size and perceived potential of the "ecosystem" in a way which attracts yet more money and increases the perception of further value creation in a positive feedback loop. However, since no one company, no single investment instrument is involved, there is no single perpetrator to blame. It's exploiting the same social proof dynamics, but in a highly distributed fashion. It's technically and legally not a Ponzi scheme, even though it's powered by the same mechanisms. So this should probably be the next frontier in the startup world -- preventing or at least mitigating this form of corruption. Or is it just to be adopted as the "startup business cycle" -- justified by the minority of companies that come out of such foam-swells that actually create value?
  - rory 10y ago
    > Then instead of a bubble, how about a "Foam?" "Froth" is the standard terminology for this concept.
    - stcredzero 10y ago
      That works. It also works with "hot" markets. The market gets so hot, it starts boiling then foams over.
  - 10y ago
cehrnrooth 10y ago
What are ways this can be bet on since these are non-public companies? So far I've identified: 1. Commercial real estate. Could take a short position on any public companies (ex. CBRE) though they're likely too diversified to drive them down to zero. 2. Hiring. Could bet against LinkedIn? Most local recruiters / agencies are privately owned and the public ones are diversified. 3. Ancillary services. Seems like start-ups serving start-ups so there's no publicly available position to take. 4. Tax Revenue. Assuming a contraction, can you bet on local municipalities being short on budget / revenue with a smaller tax base? Might be a fools errand to short these if the excess capacity can be picked up by all the behemoths (Google, Facebook, Apple). I wouldn't dare take a short position on SF residential real-estate although outlying areas might see a larger contraction.
- api 10y ago
  A short position on SF real estate is probably good from several angles: possibly overheated tech market, geographic diversification of the tech industry, and strong movements to build more residential capacity. Geographic diversification of the industry seems to be a thing. A few years ago the major SF/SV VCs were pretty much restricted to investing in Bay Area companies only. Today I see a lot of non-Bay Area things in their portfolio. YC is a stubborn holdout here but in general I see the industry diversifying. The real estate costs are a factor-- in our own case moving to the Bay would about double our burn rate. That doubled burn rate would be going only to real estate (by way of higher salaries to afford it and higher office space costs). Investors should just start cutting checks to real estate rentiers directly and bypass the middleman.
  - exolymph 10y ago
    > strong movements to build more residential capacity. Alas, you may be underestimating just how politically dysfunctional the Bay Area is.
    - kbenson 10y ago
      ...which is why the effort now is at a state level which takes it out of their hands. Then again, who's to say state politics are much better?
jgalt212 10y ago
Of course, it's a ponzi scheme. How else can you explain such behaviors as the same VC investing in the same company's Series A at $10, Series B at $100, Series C at $1000, etc?
- laxatives 10y ago
  No doubt its unsustainable or exaggerated growth, but is it still a Ponzi scheme if it lasts a decade and most participants exit with more money than they started?
  - abduhl 10y ago
    Ponzi schemes do not have a set time line and any successful Ponzi scheme will have most participants exit with a profit until the Ponzi scheme collapses and then the remaining participants will be holding nothing.
  - jrochkind1 10y ago
    do you know what a ponzi scheme is? Yes, a ponzi scheme requires most participants exiting with more money than they started -- until they don't. https://en.wikipedia.org/wiki/Ponzi_scheme https://en.wikipedia.org/wiki/Ponzi_scheme
  - deleted 10y ago
    [deleted]
- gohrt 10y ago
  The value of the business grows over time, and needs cash to fund growth. The investor sees the continued opportunity to grow.
haliax 10y ago
Is this taking into account the terms of these ridiculous valuations? According to http://www.fenwick.com/publications/pages/the-terms-behind-the-unicorn-valuations.aspx http://www.fenwick.com/publications/pages/the-terms-behind-t... these come with "significant downside protection" and other terms that make these deals more akin to debt than equity funding. If you stop thinking about the valuation being the price of the company, and instead being the price of a financial product which includes shares AND these protection mechanisms (e.g. liquidity preferences) do these valuations still seem irrational?
- poof131 10y ago
  There’s little downside protection from bankruptcy or from a fire sale to strategic investors who are waiting for bankruptcy. A friend recently left a startup that had raised over $100M where the whole executive team was celebrating an $800 revenue deal. He didn’t even wait to vest. Lots of mid to late stage startups are in big trouble, and it will take time to flush it out and see who’s all hype, who’s unit economics are upside down, and who are the real companies.
muench 10y ago
Even a broken clock is right twice a day. Steve Blank has been saying this since 2011 when the economist hosted a debate between Blank and Ben Horowitz. All respect to Steve Blank though for his other work. The Economist seems to have broken the link to the content on their site, but below is a video the Economist posted on Youtube and the articles posted on the personal blogs of Blank and Horowitz. https://www.youtube.com/watch?v=AfX9VLsUWwc https://www.youtube.com/watch?v=AfX9VLsUWwc http://www.bhorowitz.com/debating_the_tech_bubble_with_steve_blank_part_i http://www.bhorowitz.com/debating_the_tech_bubble_with_steve... https://steveblank.com/2011/06/15/the-next-bubble-dont-get-fooled-again/ https://steveblank.com/2011/06/15/the-next-bubble-dont-get-f... http://a16z.com/2011/06/17/debating-the-tech-bubble-with-steve-blank-part-ii/ http://a16z.com/2011/06/17/debating-the-tech-bubble-with-ste... https://steveblank.com/2011/06/17/are-you-you-the-fool-at-the-table/ https://steveblank.com/2011/06/17/are-you-you-the-fool-at-th... https://steveblank.com/2011/06/22/the-internet-might-kill-us-all/ https://steveblank.com/2011/06/22/the-internet-might-kill-us...
- geofft 10y ago
  Given that Steve Blank is usually correct about startups, not incorrect, wouldn't a better analogy be "even a working clock is wrong twice a day"? (Which of course is a nonsensical analogy.) It seems like a bubble could take more than 5 years to pop. Blank makes an analogy to the housing bubble, in which housing prices grew somewhat steadily from about 1970 to a peak in 2007. Economists started claiming a bubble in the early 2000s, and housing prices after the bubble popped only went back down to about where they were in the early 2000s. https://en.wikipedia.org/wiki/United_States_housing_bubble#Identification https://en.wikipedia.org/wiki/United_States_housing_bubble#I...
