12 ms·

$100M Was Once Big Money for a Startup. Now, It’s Common

145 points by prostoalex 8y ago

deleted 8y ago
[deleted]
scranglis 8y ago
$100M is still big money.
- tim333 8y ago
  I guess if you are looking to serve the world population it's only like a couple of cents per head.
Brushfire 8y ago
Yeah, this is insanity. It's not common. Its still the 1% of startups, at best.
izzydata 8y ago
It seems like you should still be able to accomplish a lot with 100 million. Maybe the problem is that startups are wasting too much money and not being productive and / or efficient enough with finances. Now it takes the average startup more money to accomplish the same amount of progress.
- j45 8y ago
  Learning to spend effectively with your own money, before spending the money of others can be a valuable lesson to achieve many times return per dollar. Startups benefit from swinging above their weight, and this is one big way. Spending alone doesn't solve problems. It's similar to management by abdication and dumping the responsibility on someone else and wondering why it didn't turn out.
  - davidgil 8y ago
    More money alone is never the solution, there's endless examples of huge companies with endless resources throwing money at some new project and it failing miserably. A good recent example is Verizon's attempt to compete with Netflix: https://www.thewrap.com/go90-failure-just-cost-verizon-658-million/ https://www.thewrap.com/go90-failure-just-cost-verizon-658-m...
- madamelic 8y ago
  >Maybe the problem is that startups are wasting too much money and not being productive and / or efficient enough with finances. Definitely. I was talking to one startup and they were on the 5th round and they started in ~2016. They bragged that they had raised $100MM, but no mention of profitability or why they were raising so much. Tons of people think "we raised $100MM" is impressive, what's more impressive is not blowing out your cap table and diluting everyone except investors.
  - deleted 8y ago
    [deleted]
  - syedkarim 8y ago
    I always see people get fixated on dilution. As a shareholder, the most important factor should be share price. More investment at greater valuations implies a higher share price. A greater number of shareholders also leads to opportunities for liquidity for earlier shareholders.
  - adventured 8y ago
    I've been at the start-up game non-stop since the mid 1990s. You know what's really amazing today? What would have cost me $30,000 per year in infrastructure in 1999 or 2003, plus the obnoxious management of it all, is now $2k or $3k at DigitalOcean (and others) and rather easy to script and manage. After you adjust for the better hardware vs increased total Internet users scale and often increased resource demands, I also think that value proposition heavily tilts toward a greater than 10x gain versus eg 15 years ago. Most everyone here will fully understand that effect. I'm skeptical the NYTimes et al. understands what it has done to the start-up vs capital equation however. When Excite got started, you know what they needed? A $10,000, 10gb drive. Vinod Khosla had to provide it just so they could properly test out their search engine. Adjusting to today's scale, the equivalent might be three dozen virtual servers for tens of hours per month at a cost of $100. I don't need venture capital to scale to a large size. It's beautiful, the VC aspect has almost entirely become optional outside of a few niche scenarios. That has provided the large capital raising start-ups with a lot of sustained bargaining power that they have never had before. If nothing else, you can simply wait longer to deal with VCs, boosting your position. That's not going away with the next crash (it will deflate some of course), that cost edge is here to stay. The leverage point is: can you actually build the thing, can you execute, do you have the ability / persistence / etc to get it done. It really wasn't that long ago that infrastructure was the biggest cost in being able to prove out an Internet business and scale. Just to put on a good test of a product meant for scale you had to sink large sums of money in upfront. Today the people - their time - have become the biggest cost (unless you're in SF etc., then it's that and real-estate). If I want to start something today, my time is the (personal) red ink risk, rather than very large amounts of capital plowed into infrastructure.
- puranjay 8y ago
  Tech salaries, and tech valuations are both a little crazy right now. It's become very hard for non-funded startups to recruit talented engineers when Google and Facebook are happy paying six figures in stock options every year
  - biohax2015 8y ago
    Praying these crazy tech salaries continue for years to come!
    - Jach 8y ago
      If anything they're not crazy enough for ICs, given the overall value the parent orgs generate from their efforts. Tech is likely to remain a key component of the next doubling of the worldwide economy (roughly every 15 years), make sure you capture some of that...
  - sk5t 8y ago
    Non-funded startups can start by accepting that 1% of squat isn't a lot.
- duxup 8y ago
  Yeah it is hard to imagine what things you couldn't do with $100 million.
- mbesto 8y ago
  > Now it takes the average startup more money to accomplish the same amount of progress. Depends on exactly what you're referring to. Sales & Marketing - sure, but that's because it's a zero-sum game (advertising is at least). But I would argue the cost to technically accomplish reach scale is much cheaper today than it was 10 years ago when $100M wasn't the norm.
golergka 8y ago
So much money, and yet, the same horrible open office plans and transparent meeting rooms. Does office space in SF really cost that much?
- madamelic 8y ago
  >So much money, and yet, the same horrible open office plans and transparent meeting rooms. Does office space in SF really cost that much? Personally I don't think it is about actually needing the money. It is about wanting it. Thinking that if you have enough cash to burn, you'll be the next Google. In reality, 99.99% (if not 100%) of them are going to burn through their bank and fly off a cliff in 3 years.
