14 ms·

Panic in Startupland

96 points by nbstme 4y ago

sharemywin 4y ago
The thing I wonder about is what does all these startups ARR look like when everyone's budget dries up and/or there are no startups to buy your startups neat(but not needed) software.
- RexM 4y ago
  I’m wondering what the ARR looks like now. I read here on HN that Bolt had $40m in revenue last year with an $11b valuation. I have no idea if that revenue number is real, or if I’m misremembering.
  - imachine1980_ 4y ago
    Revenue isn't profit, you can have higher revenue if you spend 100 dollars to get 90 dollar return, this is the problem right now much companies allow to spend well over what they should, maybe bolt should be a 40 employes companies not 900(linkedin), and a marketing budget of 10 millions not 100 million (no data here)
    - foobiekr 4y ago
      Uber has been the king of this approach for years. Subsidized rides.
      - nbstme 4y ago
        Good for us as consumers, not for Uber biz haha!
      - solarkraft 4y ago
        It's impressive for how long they've been able to do this.
    - nbstme 4y ago
      Yes! If you were raising at 100x ARR it means that $1 of ARR generated $100 of market value. In that sense, it made sense to burn $100 to acquire $1 of revenue. Of course, when the reversion to the mean hit and companies trade at 7x ARR, it doesn't make sense to spend that much. Unfortunately, most startups won't be able to adapt their expenses to this new environment.
    - solarkraft 4y ago
      For sure, but that means their profit is definitely below 40M$.
- ebiester 4y ago
  A word processor and spreadsheet is necessary. Everything else is optional. The question isn't "is it neat?" The question is does the money expended save more than if a human performed the equivalent labor? Does Confluence and Jira save more money than having a human librarian and project manager manually tracking the status of projects? There will always be room for "neat" software that replaces necessary human labor costs. If you can allow a team of 5 to do what used to take a team of 10, you will be able to sell that for the equivalent of the fully loaded cost of 3-4 people. Do that for enough people and you have a successful business.
  - sharemywin 4y ago
    I'm talking about second order effects. if the company you no longer saved money for don't have a business need to slash money left and right you may have a problem. If you have software related to mortgage companies you might have a problem in this market.
- nbstme 4y ago
  Interesting take! I agree that we will all reevaluate the software we are paying for and get rid of "nice to have". If companies fire employees in means software businesses will sell fewer "seats" per customer. The average revenue per customer might decline.
gnicholas 4y ago
Love these: > Introducing the hype ratio and the burn multiple. Hype Ratio = Capital Raised / Annual Recurring Revenue. Burn multiple = Net Burn / Net New ARR If these ratios are superior to 3 then there is a problem. It’s not uncommon to see startups with a 10+ ratio these days.
- nbstme 4y ago
  Thanks! All credits to https://twitter.com/DavidSacks https://twitter.com/DavidSacks who publishes great content.
bloodyplonker22 4y ago
Of course he's cherry-picking "pandemic businesses". A lot of these businesses that he uses as examples are actually bad businesses, pandemic or not. There are plenty of great enterprise SAAS businesses that will have a slight slowdown in revenue growth for a while, but will more than thrive in the long term. These bloggers always act like everything is binary. "It's a shite business or a great one."
- pseudosavant 4y ago
  Toward the end he writes: > Ok, what about the silver lining? > > Good business will have the time of their life. Fast-growing, profitable startups will have the opportunity to buy out struggling competitors, invest in an environment where CAC will decrease, and hire people with fair compensation packages. Startups with positive cash flows are the cool kids again - until the next exuberance of course. He nails the fundamentally poor businesses, but points out how it is a prime opportunity for sound businesses.
  - aetherson 4y ago
    I worked at companies that survived both the 2008 and 2001 crashes, and indeed perhaps were overall helped by those crashes. Nobody was having "the time of their life." It may be true that businesses with good underlying economics are ultimately helped by these crashes, but they're tense, uncomfortable experiences all around.
    - nbstme 4y ago
      Agree. It's not enjoyable to work in a bad macro environment. My point is that companies that have significant cash flows won't have to lay off employees and might even continue to hire, acquire businesses and consolidate their business. They will expand, not contract like the rest of the market.
      - aetherson 4y ago
        One thing that I think works against businesses expanding right now -- even profitable businesses -- is that with it having been like 12+ years since anyone worked in a bad macro environment is that nobody really knows how their company behaves in a recession. Like, sure, you're profitable right now, but right now we're not in a recession, the bad times are pretty limited to just the tech sector. If the whole economy does go into recession, do your customers vanish on you? Even if you were around in 2008, your business is probably different now in 2022, and you don't really know what the pressures are going to be like. In this environment, I think lots of companies that have fundamentally sound businesses are still going to be very conservative. (Not disagreeing with you, exactly, just adding more thoughts and some context for why it's not enjoyable to work in a bad macro even if your business is ultimately the healthier for it.)
deleted 4y ago
[deleted]
lordnacho 4y ago
The problem isn't that there's a recession coming, the problem is that there hasn't been one for a long long time. Evolution had the same problem actually. Due to the way it works it took absolutely ages to evolve a way to recycle lignin, a problem that is now giving us issues millions of years after. We're supposed to be smart though. If we'd not been scared of an occasional recession cleaning out various industries, we'd have more resilient businesses. Now what we've bred is a generation of founders and investors that only know how to apply max pedal. Have a good idea? Eat the world, get a monopoly, exploit it. That's the only plan for a large number of currently famous firms. That other plan, where you maybe grow into a sensible size and dominate a local market is what we really need if there's going to be an actual market economy.