  - B1FF_PSUVM 10y ago
    > is usually correct about startups, not incorrect, wouldn't a better ... phrase be "prematurely correct". Not a good position to be in, but some people insist in telling the truth, poor asses. ("Premature antifascists" was how the US communists and sympathizers of the 1930s were designated later, when WW2 got underway. Embarrassingly enough, those people were highly agitated when the Axis powers were chasing communists and making trains run on time, but calmed down for the couple of years that the German-Soviet pact lasted. History is more fun than a barrel of monkeys, except for the bits where people get killed.)
iambvk 10y ago
As an outsider, what is the best way to measure or identify the bubble? Is a "VC firm filing for bankruptcy" the only indicator? Can someone more knowledgeable share some thoughts on this?
- w1ntermute 10y ago
  A drop in ping pong table sales is a leading indicator[0]. 0: http://www.wsj.com/articles/is-the-tech-bubble-popping-ping-pong-offers-an-answer-1462286089 http://www.wsj.com/articles/is-the-tech-bubble-popping-ping-...
  - onion2k 10y ago
    That only indicates startups being more prudent and reducing their burn rate.
    - carapace 10y ago
      Right. Which they only do when..?
      - onion2k 10y ago
        ...they realise they aren't getting value for money, which can happen at any time, not just during a bubble.
        carapace 10y ago
        Ping-pong tables. In enough numbers to make the graph deflect.
educar 10y ago
Yeah, probably the worst thing about the valley culture is that organic growth has lost it's charm. There was value in bootstrapping, making revenue, then profits and then seeking funding as a way of increasing profits by growing. My understanding is that silicon valley VC culture started out because people were building hardware and this required some investment to get started. Software is totally different and with AWS and the like, building software is so cheap. But no, now it's basically: take money, give out stuff for free and take more money showing the free customers and get even more free questions and take even more money and so on. In the end, nobody knows the true value of the company - the founders, the VCs or the customers. True money is made by either ads, selling customer data or lock-in by making migrations to another service very expensive. What irks me is that this scheme overly favours VCs and to some part the founders. The thing is the stream of founders who are willing to do this is never ending (same thing about privacy. the number of people willing to give up their privacy consciously is never ending). Even YC thinks of the whole thing as a game (if you followed the snapchat thing). I am cynical but this is really about rich people having fun and everyone else (customers, employees) is getting suckered. None of these companies are being built to last.
- traviswingo 10y ago
  You hit the nail on the head!
- freyr 10y ago
  > with AWS and the like, building software is so cheap. Yes and no. Developers aren't cheap. Lobbyists and lawyers (e.g., Uber) even less so. AWS makes it cheap to get started, but it's not so cheap once people actually start using your service. If I were starting a business, I'd aim for organic growth. But admittedly, in hyper-competitive spaces or businesses that involve scaling a user base fast and cashing in on ad revenue after you have a lot of eyeballs, there can be a lot of legitimate up front costs.
- Taniwha 10y ago
  I think it's more "the web" rather than "software", before the first dotcom boom the rule of thumb (for software and hardware companies) was that you had to have 5 profitable quarters before you went public (5, count them, 5!). The original dotcom boom threw all that out the window, companies were going public on the smell of an oily rag and no product just because people wanted to buy a piece oif the web, we've forgotten what it takes to make a real company that lasts
traviswingo 10y ago
He's correct. The economy will only support "fluff" for so long. At some point, no one will be willing to acquire these companies for their price, and the public won't support an IPO at their price also. Revenue and cash flow are vital to long-term success. Increasing your sticker price just by saying your company is worth more doesn't hold up in the real world. Find a problem, solve the problem way better than anyone else is, and create a monopoly with real profits. It's not easy, but that's where the real wealth is created.
green_lunch 10y ago
I think it was worse in the late 90s early 00s. There is this documentary called 'e-dreams' that came out in 2001. It documents a delivery startup that didn't charge anything to deliver products to customers. They had virtually no business model (and lost money on every order) and got millions in startup capital. The whole company imploded within a year, but some of the interviews with the executives of the company are pretty telling: they never intended on making a profit. The intent was to either get bought out by a larger company or get an IPO and bank the proceeds. E-dreams is a really good documentary for anyone interested in seeing a small sliver out of the early days of the first .com boom/bust. I watch it once-a-year to remind me of the craziness.
- andyjdavis 10y ago
  I haven't seen e-dreams but the documentary sounds somewhat similar to Riot On which is actually from 2004 I believe. It is about a company called Riot Entertainment that took in millions in funding from a bunch of high profile sources, made a ton of fairly dubious decisions before imploding. https://www.youtube.com/watch?v=g0lrIi0ce5E https://www.youtube.com/watch?v=g0lrIi0ce5E
- zanethomas 10y ago
  Sure, now they all have business models. But how realistic are those models? Were they contrived by the same sorts of who gave us the housing bubble?
- pekk 10y ago
  This really doesn't show that the situation in the late 90s was more ridiculous than today. First, this is a very carefully selected story, not a representative sample, so it's anyone's guess how bad a measure it is of the absurdity of the overall situation in the late 90s. If we are selective we can find similarly crazy stories from last year, so that it is only a matter of selling the story that the craziest stuff is representative. Second, the problem is not merely that people take silly risks, the problem is when too much is staked on those silly risks. If everyone thought the market was wacky and outrageous, they wouldn't stake very much. The really serious situation, where too much is staked, is one where everyone is saying things like "can't lose" leading to a system which is structured for catastrophe. Third, to say it was worse back then implies that we know how bad it is now, which really drives us to the heart of the issue - what evidence we have today. It doesn't really matter about how crazy we think it was in the late 90s.
jorblumesea 10y ago