  - parthdesai 8y ago
    Yup, i don't remember if i heard this quote by DHH in one of his interviews or was in his book, but it struck to me and honestly if i ever have my own company, i'm going to try to follow Basecamp's model. I'm paraphrasing the quote but it was something like "Not everyone needs to be next Google, Fb, Amazon. There is ton's of space for medium size $50 million/year businesses."
    - nikanj 8y ago
      But no investor wants to put their money in those.
      - tclancy 8y ago
        Sure they do, they just don't get written about here or glorified. But they exist and they're happy.
      - parthdesai 8y ago
        It's definitely more difficult but you can always try to bootstrap or take small investments and try to grow organically instead of going for 10x growth.
bertil 8y ago
I am surprised that the NYTimes doesn’t see it as a positive sign: the structures around start-up (accelerators, investors, hosting, third party tools, etc.) have grown in maturity and relevance quite considerably. I certainly expect people familiar with YCombinator to agree. More funding like that means more companies trusted to spend that money into creating something profitable. If this goes into people who have grown companies into a unicorn a couple of times; scaling faster local operations lead by managers with relevant experience; AWS, GCP, Twilio & Square bills, it’s certainly expensive but overall sensical. I don’t know of an investor who, since 2000 has said: “This is silly, I can’t invest anymore.” and left, so I don’t think the game got non-sensical overall. Real-estate in SF certainly has, but high valuations proved when they made sense and gave investors confidence. There certainly has been cases where the value wasn’t justified, but very few at that level of money raised. Certainly less in proportion than the rounds with crazy valuations in 2000
- timr 8y ago
  "More funding like that means more companies trusted to spend that money into creating something profitable. If this goes into people who have grown companies into a unicorn a couple of times; scaling faster local operations lead by managers with relevant experience; AWS, GCP, Twilio & Square bills, it’s certainly expensive but overall sensical." Who are these founders who have grown "a couple" of unicorns? There are huge numbers of them walking around now? More importantly: who are these mythical founders who have experience growing/managing a company by hundreds of percent in a single year? They're pretty thin on the ground. This money is going to inexperienced people. Save for (maybe) a few founders who lived through the late 90s, nobody has experience with this. It's new territory. Also, Let's not kid ourselves: this money isn't going to AWS and Twilio. It's going to salaries, and it's going to marketing. And that's why it's risky. When you have to hire insanely quickly and buy revenue with marketing spend, it's essentially impossible to manage the growth. Overfunding is a real thing, and unless you've seen it firsthand, it's hard to internalize the perverse incentives it creates.
  - mbesto 8y ago
    > It's going to salaries, and it's going to marketing. And that's why it's risky. Risky to who though? S&M salaries are expendable. If you can achieve 90% gross margins, you can basically flip the switch, turn S&M off, and you're profitable. > Overfunding is a real thing Overfunding has only real two business-centric downsides: undue dilution and chaotic operations. As they say though, revenue solves everything.
Xcelerate 8y ago
Is there a website/newsletter of these companies that receive funding each month? I would be curious to learn more about them.
- ylere 8y ago
  http://fortune.com/newsletter/termsheet/ http://fortune.com/newsletter/termsheet/
weka 8y ago
In some states, yes. Here in the South, KS, TN, FL (maybe), AL and GA. A lot of these startups... 100M would be a godsend.
meritt 8y ago
Rand Fishkin (founder of Moz) commented on this phenomenon the other day [1] by saying: "Make $10mm. Crickets. Raise $10mm. Everyone writes about you." and "This is how we get a culture that trains founders to raise $$ > make $$." Might I suggest to some budding founders that you try the revenue-funded approach. It's not as fast or as glamorous but the payout when you're successful is so much more significant. [1] https://twitter.com/randfish/status/1028863855353417728 https://twitter.com/randfish/status/1028863855353417728
- dminor 8y ago
  Sure, but if you've raised $10mm it means that someone has the expectation/hope that you'll be able to make much more than $10mm in the future.
cft 8y ago
The inflation due to quantitative easing has already happened at the higher economic levels. It just has not reached the main street yet.
- 0xB31B1B 8y ago
  Medical bills, home prices, education prices.... It has definitely hit main street
  - user5994461 8y ago
    Medical bills are covered in many countries outside of the US. The inflation goes into home instead.
  - padobson 8y ago
    I thought those particular examples were caused by federal subsidies and regulations juicing the demand side of the price curve via Medicare/Medicaid, Fannie/Freddie/FHA/USDA, and guaranteed student loans. As I understand it, QE (and monetary policy more broadly) juices the supply side of the price curve, leading to a general rise in prices due to the increased supply of the metric we use to measure prices (i.e. dollars). So it's likely QE has led to a general devaluing of the dollar that would lead upward pressure on all prices. The reason the three industries you mentioned have outpaced every other seems to be federal policies like subsidies and regulation juicing the demand side of the curve. It also seems like those three industries are fairly insulated from globalization and, to an extent, automation, which accounts for a lot of the downwards pressure on prices, offsetting some of the devaluing effects of QE.
    - moorhosj 8y ago