- nickff 4y ago
  >" The problem isn't that there's a recession coming, the problem is that there hasn't been one for a long long time." I agree with you, but the persistently low interest rates have also fueled malinvestment and speculation on relatively low-potential, high-risk, long term investments.
  - lumost 4y ago
    This even spreads to technical architecture, many tech teams stopped exercising fiscal discipline in how they design services. This emerges in tiny low traffic micro-services, 4 teams building the same service, un-neccessary data allowed to accumulate in expensive data0stores for a rainy day and more. When some of these startups need to layoff, I'm curious if they'll actually be able to maintain KTLO operations on their reduced staffs without making large product cuts.
    - Ekaros 4y ago
      Now I actually wonder if there would be room for some type of consulting in cost optimization field. Someone coming in and making inventory of data and services run and then recommending how to save on running costs and so on...
deleted 4y ago
[deleted]
zkirill 4y ago
> Good business will have the time of their life. Fast-growing, profitable startups will have the opportunity to buy out struggling competitors, invest in an environment where CAC will decrease, and hire people with fair compensation packages. What will qualify as "fast-growing" in this climate?
- nbstme 4y ago
  Thanks for your comment. Stocks got hammered but SaaS businesses continue to grow. Zoom is growing 50% YoY, Datadog 80% YoY...
  - snehasish 4y ago
    Interested in what you think about startups like Flexport - 2021 3.3B in revenue (80% passthrough) = 660M net. Their last round in Jan 2022 was ~1B. So "hype ratio" < 2. Am I looking at this right?
  - HFguy 4y ago
    They are certainly growing. But not much profits in many cases. The real question is can they generate a lot of cash once they are out of hyper growth mode? Or will they just never generate much cash flow ever?
gkop 4y ago
> The pundits lecture that it was caused by an acceleration of the use of software after covid It’s frustrating seeing this straw man BS come up here. Everyone (on HN as well as at large) knew it was the Fed’s historic low interest rates that meant the easy money..
- nbstme 4y ago
  Thanks for your comment. IMO, a lot of people thought, and still think, that the appreciation of stocks was due to an acceleration of the penetration of software. I think it's a valid viewpoint. Gartner expects public cloud spending to rise by 20% next year to $500 Billion. Even AWS, Azure, and Google Cloud continue to grow by more than 40%.
nathanaldensr 4y ago
Is Zoom really a "startup?" It seems to me a better title would be "panic in Greedland." This is all just greed and FOMO, with the latest targets being tech companies and crypto.
- nbstme 4y ago
  Startup = growth, and Zoom is growing by 55% yearly with $4bn of ARR. It's an impressive business (startup?)
  - sofixa 4y ago
    So is AWS a startup too? I believe we call Zoom and similar scaleups, startup being more applicable to starting and up and coming companies.
  - icedchai 4y ago
    Zoom is a 10 year old public company with a 30 billion dollar market cap and over 7000 employees. It is not a "startup" by any meaningful definition of the word.
- deleted 4y ago
  [deleted]
lumost 4y ago
One general concern that's bubbled around the FB's and SaaS's of the world. It's unclear how much of these very sound businesses revenue is due to profligate spending by startups. Smart SaaS businesses may find their top customers vanishing. It's easier to right size a smart business than a bad business, but we may see a (small) contagion.
- nbstme 4y ago
  Thanks for your comment. I agree for SaaS companies that mostly sell to startups, but SaaS selling to big enterprise customers should be fine.
- HFguy 4y ago
  It is obviously, very much company by company thing. However, I've seen some analyses that put it at between 35-50% for typical SasS (i.e., they are selling to each other and other start-ups). To me, if true, that seems like rough sledding for many firms in a funding down turn.
hahaxdxd123 4y ago
> Central bankers created a gigantic misallocation of resources - as they have always done since the dawn of time. Lmao, we came out of a once-in-a-century pandemic with nothing more than a couple scratches and minor inflation and you find a way to complain? The real misallocation would have been seeing profitable, healthy businesses die in the months following March 2020 - has everyone just forgotten the mass panic until the Fed stepped in? A couple overconfident hedge funds and bad SPACs who have already been brought back down to earth is a very small price to pay (I paid very little since I did not invest in meme stonks).
- riku_iki 4y ago
  > than a couple scratches and minor inflation and you find a way to complain? it had very big bill attached: +6T national debt, and maybe several dozens T funneled through cheap loans with twice inflated stocks and real estate, rich became much richer, and poor are screwed dramatically in exchange to $600 stimulus check.
anm89 4y ago
I think the way many people get schadenfreude watching crypto crash, I get equally watching startups crash. So many people were loudly proclaiming what geniuses they were for understanding that all the mattered were network effects and hyper growth and that cashflow was for suckers. And it's not that there aren't cases where that's a valid model but it was used in so many obviously stupid cases. So, just honestly kind of enjoyable to watch it crash and burn.
indus 4y ago
How is this rational that VCs that are calling out that “we are screwed” participated or encouraged startups to invest at those valuations.
heywoodlh 4y ago
I have been wondering this lately (naive question I am sure): is it possible for a company to hit a stable financial point and just stay there? Or is the only way to sustain a company in the US economy to always be growing?
karimmaassen 4y ago
Here's the thing: Finding a solution to a problem, then making it into a business that is sustainable (read: had money influx) during dire times (read: economic recession), is a very good and healthy beginning for your start-up. Doing startups when money is sloshing around, often leads to zombie companies that are on life support. The panic in startupland stems from the fact that most of them are cut off from said life support.