The reality is that some VCs invest in smart but risky bets and some just throw money around like it's free. Uber and Tesla are risky bets, but also have solid thinking behind their business and target specific market demands. There are risks in execution and a whole host of other problems, but the idea behind it is fairly solid. What is not a smart investment is funding some company that is planning on making "the next social media analytics platform". There are what, 200+ companies all doing that? The issue is mostly one of perception: What happens when investors realize this and want their money back? The house of cards comes crashing down, and might take out some smaller, legitimately innovative places in the process. Money flows out of the industry, it is no longer seen as viable. Investors see VCs as some kind of get rich scheme, it's only a matter of time before reality intercedes. When that happens, it may even take out the biggest players. VCs are a great idea but often poorly executed, basically due to greed.
blahblah3 10y ago
even companies with little intrinsic value (i.e no ability to generate future cash flows for shareholders) can trade at high valuations for a long time (see the tulip mania)
_yosefk 10y ago
"Nowadays, most of the liquidity is happening for large companies paying for startups and hedge funds buying into the latest round. So when this crash happens, it's mostly going to affect the later-stage investors," Blank says. That's different from what happened when the bubble burst previously, inasmuch as "It [the '99 crash] destroyed a lot of public value, not just private capital. Your grandmother got hurt as well." Newspapers were complaining about the public being unable to invest in unicorns, with all the benefits going to wealthy private investors. Then people on HN started echoing these sentiments (the part where stuff from newspapers gets planted into the heads of normal people and becomes their opinion is really scary, I guess it must be happening to me, too. Really scary to watch this happen though, reading some weird idea in a newspaper and then reading/hearing it repeated by people the next month.) Will newspapers remember to thank wealthy private investors for taking the hit when the bubble pops? (BTW, what AFAIK doesn't exist but could is a VC fund with publicly traded shares. Of course the average VC produces below-average returns.)
erikb 10y ago
More tiresome than the current state of the valley is how people react to it. I'm here since it started. I was reading on Venture Hacks and Hacker News before Y Combinator was really a thing. People where actually talking about what a Y combinator is, the Lisp one. The moment it started to hype everybody above the age of 20 should know how it would go since it is like every other hype. It starts optimistically, everybody happy that somehting is actually happening. Then the euphory spreads. Then people start to do ridiculous things. Then everybody knows that it's ridiculous but nobody knows how to get out. Then it starts to die, slowly or in a burst. That's how life is. No surprises here. But despite that most people seem to act like they have the biggest conclusion of their life: The valley is a bubble. Wow. In business as in IT the basic rules stay the same. If it is healthy to go public with five consecutive successful quarters, then aim for that with your business. If you are editing text better spend time learning vim or emacs than the newest flashy text editor. No need to hype the explosion or burst of any hype. Thus, I'd rather see us discussing about how to make a business work. And I'm really disappointed that Steve Blank, who always was about core marketing values, participates in such a attention seeking article.
- Stryder 10y ago
  The voice of reason.
elevenfist 10y ago
It's odd for Blank to continually be tooting this horn when his ideas on "The Lean Startup" are part of the problem. You can't walk into a business not knowing how the business is going to work. That's not something TBD. Sure, some "startups" manage to make it through, but if we're talking about ponzi schemes here...
mathattack 10y ago
When was this article written? I'm a huge fan of Steve Blank, but the attached doesn't seem current. For entrepreneurs, Blank warns, the future is clear: "Startups are going to find it much, much harder to raise money, and the liquidity pipeline will bounce back to the good old days -- when you actually had to make money to have some liquidity event [go public]." I don't see many companies going public nowadays, so it isn't like there's a mad dash of premature IPOs. If anything it's harder than ever to go IPO. Due to Sarbanes-Oxley companies are getting much larger before the exit. Due to activist investors, companies want to have the future 5 or 6 quarters in the bag (in addition to the past 5 or 6) before going public.
- vonnik 10y ago
  It looks like it was published two days ago, if you google the headline. It's totally stupid that Inc. doesn't give the article a time stamp...
eternalban 10y ago
Devonshire Research Group had a very interesting analysis of Tesla. Related to OP, I found their high level matrix of identifying probable ponzi schemes interesting. https://news.ycombinator.com/item?id=11769775 https://news.ycombinator.com/item?id=11769775
SocksCanClose 10y ago
This is an interesting thing to trend, especially since it has been just over a year since @sama put out his famous bet (http://blog.samaltman.com/bubble-talk http://blog.samaltman.com/bubble-talk). I think the author may be conflating (as most do) VC investments at the left side of the power-law curve, and those on the right side. Meaning that the investments on the left (that produce at least 100x returns) are likely valued correctly, whereas investments on the right (at the tail end of the power law curve -- or even those in the center) are supposedly overvalued. Even so, the Inc author's insinuations about Uber and Airbnb are not exactly the smartest things I've ever seen written. Since I fully expect that within 10 years Uber will be running a massive network of electric, self-driving cars and busses (and perhaps even long-haul networks?) in every major and even minor city in the world. The global transportation infrastructure is absolutely worth MUCH more than $50bn.
vonnik 10y ago
Startups are just illiquid investments, like real estate or even like chunks of public-company equity so large that the market can't absorb their sale. Every single investor who ever existed has talked their own book; i.e. they promote the assets in which they have a stake. This is not a Ponzi scheme, it's a market. And unlike Ponzi schemes, in venture, there is an underlying asset, which is the company that's growing. Growth and profit are two different things. Profit and valuation are two different things. Valuation, or market cap, are based on the expectation of future revenue. With tech companies, these expectations can be very high, and rightly so. Even if they are grounded in human psychology, and subject to projections, distortions and the like.
deleted 10y ago
[deleted]