      ==So it's likely QE has led to a general devaluing of the dollar that would lead upward pressure on all prices.== QE started 10 years ago, why is it only showing up in the "all prices" data now? Inflation was historically low from 2009 to 2016, but is coming fast and hard now. This lends credence to the OP comment that it is flowing down to main street from higher economic levels. The higher economic levels are "assets" like homes, public and private stock, crypto, art, etc. ==The reason the three industries you mentioned have outpaced every other seems to be federal policies like subsidies and regulation juicing the demand side of the curve.== Have the countries with more government subsidies and regulations in healthcare (almost all of them) seen the same inflation in helathcare costs?
bitL 8y ago
Bootstrapping is the way to go; borrow/raise money only if you are already in the exponential growth phase and need cashflow for expansion.
FlyingSideKick 8y ago
As an entrepreneur I’ve never understood how closing a round of funding is somehow a badge of success. In fact it is quite the opposite. The ultimate businesses are those that are highly profitable and can scale using their own funding. Successful bootstrappers are the best entrepreneurs.
- ISL 8y ago
  I'd generally agree, however, seeking to team up with others for a greater good is also a healthy sign for an entrepreneur. "Hey, you have some capital, and we have this great thing that can serve the world. We're capital constrained, either for quality or for growth, how about we partner to make the world a better place?"
  - WJW 8y ago
    I think that pitch significantly misaligns with the goals of most VCs. If you promised them "how about we partner up to earn billions of dollars?" you would probably find many more people willing to invest.
    - ISL 8y ago
      True, but the people with whom you want to partner understand that money is only a medium of exchange, in time and space, not a goal of its own.
- tomnipotent 8y ago
  > The ultimate businesses are those that are highly profitable and can scale using their own funding I'd like to fly across the sky on a unicorn while drinking whiskey with a leprechaun, but it's not really in the cards. How many bootstrapped businesses can you think of in the Fortune 100/500? It's very rare to get to that size without the capital to make mistakes. Bootstrapped businesses generally have very little room for risk, and the ones with business models that can both be executed on and monetized profitably to > $100MM revenue/yr can probably be counted on two hands (e.g. GitHub, Plenty Of Fish, Braintree, GoPro).
fipple 8y ago
50% of all this money is being captured by Bay Area landowners.
- dmitrygr 8y ago
  Do you have any citation that claims that startups spend 50% of their money on real estate?
  - skndr 8y ago
    I think the implication is that it's captured via salaries paying high rent.
    - vincentmarle 8y ago
      It's actually pretty easy to calculate. Labor costs can account for up to 70% of total business costs so, out of $100, roughly $70mm is spent on salaries. The "one-third rule" for landlords to determine eligibility for rent means you can spend up to roughly 33% of your income on rent. So 33% out of $70mm is $23 million. You can say that 23% of every VC dollar goes towards landlords.
      - Retric 8y ago
        That's only the employee portion, you also spend money on office space.
        TheCoelacanth 8y ago
        Also some of the employee's non-rent spending will go to local businesses which will spend some of that money on rent and some of that money on salaries and so on with the new set of employees.
      - goobynight 8y ago
        This assumes people spend at the 33% level on housing. You'd have to actually know what people are spending on housing, after accounting for spouses/roommates. It could end more being more or less than 23 million, easily. e.g. I spend ~22% Also, some people will own their home or live at a family owned home.
aaavl2821 8y ago
In biotech (by which I mean therapeutics), out of ~150 "major"* VC investments from 1/2018 to 7/2018, 14% of deals have been over $100M. Many of these have been Series A deals [0]. Many of these rounds are tranched (ie you only get a certain amount upfront, then get the rest if you hit milestones), but I think I saw data suggesting only 30-40% were tranched. I think this phenomenon is largely due to 1) more money going into biotech VC but 2) very little increase in the number of good startups. Many startups are created in house by 5-10 VCs (though this is changing, especially with increasing number of well funded Chinese startups), so there's limited bandwidth. Therapeutics is so different from any other type of startup that pretty much all the incubators / educational materials don't apply, and the only ppl who know how to start startups are those who've developed drugs at big companies or have started successful companies before * Announced Series A through later deals, and some large seed deals ($5m+) [0] source is a website where i've been tracking major biotech VC investments. i'm a hobbyist programmer and its on a free heroku plan, and i'm in the early stages of turning what was a personal project into a product so expect bugs and not-ideal performance. but deal coverage is comparable to other biotech databases. https://bio-vc-tracker.herokuapp.com/ https://bio-vc-tracker.herokuapp.com/
- refurb 8y ago
  Biotech investment has been accelerating significantly over the past year. A few years ago, you’d see a handful of rounds over $100M. There have been several in the past couple of months. And you make a good point about Asian investments in biotech. The Hong Kong exchange had its first biotech IPO and there have been several big rounds in Asian as well!
usrusr 8y ago
From my consumer's perspective, the most annoying part is when a company provides a service I like, they look like they could be reasonably profitable for an investment of x but not for 10x, and then they suddenly raise to 10x or more. It's inevitable then that they will eventually ruin the existing service in search (usually futile) for some mythical product/market fit that was somehow projected be appropriately profitable for that 10x investment. It's particularly irritating with paid services, where all of a sudden paying customers turn from highly valued into a legacy nuisance.