96 points by nbstme 4y ago

The thing I wonder about is what does all these startups ARR look like when everyone's budget dries up and/or there are no startups to buy your startups neat(but not needed) software.

RexM 4y ago
I’m wondering what the ARR looks like now. I read here on HN that Bolt had $40m in revenue last year with an $11b valuation. I have no idea if that revenue number is real, or if I’m misremembering.
- imachine1980_ 4y ago
  Revenue isn't profit, you can have higher revenue if you spend 100 dollars to get 90 dollar return, this is the problem right now much companies allow to spend well over what they should, maybe bolt should be a 40 employes companies not 900(linkedin), and a marketing budget of 10 millions not 100 million (no data here)
  - foobiekr 4y ago
    Uber has been the king of this approach for years. Subsidized rides.
    - nbstme 4y ago
      Good for us as consumers, not for Uber biz haha!
    - solarkraft 4y ago
      It's impressive for how long they've been able to do this.
  - nbstme 4y ago
    Yes! If you were raising at 100x ARR it means that $1 of ARR generated $100 of market value. In that sense, it made sense to burn $100 to acquire $1 of revenue. Of course, when the reversion to the mean hit and companies trade at 7x ARR, it doesn't make sense to spend that much. Unfortunately, most startups won't be able to adapt their expenses to this new environment.
  - solarkraft 4y ago
    For sure, but that means their profit is definitely below 40M$.
ebiester 4y ago
A word processor and spreadsheet is necessary. Everything else is optional. The question isn't "is it neat?" The question is does the money expended save more than if a human performed the equivalent labor? Does Confluence and Jira save more money than having a human librarian and project manager manually tracking the status of projects? There will always be room for "neat" software that replaces necessary human labor costs. If you can allow a team of 5 to do what used to take a team of 10, you will be able to sell that for the equivalent of the fully loaded cost of 3-4 people. Do that for enough people and you have a successful business.
- sharemywin 4y ago
  I'm talking about second order effects. if the company you no longer saved money for don't have a business need to slash money left and right you may have a problem. If you have software related to mortgage companies you might have a problem in this market.
nbstme 4y ago
Interesting take! I agree that we will all reevaluate the software we are paying for and get rid of "nice to have". If companies fire employees in means software businesses will sell fewer "seats" per customer. The average revenue per customer might decline.