200 points by jackgavigan 10y ago

Aelinsaar 10y ago

I think "Ponzi Scheme" is both too harsh, and too generous.

arcanus 10y ago
Triangle opportunity?
- Aelinsaar 10y ago
  ...lol! Now really, how many places online can you go to get a humorous ESOS reference? Thanks HN :)
- ryguytilidie 10y ago
  Conjoined triangles of opportunity.
  - jcomis 10y ago
    They teach that in business schools now
- smacktoward 10y ago
  A triangle is just a rectangle that's been DISRUPTED!
  - TaylorGood 10y ago
    Until it becomes a Conjoined Triangles of Success! http://store.hbo.com/silicon-valley-conjoined-triangles-of-success-poster-11-x-17/detail.php?p=1006001&v=silicon-valley-accessories http://store.hbo.com/silicon-valley-conjoined-triangles-of-s...
    - exadeci 10y ago
      It's kinda sad that what they show in this show is not comedy but the reality of the Silicon Valley

api 10y ago

I think it's possible to draw a line between angel/VC with sane valuations and the "unicorn" phenomenon. The former does not seem to be in a bubble per se, though we have seen a cool down. A "hot" market is not a "bubble" and a cool down is not a "crash." Bubbles are violent and insane and that's not what we've seen in seed/series A. The latter may well be a bubble. What I'm hearing about right now is that it's getting a lot harder to raise money in later stages if you don't have great revenue numbers and real revenue growth. Earlier stages have cooled a bit but not catastrophically.