- javier2 8y ago
  This is how I feel about Slack and Trello...
  - eafkuor 8y ago
    Wait, why Trello? Isn't it still free?
- ditonal 8y ago
  I worked for a startup with a well liked paid product built through iteration (test prep product). Then it was dropped on the ground and discontinued cause they raised a hundred million and now needed to build the founders vision, a free consumer project designed and built for years without showing it to potential users. Didn’t work out. So I’ve seen that happen.
  - daanlo 8y ago
    It is so sad when too much money destroys products / companies. IMHO great products are only built when the ultimate stakeholder is the user and this can get very difficult to maintain when you are effectively not financed by your users.
  - patothon 8y ago
    do you mind me asking what was that service? not even the company, but more the product itself?
gumby 8y ago
An important point: I looked up the deals mentioned the article and they were all late stage, where such numbers are unsurprising. One company was a bit over 2 years old (and then did a Softbank deal); the others were 6-9 years old. The article makes it sound like enormous A round deals are being done in commerce and tech.
nostrademons 8y ago
Many of these rounds are replacements for what would otherwise be IPOs or other public financing rounds. Flywire was founded in 2009 and in 2017 processed over $2B in payments. [1] Gusto was founded in 2011 with a rumored valuation of over a billion and $100M+ in revenues. Convene was founded in 2009 and was doing $18.6M in revenue in 2015 [2]. All of them have acquired other companies. Before 2000 these would be public companies; hell, before 2000 there were public companies that were barely 2 years old and had virtually no revenue. The investors for these rounds are largely the same firms who would be playing in the public markets. [1] https://www.flywire.com/pT/articles/how-two-boston-startups-are-shaking-up-the-payments-industry https://www.flywire.com/pT/articles/how-two-boston-startups-... [2] https://www.forbes.com/companies/convene/ https://www.forbes.com/companies/convene/
- Ologn 8y ago
  > what would otherwise be IPOs or other public financing rounds The NYSE and Nasdaq do a lot of hype about how much money they raise for companies in IPOs and secondary offerings. But if you look at the numbers since World War II (and even before), very little of the money corporate America raises comes from the stock market. US corporations raise money via bonds, term loans, credit lines and so on. The stock markets facilitate stocks moving from one shareholder to another, but have (relatively) little involvement in raising cash. As you note, companies are staying private much longer nowadays. Facebook didn't go public until it was worth $100 billion.
  - bobthepanda 8y ago
    There are certainly benefits to staying private; no pesky shareholders to potentially overthrow you, less stringent reporting requirements and regulations, etc. Of course, the reporting requirements and regulation compliance could also be considered a feature and not a bug, but those things are generally not considered a good thing for startups.
  - another-cuppa 8y ago
    Indeed. It's a complete joke and a big reason why "the rich get richer". I, for example, believe that artificial meat will be one of the biggest industries in the world once governments outlaw the cruel and barbaric practice of producing the "real thing". I also want to support the beginning of that industry. But is there any way for me to do that? No. The deals are done in private with a few very rich individuals. If those companies ever go public it's just a way to cash out because they are already turning a profit.
RestlessMind 8y ago
At a personal level - being a millionaire was a big deal once. Apparently not, anymore.
bwestergard 8y ago
Does anyone care to guess how many of these will return the principal? How many will turn a profit? Of those that turn a profit, how many will be engaging in some form of regulatory arbitrage (i.e. Uber and labor/taxi regulation)?
- dmritard96 8y ago
  lots of literature is available on this (granted, not always clear what their source of info is). In general, many funds at that stage are playing the unicorn game (and many raising 100M are already a unicorn or at least not too far away). Unicorn economics is basically, 1/10 will hit >1B in value while X% will be mediocre outcomes and Y% will fail. The 1 unicorn will return the fund generally speaking, after accounting for X, Y, opportunity costs (this is high given the strength of the markets lately) and interest.
- mywittyname 8y ago
  I don't think the ultimate goal for many of these startups is to make a profit. I think most investors are expecting to be acquired by a tech giant at a huge premium.
pascalxus 8y ago
These trends and actions aren't arbitrary. It's a reaction to the fact that the world is becoming increasingly "Winner take All". VCs, having enough information to recognize this fact, are now shoveling more and more money into fewer and fewer investments. On the plus side, I hope that means we'll get more companies that are truely taking on Moon Shot problems and not just building another useless app we don't need. The danger on the other side, is companies that use those large funds for rent seeking behaviors that hurt consumers in the long run.
infinity0 8y ago
Pretty ironic that a couple days ago there was some article claiming that China was about to collapse because it was going through "an orgy of investment" in an attempt to grow whilst its recent projects did not generate any actual revenue.
setgree 8y ago
A professor friend notes a similar dynamic in grant applications. Certain big philanthropic groups only have bandwidth to look at grants that are >=$1M -- with predictable effects (grants balloon, the amount of time spent thinking about how to spend each marginal dollar asymptotes to zero, etc.).
arisAlexis 8y ago
then they say crypto is overvalued