stcredzero 10y ago
A "hot" market is not a "bubble" and a cool down is not a "crash." Then instead of a bubble, how about a "Foam?" It occurred to me about a year ago that an "ecosystem" where you had a lot of startup companies serving the needs of other startup companies would be the perfect place for one to pump-up the size and perceived potential of the "ecosystem" in a way which attracts yet more money and increases the perception of further value creation in a positive feedback loop. However, since no one company, no single investment instrument is involved, there is no single perpetrator to blame. It's exploiting the same social proof dynamics, but in a highly distributed fashion. It's technically and legally not a Ponzi scheme, even though it's powered by the same mechanisms. So this should probably be the next frontier in the startup world -- preventing or at least mitigating this form of corruption. Or is it just to be adopted as the "startup business cycle" -- justified by the minority of companies that come out of such foam-swells that actually create value?
- rory 10y ago
  > Then instead of a bubble, how about a "Foam?" "Froth" is the standard terminology for this concept.
  - stcredzero 10y ago
    That works. It also works with "hot" markets. The market gets so hot, it starts boiling then foams over.
- 10y ago

cehrnrooth 10y ago

What are ways this can be bet on since these are non-public companies? So far I've identified: 1. Commercial real estate. Could take a short position on any public companies (ex. CBRE) though they're likely too diversified to drive them down to zero. 2. Hiring. Could bet against LinkedIn? Most local recruiters / agencies are privately owned and the public ones are diversified. 3. Ancillary services. Seems like start-ups serving start-ups so there's no publicly available position to take. 4. Tax Revenue. Assuming a contraction, can you bet on local municipalities being short on budget / revenue with a smaller tax base? Might be a fools errand to short these if the excess capacity can be picked up by all the behemoths (Google, Facebook, Apple). I wouldn't dare take a short position on SF residential real-estate although outlying areas might see a larger contraction.

api 10y ago
A short position on SF real estate is probably good from several angles: possibly overheated tech market, geographic diversification of the tech industry, and strong movements to build more residential capacity. Geographic diversification of the industry seems to be a thing. A few years ago the major SF/SV VCs were pretty much restricted to investing in Bay Area companies only. Today I see a lot of non-Bay Area things in their portfolio. YC is a stubborn holdout here but in general I see the industry diversifying. The real estate costs are a factor-- in our own case moving to the Bay would about double our burn rate. That doubled burn rate would be going only to real estate (by way of higher salaries to afford it and higher office space costs). Investors should just start cutting checks to real estate rentiers directly and bypass the middleman.
- exolymph 10y ago
  > strong movements to build more residential capacity. Alas, you may be underestimating just how politically dysfunctional the Bay Area is.
  - kbenson 10y ago
    ...which is why the effort now is at a state level which takes it out of their hands. Then again, who's to say state politics are much better?

jgalt212 10y ago

Of course, it's a ponzi scheme. How else can you explain such behaviors as the same VC investing in the same company's Series A at $10, Series B at $100, Series C at $1000, etc?

laxatives 10y ago
No doubt its unsustainable or exaggerated growth, but is it still a Ponzi scheme if it lasts a decade and most participants exit with more money than they started?
- abduhl 10y ago
  Ponzi schemes do not have a set time line and any successful Ponzi scheme will have most participants exit with a profit until the Ponzi scheme collapses and then the remaining participants will be holding nothing.
- jrochkind1 10y ago
  do you know what a ponzi scheme is? Yes, a ponzi scheme requires most participants exiting with more money than they started -- until they don't. https://en.wikipedia.org/wiki/Ponzi_scheme https://en.wikipedia.org/wiki/Ponzi_scheme
- deleted 10y ago
  [deleted]
gohrt 10y ago
The value of the business grows over time, and needs cash to fund growth. The investor sees the continued opportunity to grow.