145 points by prostoalex 8y ago

deleted 8y ago

[deleted]

scranglis 8y ago

$100M is still big money.

tim333 8y ago
I guess if you are looking to serve the world population it's only like a couple of cents per head.

Brushfire 8y ago

Yeah, this is insanity. It's not common. Its still the 1% of startups, at best.

izzydata 8y ago

It seems like you should still be able to accomplish a lot with 100 million. Maybe the problem is that startups are wasting too much money and not being productive and / or efficient enough with finances. Now it takes the average startup more money to accomplish the same amount of progress.

j45 8y ago
Learning to spend effectively with your own money, before spending the money of others can be a valuable lesson to achieve many times return per dollar. Startups benefit from swinging above their weight, and this is one big way. Spending alone doesn't solve problems. It's similar to management by abdication and dumping the responsibility on someone else and wondering why it didn't turn out.
- davidgil 8y ago
  More money alone is never the solution, there's endless examples of huge companies with endless resources throwing money at some new project and it failing miserably. A good recent example is Verizon's attempt to compete with Netflix: https://www.thewrap.com/go90-failure-just-cost-verizon-658-million/ https://www.thewrap.com/go90-failure-just-cost-verizon-658-m...
madamelic 8y ago
>Maybe the problem is that startups are wasting too much money and not being productive and / or efficient enough with finances. Definitely. I was talking to one startup and they were on the 5th round and they started in ~2016. They bragged that they had raised $100MM, but no mention of profitability or why they were raising so much. Tons of people think "we raised $100MM" is impressive, what's more impressive is not blowing out your cap table and diluting everyone except investors.
- deleted 8y ago
  [deleted]
- syedkarim 8y ago
  I always see people get fixated on dilution. As a shareholder, the most important factor should be share price. More investment at greater valuations implies a higher share price. A greater number of shareholders also leads to opportunities for liquidity for earlier shareholders.
- adventured 8y ago
  I've been at the start-up game non-stop since the mid 1990s. You know what's really amazing today? What would have cost me $30,000 per year in infrastructure in 1999 or 2003, plus the obnoxious management of it all, is now $2k or $3k at DigitalOcean (and others) and rather easy to script and manage. After you adjust for the better hardware vs increased total Internet users scale and often increased resource demands, I also think that value proposition heavily tilts toward a greater than 10x gain versus eg 15 years ago. Most everyone here will fully understand that effect. I'm skeptical the NYTimes et al. understands what it has done to the start-up vs capital equation however. When Excite got started, you know what they needed? A $10,000, 10gb drive. Vinod Khosla had to provide it just so they could properly test out their search engine. Adjusting to today's scale, the equivalent might be three dozen virtual servers for tens of hours per month at a cost of $100. I don't need venture capital to scale to a large size. It's beautiful, the VC aspect has almost entirely become optional outside of a few niche scenarios. That has provided the large capital raising start-ups with a lot of sustained bargaining power that they have never had before. If nothing else, you can simply wait longer to deal with VCs, boosting your position. That's not going away with the next crash (it will deflate some of course), that cost edge is here to stay. The leverage point is: can you actually build the thing, can you execute, do you have the ability / persistence / etc to get it done. It really wasn't that long ago that infrastructure was the biggest cost in being able to prove out an Internet business and scale. Just to put on a good test of a product meant for scale you had to sink large sums of money in upfront. Today the people - their time - have become the biggest cost (unless you're in SF etc., then it's that and real-estate). If I want to start something today, my time is the (personal) red ink risk, rather than very large amounts of capital plowed into infrastructure.
puranjay 8y ago
Tech salaries, and tech valuations are both a little crazy right now. It's become very hard for non-funded startups to recruit talented engineers when Google and Facebook are happy paying six figures in stock options every year
- biohax2015 8y ago
  Praying these crazy tech salaries continue for years to come!
  - Jach 8y ago
    If anything they're not crazy enough for ICs, given the overall value the parent orgs generate from their efforts. Tech is likely to remain a key component of the next doubling of the worldwide economy (roughly every 15 years), make sure you capture some of that...
- sk5t 8y ago
  Non-funded startups can start by accepting that 1% of squat isn't a lot.
duxup 8y ago
Yeah it is hard to imagine what things you couldn't do with $100 million.
mbesto 8y ago
> Now it takes the average startup more money to accomplish the same amount of progress. Depends on exactly what you're referring to. Sales & Marketing - sure, but that's because it's a zero-sum game (advertising is at least). But I would argue the cost to technically accomplish reach scale is much cheaper today than it was 10 years ago when $100M wasn't the norm.

golergka 8y ago

So much money, and yet, the same horrible open office plans and transparent meeting rooms. Does office space in SF really cost that much?

madamelic 8y ago
>So much money, and yet, the same horrible open office plans and transparent meeting rooms. Does office space in SF really cost that much? Personally I don't think it is about actually needing the money. It is about wanting it. Thinking that if you have enough cash to burn, you'll be the next Google. In reality, 99.99% (if not 100%) of them are going to burn through their bank and fly off a cliff in 3 years.
- parthdesai 8y ago
  Yup, i don't remember if i heard this quote by DHH in one of his interviews or was in his book, but it struck to me and honestly if i ever have my own company, i'm going to try to follow Basecamp's model. I'm paraphrasing the quote but it was something like "Not everyone needs to be next Google, Fb, Amazon. There is ton's of space for medium size $50 million/year businesses."
  - nikanj 8y ago
    But no investor wants to put their money in those.
    - tclancy 8y ago
      Sure they do, they just don't get written about here or glorified. But they exist and they're happy.
    - parthdesai 8y ago
      It's definitely more difficult but you can always try to bootstrap or take small investments and try to grow organically instead of going for 10x growth.

bertil 8y ago

I am surprised that the NYTimes doesn’t see it as a positive sign: the structures around start-up (accelerators, investors, hosting, third party tools, etc.) have grown in maturity and relevance quite considerably. I certainly expect people familiar with YCombinator to agree. More funding like that means more companies trusted to spend that money into creating something profitable. If this goes into people who have grown companies into a unicorn a couple of times; scaling faster local operations lead by managers with relevant experience; AWS, GCP, Twilio & Square bills, it’s certainly expensive but overall sensical. I don’t know of an investor who, since 2000 has said: “This is silly, I can’t invest anymore.” and left, so I don’t think the game got non-sensical overall. Real-estate in SF certainly has, but high valuations proved when they made sense and gave investors confidence. There certainly has been cases where the value wasn’t justified, but very few at that level of money raised. Certainly less in proportion than the rounds with crazy valuations in 2000

timr 8y ago
"More funding like that means more companies trusted to spend that money into creating something profitable. If this goes into people who have grown companies into a unicorn a couple of times; scaling faster local operations lead by managers with relevant experience; AWS, GCP, Twilio & Square bills, it’s certainly expensive but overall sensical." Who are these founders who have grown "a couple" of unicorns? There are huge numbers of them walking around now? More importantly: who are these mythical founders who have experience growing/managing a company by hundreds of percent in a single year? They're pretty thin on the ground. This money is going to inexperienced people. Save for (maybe) a few founders who lived through the late 90s, nobody has experience with this. It's new territory. Also, Let's not kid ourselves: this money isn't going to AWS and Twilio. It's going to salaries, and it's going to marketing. And that's why it's risky. When you have to hire insanely quickly and buy revenue with marketing spend, it's essentially impossible to manage the growth. Overfunding is a real thing, and unless you've seen it firsthand, it's hard to internalize the perverse incentives it creates.
- mbesto 8y ago
  > It's going to salaries, and it's going to marketing. And that's why it's risky. Risky to who though? S&M salaries are expendable. If you can achieve 90% gross margins, you can basically flip the switch, turn S&M off, and you're profitable. > Overfunding is a real thing Overfunding has only real two business-centric downsides: undue dilution and chaotic operations. As they say though, revenue solves everything.

Xcelerate 8y ago

Is there a website/newsletter of these companies that receive funding each month? I would be curious to learn more about them.

ylere 8y ago
http://fortune.com/newsletter/termsheet/ http://fortune.com/newsletter/termsheet/

weka 8y ago

In some states, yes. Here in the South, KS, TN, FL (maybe), AL and GA. A lot of these startups... 100M would be a godsend.

meritt 8y ago

Rand Fishkin (founder of Moz) commented on this phenomenon the other day [1] by saying: "Make $10mm. Crickets. Raise $10mm. Everyone writes about you." and "This is how we get a culture that trains founders to raise $$ > make $$." Might I suggest to some budding founders that you try the revenue-funded approach. It's not as fast or as glamorous but the payout when you're successful is so much more significant. [1] https://twitter.com/randfish/status/1028863855353417728 https://twitter.com/randfish/status/1028863855353417728

dminor 8y ago
Sure, but if you've raised $10mm it means that someone has the expectation/hope that you'll be able to make much more than $10mm in the future.

cft 8y ago

The inflation due to quantitative easing has already happened at the higher economic levels. It just has not reached the main street yet.

0xB31B1B 8y ago
Medical bills, home prices, education prices.... It has definitely hit main street
- user5994461 8y ago
  Medical bills are covered in many countries outside of the US. The inflation goes into home instead.
- padobson 8y ago
  I thought those particular examples were caused by federal subsidies and regulations juicing the demand side of the price curve via Medicare/Medicaid, Fannie/Freddie/FHA/USDA, and guaranteed student loans. As I understand it, QE (and monetary policy more broadly) juices the supply side of the price curve, leading to a general rise in prices due to the increased supply of the metric we use to measure prices (i.e. dollars). So it's likely QE has led to a general devaluing of the dollar that would lead upward pressure on all prices. The reason the three industries you mentioned have outpaced every other seems to be federal policies like subsidies and regulation juicing the demand side of the curve. It also seems like those three industries are fairly insulated from globalization and, to an extent, automation, which accounts for a lot of the downwards pressure on prices, offsetting some of the devaluing effects of QE.
  - moorhosj 8y ago
    ==So it's likely QE has led to a general devaluing of the dollar that would lead upward pressure on all prices.== QE started 10 years ago, why is it only showing up in the "all prices" data now? Inflation was historically low from 2009 to 2016, but is coming fast and hard now. This lends credence to the OP comment that it is flowing down to main street from higher economic levels. The higher economic levels are "assets" like homes, public and private stock, crypto, art, etc. ==The reason the three industries you mentioned have outpaced every other seems to be federal policies like subsidies and regulation juicing the demand side of the curve.== Have the countries with more government subsidies and regulations in healthcare (almost all of them) seen the same inflation in helathcare costs?

bitL 8y ago

Bootstrapping is the way to go; borrow/raise money only if you are already in the exponential growth phase and need cashflow for expansion.