haliax 10y ago

Is this taking into account the terms of these ridiculous valuations? According to http://www.fenwick.com/publications/pages/the-terms-behind-the-unicorn-valuations.aspx http://www.fenwick.com/publications/pages/the-terms-behind-t... these come with "significant downside protection" and other terms that make these deals more akin to debt than equity funding. If you stop thinking about the valuation being the price of the company, and instead being the price of a financial product which includes shares AND these protection mechanisms (e.g. liquidity preferences) do these valuations still seem irrational?

poof131 10y ago
There’s little downside protection from bankruptcy or from a fire sale to strategic investors who are waiting for bankruptcy. A friend recently left a startup that had raised over $100M where the whole executive team was celebrating an $800 revenue deal. He didn’t even wait to vest. Lots of mid to late stage startups are in big trouble, and it will take time to flush it out and see who’s all hype, who’s unit economics are upside down, and who are the real companies.

muench 10y ago

Even a broken clock is right twice a day. Steve Blank has been saying this since 2011 when the economist hosted a debate between Blank and Ben Horowitz. All respect to Steve Blank though for his other work. The Economist seems to have broken the link to the content on their site, but below is a video the Economist posted on Youtube and the articles posted on the personal blogs of Blank and Horowitz. https://www.youtube.com/watch?v=AfX9VLsUWwc https://www.youtube.com/watch?v=AfX9VLsUWwc http://www.bhorowitz.com/debating_the_tech_bubble_with_steve_blank_part_i http://www.bhorowitz.com/debating_the_tech_bubble_with_steve... https://steveblank.com/2011/06/15/the-next-bubble-dont-get-fooled-again/ https://steveblank.com/2011/06/15/the-next-bubble-dont-get-f... http://a16z.com/2011/06/17/debating-the-tech-bubble-with-steve-blank-part-ii/ http://a16z.com/2011/06/17/debating-the-tech-bubble-with-ste... https://steveblank.com/2011/06/17/are-you-you-the-fool-at-the-table/ https://steveblank.com/2011/06/17/are-you-you-the-fool-at-th... https://steveblank.com/2011/06/22/the-internet-might-kill-us-all/ https://steveblank.com/2011/06/22/the-internet-might-kill-us...

geofft 10y ago
Given that Steve Blank is usually correct about startups, not incorrect, wouldn't a better analogy be "even a working clock is wrong twice a day"? (Which of course is a nonsensical analogy.) It seems like a bubble could take more than 5 years to pop. Blank makes an analogy to the housing bubble, in which housing prices grew somewhat steadily from about 1970 to a peak in 2007. Economists started claiming a bubble in the early 2000s, and housing prices after the bubble popped only went back down to about where they were in the early 2000s. https://en.wikipedia.org/wiki/United_States_housing_bubble#Identification https://en.wikipedia.org/wiki/United_States_housing_bubble#I...
- B1FF_PSUVM 10y ago
  > is usually correct about startups, not incorrect, wouldn't a better ... phrase be "prematurely correct". Not a good position to be in, but some people insist in telling the truth, poor asses. ("Premature antifascists" was how the US communists and sympathizers of the 1930s were designated later, when WW2 got underway. Embarrassingly enough, those people were highly agitated when the Axis powers were chasing communists and making trains run on time, but calmed down for the couple of years that the German-Soviet pact lasted. History is more fun than a barrel of monkeys, except for the bits where people get killed.)

iambvk 10y ago

As an outsider, what is the best way to measure or identify the bubble? Is a "VC firm filing for bankruptcy" the only indicator? Can someone more knowledgeable share some thoughts on this?

w1ntermute 10y ago
A drop in ping pong table sales is a leading indicator[0]. 0: http://www.wsj.com/articles/is-the-tech-bubble-popping-ping-pong-offers-an-answer-1462286089 http://www.wsj.com/articles/is-the-tech-bubble-popping-ping-...
- onion2k 10y ago
  That only indicates startups being more prudent and reducing their burn rate.
  - carapace 10y ago
    Right. Which they only do when..?
    - onion2k 10y ago
      ...they realise they aren't getting value for money, which can happen at any time, not just during a bubble.
      - carapace 10y ago
        Ping-pong tables. In enough numbers to make the graph deflect.

educar 10y ago

Yeah, probably the worst thing about the valley culture is that organic growth has lost it's charm. There was value in bootstrapping, making revenue, then profits and then seeking funding as a way of increasing profits by growing. My understanding is that silicon valley VC culture started out because people were building hardware and this required some investment to get started. Software is totally different and with AWS and the like, building software is so cheap. But no, now it's basically: take money, give out stuff for free and take more money showing the free customers and get even more free questions and take even more money and so on. In the end, nobody knows the true value of the company - the founders, the VCs or the customers. True money is made by either ads, selling customer data or lock-in by making migrations to another service very expensive. What irks me is that this scheme overly favours VCs and to some part the founders. The thing is the stream of founders who are willing to do this is never ending (same thing about privacy. the number of people willing to give up their privacy consciously is never ending). Even YC thinks of the whole thing as a game (if you followed the snapchat thing). I am cynical but this is really about rich people having fun and everyone else (customers, employees) is getting suckered. None of these companies are being built to last.