FlyingSideKick 8y ago

As an entrepreneur I’ve never understood how closing a round of funding is somehow a badge of success. In fact it is quite the opposite. The ultimate businesses are those that are highly profitable and can scale using their own funding. Successful bootstrappers are the best entrepreneurs.

ISL 8y ago
I'd generally agree, however, seeking to team up with others for a greater good is also a healthy sign for an entrepreneur. "Hey, you have some capital, and we have this great thing that can serve the world. We're capital constrained, either for quality or for growth, how about we partner to make the world a better place?"
- WJW 8y ago
  I think that pitch significantly misaligns with the goals of most VCs. If you promised them "how about we partner up to earn billions of dollars?" you would probably find many more people willing to invest.
  - ISL 8y ago
    True, but the people with whom you want to partner understand that money is only a medium of exchange, in time and space, not a goal of its own.
tomnipotent 8y ago
> The ultimate businesses are those that are highly profitable and can scale using their own funding I'd like to fly across the sky on a unicorn while drinking whiskey with a leprechaun, but it's not really in the cards. How many bootstrapped businesses can you think of in the Fortune 100/500? It's very rare to get to that size without the capital to make mistakes. Bootstrapped businesses generally have very little room for risk, and the ones with business models that can both be executed on and monetized profitably to > $100MM revenue/yr can probably be counted on two hands (e.g. GitHub, Plenty Of Fish, Braintree, GoPro).

fipple 8y ago

50% of all this money is being captured by Bay Area landowners.

dmitrygr 8y ago
Do you have any citation that claims that startups spend 50% of their money on real estate?
- skndr 8y ago
  I think the implication is that it's captured via salaries paying high rent.
  - vincentmarle 8y ago
    It's actually pretty easy to calculate. Labor costs can account for up to 70% of total business costs so, out of $100, roughly $70mm is spent on salaries. The "one-third rule" for landlords to determine eligibility for rent means you can spend up to roughly 33% of your income on rent. So 33% out of $70mm is $23 million. You can say that 23% of every VC dollar goes towards landlords.
    - Retric 8y ago
      That's only the employee portion, you also spend money on office space.
      - TheCoelacanth 8y ago
        Also some of the employee's non-rent spending will go to local businesses which will spend some of that money on rent and some of that money on salaries and so on with the new set of employees.
    - goobynight 8y ago
      This assumes people spend at the 33% level on housing. You'd have to actually know what people are spending on housing, after accounting for spouses/roommates. It could end more being more or less than 23 million, easily. e.g. I spend ~22% Also, some people will own their home or live at a family owned home.

aaavl2821 8y ago

In biotech (by which I mean therapeutics), out of ~150 "major"* VC investments from 1/2018 to 7/2018, 14% of deals have been over $100M. Many of these have been Series A deals [0]. Many of these rounds are tranched (ie you only get a certain amount upfront, then get the rest if you hit milestones), but I think I saw data suggesting only 30-40% were tranched. I think this phenomenon is largely due to 1) more money going into biotech VC but 2) very little increase in the number of good startups. Many startups are created in house by 5-10 VCs (though this is changing, especially with increasing number of well funded Chinese startups), so there's limited bandwidth. Therapeutics is so different from any other type of startup that pretty much all the incubators / educational materials don't apply, and the only ppl who know how to start startups are those who've developed drugs at big companies or have started successful companies before * Announced Series A through later deals, and some large seed deals ($5m+) [0] source is a website where i've been tracking major biotech VC investments. i'm a hobbyist programmer and its on a free heroku plan, and i'm in the early stages of turning what was a personal project into a product so expect bugs and not-ideal performance. but deal coverage is comparable to other biotech databases. https://bio-vc-tracker.herokuapp.com/ https://bio-vc-tracker.herokuapp.com/

refurb 8y ago
Biotech investment has been accelerating significantly over the past year. A few years ago, you’d see a handful of rounds over $100M. There have been several in the past couple of months. And you make a good point about Asian investments in biotech. The Hong Kong exchange had its first biotech IPO and there have been several big rounds in Asian as well!

usrusr 8y ago

From my consumer's perspective, the most annoying part is when a company provides a service I like, they look like they could be reasonably profitable for an investment of x but not for 10x, and then they suddenly raise to 10x or more. It's inevitable then that they will eventually ruin the existing service in search (usually futile) for some mythical product/market fit that was somehow projected be appropriately profitable for that 10x investment. It's particularly irritating with paid services, where all of a sudden paying customers turn from highly valued into a legacy nuisance.

javier2 8y ago
This is how I feel about Slack and Trello...
- eafkuor 8y ago
  Wait, why Trello? Isn't it still free?
ditonal 8y ago
I worked for a startup with a well liked paid product built through iteration (test prep product). Then it was dropped on the ground and discontinued cause they raised a hundred million and now needed to build the founders vision, a free consumer project designed and built for years without showing it to potential users. Didn’t work out. So I’ve seen that happen.
- daanlo 8y ago
  It is so sad when too much money destroys products / companies. IMHO great products are only built when the ultimate stakeholder is the user and this can get very difficult to maintain when you are effectively not financed by your users.
- patothon 8y ago
  do you mind me asking what was that service? not even the company, but more the product itself?

gumby 8y ago

An important point: I looked up the deals mentioned the article and they were all late stage, where such numbers are unsurprising. One company was a bit over 2 years old (and then did a Softbank deal); the others were 6-9 years old. The article makes it sound like enormous A round deals are being done in commerce and tech.

nostrademons 8y ago

Many of these rounds are replacements for what would otherwise be IPOs or other public financing rounds. Flywire was founded in 2009 and in 2017 processed over $2B in payments. [1] Gusto was founded in 2011 with a rumored valuation of over a billion and $100M+ in revenues. Convene was founded in 2009 and was doing $18.6M in revenue in 2015 [2]. All of them have acquired other companies. Before 2000 these would be public companies; hell, before 2000 there were public companies that were barely 2 years old and had virtually no revenue. The investors for these rounds are largely the same firms who would be playing in the public markets. [1] https://www.flywire.com/pT/articles/how-two-boston-startups-are-shaking-up-the-payments-industry https://www.flywire.com/pT/articles/how-two-boston-startups-... [2] https://www.forbes.com/companies/convene/ https://www.forbes.com/companies/convene/

Ologn 8y ago
> what would otherwise be IPOs or other public financing rounds The NYSE and Nasdaq do a lot of hype about how much money they raise for companies in IPOs and secondary offerings. But if you look at the numbers since World War II (and even before), very little of the money corporate America raises comes from the stock market. US corporations raise money via bonds, term loans, credit lines and so on. The stock markets facilitate stocks moving from one shareholder to another, but have (relatively) little involvement in raising cash. As you note, companies are staying private much longer nowadays. Facebook didn't go public until it was worth $100 billion.
- bobthepanda 8y ago
  There are certainly benefits to staying private; no pesky shareholders to potentially overthrow you, less stringent reporting requirements and regulations, etc. Of course, the reporting requirements and regulation compliance could also be considered a feature and not a bug, but those things are generally not considered a good thing for startups.
- another-cuppa 8y ago
  Indeed. It's a complete joke and a big reason why "the rich get richer". I, for example, believe that artificial meat will be one of the biggest industries in the world once governments outlaw the cruel and barbaric practice of producing the "real thing". I also want to support the beginning of that industry. But is there any way for me to do that? No. The deals are done in private with a few very rich individuals. If those companies ever go public it's just a way to cash out because they are already turning a profit.

RestlessMind 8y ago

At a personal level - being a millionaire was a big deal once. Apparently not, anymore.

bwestergard 8y ago

Does anyone care to guess how many of these will return the principal? How many will turn a profit? Of those that turn a profit, how many will be engaging in some form of regulatory arbitrage (i.e. Uber and labor/taxi regulation)?

dmritard96 8y ago
lots of literature is available on this (granted, not always clear what their source of info is). In general, many funds at that stage are playing the unicorn game (and many raising 100M are already a unicorn or at least not too far away). Unicorn economics is basically, 1/10 will hit >1B in value while X% will be mediocre outcomes and Y% will fail. The 1 unicorn will return the fund generally speaking, after accounting for X, Y, opportunity costs (this is high given the strength of the markets lately) and interest.
mywittyname 8y ago
I don't think the ultimate goal for many of these startups is to make a profit. I think most investors are expecting to be acquired by a tech giant at a huge premium.

pascalxus 8y ago

These trends and actions aren't arbitrary. It's a reaction to the fact that the world is becoming increasingly "Winner take All". VCs, having enough information to recognize this fact, are now shoveling more and more money into fewer and fewer investments. On the plus side, I hope that means we'll get more companies that are truely taking on Moon Shot problems and not just building another useless app we don't need. The danger on the other side, is companies that use those large funds for rent seeking behaviors that hurt consumers in the long run.

infinity0 8y ago

Pretty ironic that a couple days ago there was some article claiming that China was about to collapse because it was going through "an orgy of investment" in an attempt to grow whilst its recent projects did not generate any actual revenue.

setgree 8y ago

A professor friend notes a similar dynamic in grant applications. Certain big philanthropic groups only have bandwidth to look at grants that are >=$1M -- with predictable effects (grants balloon, the amount of time spent thinking about how to spend each marginal dollar asymptotes to zero, etc.).

arisAlexis 8y ago

then they say crypto is overvalued