traviswingo 10y ago
You hit the nail on the head!
freyr 10y ago
> with AWS and the like, building software is so cheap. Yes and no. Developers aren't cheap. Lobbyists and lawyers (e.g., Uber) even less so. AWS makes it cheap to get started, but it's not so cheap once people actually start using your service. If I were starting a business, I'd aim for organic growth. But admittedly, in hyper-competitive spaces or businesses that involve scaling a user base fast and cashing in on ad revenue after you have a lot of eyeballs, there can be a lot of legitimate up front costs.
Taniwha 10y ago
I think it's more "the web" rather than "software", before the first dotcom boom the rule of thumb (for software and hardware companies) was that you had to have 5 profitable quarters before you went public (5, count them, 5!). The original dotcom boom threw all that out the window, companies were going public on the smell of an oily rag and no product just because people wanted to buy a piece oif the web, we've forgotten what it takes to make a real company that lasts

traviswingo 10y ago

He's correct. The economy will only support "fluff" for so long. At some point, no one will be willing to acquire these companies for their price, and the public won't support an IPO at their price also. Revenue and cash flow are vital to long-term success. Increasing your sticker price just by saying your company is worth more doesn't hold up in the real world. Find a problem, solve the problem way better than anyone else is, and create a monopoly with real profits. It's not easy, but that's where the real wealth is created.

green_lunch 10y ago

I think it was worse in the late 90s early 00s. There is this documentary called 'e-dreams' that came out in 2001. It documents a delivery startup that didn't charge anything to deliver products to customers. They had virtually no business model (and lost money on every order) and got millions in startup capital. The whole company imploded within a year, but some of the interviews with the executives of the company are pretty telling: they never intended on making a profit. The intent was to either get bought out by a larger company or get an IPO and bank the proceeds. E-dreams is a really good documentary for anyone interested in seeing a small sliver out of the early days of the first .com boom/bust. I watch it once-a-year to remind me of the craziness.

andyjdavis 10y ago
I haven't seen e-dreams but the documentary sounds somewhat similar to Riot On which is actually from 2004 I believe. It is about a company called Riot Entertainment that took in millions in funding from a bunch of high profile sources, made a ton of fairly dubious decisions before imploding. https://www.youtube.com/watch?v=g0lrIi0ce5E https://www.youtube.com/watch?v=g0lrIi0ce5E
zanethomas 10y ago
Sure, now they all have business models. But how realistic are those models? Were they contrived by the same sorts of who gave us the housing bubble?
pekk 10y ago
This really doesn't show that the situation in the late 90s was more ridiculous than today. First, this is a very carefully selected story, not a representative sample, so it's anyone's guess how bad a measure it is of the absurdity of the overall situation in the late 90s. If we are selective we can find similarly crazy stories from last year, so that it is only a matter of selling the story that the craziest stuff is representative. Second, the problem is not merely that people take silly risks, the problem is when too much is staked on those silly risks. If everyone thought the market was wacky and outrageous, they wouldn't stake very much. The really serious situation, where too much is staked, is one where everyone is saying things like "can't lose" leading to a system which is structured for catastrophe. Third, to say it was worse back then implies that we know how bad it is now, which really drives us to the heart of the issue - what evidence we have today. It doesn't really matter about how crazy we think it was in the late 90s.

jorblumesea 10y ago

The reality is that some VCs invest in smart but risky bets and some just throw money around like it's free. Uber and Tesla are risky bets, but also have solid thinking behind their business and target specific market demands. There are risks in execution and a whole host of other problems, but the idea behind it is fairly solid. What is not a smart investment is funding some company that is planning on making "the next social media analytics platform". There are what, 200+ companies all doing that? The issue is mostly one of perception: What happens when investors realize this and want their money back? The house of cards comes crashing down, and might take out some smaller, legitimately innovative places in the process. Money flows out of the industry, it is no longer seen as viable. Investors see VCs as some kind of get rich scheme, it's only a matter of time before reality intercedes. When that happens, it may even take out the biggest players. VCs are a great idea but often poorly executed, basically due to greed.

blahblah3 10y ago

even companies with little intrinsic value (i.e no ability to generate future cash flows for shareholders) can trade at high valuations for a long time (see the tulip mania)

_yosefk 10y ago

"Nowadays, most of the liquidity is happening for large companies paying for startups and hedge funds buying into the latest round. So when this crash happens, it's mostly going to affect the later-stage investors," Blank says. That's different from what happened when the bubble burst previously, inasmuch as "It [the '99 crash] destroyed a lot of public value, not just private capital. Your grandmother got hurt as well." Newspapers were complaining about the public being unable to invest in unicorns, with all the benefits going to wealthy private investors. Then people on HN started echoing these sentiments (the part where stuff from newspapers gets planted into the heads of normal people and becomes their opinion is really scary, I guess it must be happening to me, too. Really scary to watch this happen though, reading some weird idea in a newspaper and then reading/hearing it repeated by people the next month.) Will newspapers remember to thank wealthy private investors for taking the hit when the bubble pops? (BTW, what AFAIK doesn't exist but could is a VC fund with publicly traded shares. Of course the average VC produces below-average returns.)

erikb 10y ago

More tiresome than the current state of the valley is how people react to it. I'm here since it started. I was reading on Venture Hacks and Hacker News before Y Combinator was really a thing. People where actually talking about what a Y combinator is, the Lisp one. The moment it started to hype everybody above the age of 20 should know how it would go since it is like every other hype. It starts optimistically, everybody happy that somehting is actually happening. Then the euphory spreads. Then people start to do ridiculous things. Then everybody knows that it's ridiculous but nobody knows how to get out. Then it starts to die, slowly or in a burst. That's how life is. No surprises here. But despite that most people seem to act like they have the biggest conclusion of their life: The valley is a bubble. Wow. In business as in IT the basic rules stay the same. If it is healthy to go public with five consecutive successful quarters, then aim for that with your business. If you are editing text better spend time learning vim or emacs than the newest flashy text editor. No need to hype the explosion or burst of any hype. Thus, I'd rather see us discussing about how to make a business work. And I'm really disappointed that Steve Blank, who always was about core marketing values, participates in such a attention seeking article.

Stryder 10y ago
The voice of reason.

elevenfist 10y ago

It's odd for Blank to continually be tooting this horn when his ideas on "The Lean Startup" are part of the problem. You can't walk into a business not knowing how the business is going to work. That's not something TBD. Sure, some "startups" manage to make it through, but if we're talking about ponzi schemes here...

mathattack 10y ago

When was this article written? I'm a huge fan of Steve Blank, but the attached doesn't seem current. For entrepreneurs, Blank warns, the future is clear: "Startups are going to find it much, much harder to raise money, and the liquidity pipeline will bounce back to the good old days -- when you actually had to make money to have some liquidity event [go public]." I don't see many companies going public nowadays, so it isn't like there's a mad dash of premature IPOs. If anything it's harder than ever to go IPO. Due to Sarbanes-Oxley companies are getting much larger before the exit. Due to activist investors, companies want to have the future 5 or 6 quarters in the bag (in addition to the past 5 or 6) before going public.

vonnik 10y ago
It looks like it was published two days ago, if you google the headline. It's totally stupid that Inc. doesn't give the article a time stamp...

eternalban 10y ago

Devonshire Research Group had a very interesting analysis of Tesla. Related to OP, I found their high level matrix of identifying probable ponzi schemes interesting. https://news.ycombinator.com/item?id=11769775 https://news.ycombinator.com/item?id=11769775

SocksCanClose 10y ago

This is an interesting thing to trend, especially since it has been just over a year since @sama put out his famous bet (http://blog.samaltman.com/bubble-talk http://blog.samaltman.com/bubble-talk). I think the author may be conflating (as most do) VC investments at the left side of the power-law curve, and those on the right side. Meaning that the investments on the left (that produce at least 100x returns) are likely valued correctly, whereas investments on the right (at the tail end of the power law curve -- or even those in the center) are supposedly overvalued. Even so, the Inc author's insinuations about Uber and Airbnb are not exactly the smartest things I've ever seen written. Since I fully expect that within 10 years Uber will be running a massive network of electric, self-driving cars and busses (and perhaps even long-haul networks?) in every major and even minor city in the world. The global transportation infrastructure is absolutely worth MUCH more than $50bn.

vonnik 10y ago

Startups are just illiquid investments, like real estate or even like chunks of public-company equity so large that the market can't absorb their sale. Every single investor who ever existed has talked their own book; i.e. they promote the assets in which they have a stake. This is not a Ponzi scheme, it's a market. And unlike Ponzi schemes, in venture, there is an underlying asset, which is the company that's growing. Growth and profit are two different things. Profit and valuation are two different things. Valuation, or market cap, are based on the expectation of future revenue. With tech companies, these expectations can be very high, and rightly so. Even if they are grounded in human psychology, and subject to projections, distortions and the like.

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