gnicholas 4y ago

Love these: > Introducing the hype ratio and the burn multiple. Hype Ratio = Capital Raised / Annual Recurring Revenue. Burn multiple = Net Burn / Net New ARR If these ratios are superior to 3 then there is a problem. It’s not uncommon to see startups with a 10+ ratio these days.

nbstme 4y ago
Thanks! All credits to https://twitter.com/DavidSacks https://twitter.com/DavidSacks who publishes great content.

bloodyplonker22 4y ago

Of course he's cherry-picking "pandemic businesses". A lot of these businesses that he uses as examples are actually bad businesses, pandemic or not. There are plenty of great enterprise SAAS businesses that will have a slight slowdown in revenue growth for a while, but will more than thrive in the long term. These bloggers always act like everything is binary. "It's a shite business or a great one."

pseudosavant 4y ago
Toward the end he writes: > Ok, what about the silver lining? > > Good business will have the time of their life. Fast-growing, profitable startups will have the opportunity to buy out struggling competitors, invest in an environment where CAC will decrease, and hire people with fair compensation packages. Startups with positive cash flows are the cool kids again - until the next exuberance of course. He nails the fundamentally poor businesses, but points out how it is a prime opportunity for sound businesses.
- aetherson 4y ago
  I worked at companies that survived both the 2008 and 2001 crashes, and indeed perhaps were overall helped by those crashes. Nobody was having "the time of their life." It may be true that businesses with good underlying economics are ultimately helped by these crashes, but they're tense, uncomfortable experiences all around.
  - nbstme 4y ago
    Agree. It's not enjoyable to work in a bad macro environment. My point is that companies that have significant cash flows won't have to lay off employees and might even continue to hire, acquire businesses and consolidate their business. They will expand, not contract like the rest of the market.
    - aetherson 4y ago
      One thing that I think works against businesses expanding right now -- even profitable businesses -- is that with it having been like 12+ years since anyone worked in a bad macro environment is that nobody really knows how their company behaves in a recession. Like, sure, you're profitable right now, but right now we're not in a recession, the bad times are pretty limited to just the tech sector. If the whole economy does go into recession, do your customers vanish on you? Even if you were around in 2008, your business is probably different now in 2022, and you don't really know what the pressures are going to be like. In this environment, I think lots of companies that have fundamentally sound businesses are still going to be very conservative. (Not disagreeing with you, exactly, just adding more thoughts and some context for why it's not enjoyable to work in a bad macro even if your business is ultimately the healthier for it.)

deleted 4y ago

[deleted]

lordnacho 4y ago

The problem isn't that there's a recession coming, the problem is that there hasn't been one for a long long time. Evolution had the same problem actually. Due to the way it works it took absolutely ages to evolve a way to recycle lignin, a problem that is now giving us issues millions of years after. We're supposed to be smart though. If we'd not been scared of an occasional recession cleaning out various industries, we'd have more resilient businesses. Now what we've bred is a generation of founders and investors that only know how to apply max pedal. Have a good idea? Eat the world, get a monopoly, exploit it. That's the only plan for a large number of currently famous firms. That other plan, where you maybe grow into a sensible size and dominate a local market is what we really need if there's going to be an actual market economy.

nickff 4y ago
>" The problem isn't that there's a recession coming, the problem is that there hasn't been one for a long long time." I agree with you, but the persistently low interest rates have also fueled malinvestment and speculation on relatively low-potential, high-risk, long term investments.
- lumost 4y ago
  This even spreads to technical architecture, many tech teams stopped exercising fiscal discipline in how they design services. This emerges in tiny low traffic micro-services, 4 teams building the same service, un-neccessary data allowed to accumulate in expensive data0stores for a rainy day and more. When some of these startups need to layoff, I'm curious if they'll actually be able to maintain KTLO operations on their reduced staffs without making large product cuts.
  - Ekaros 4y ago
    Now I actually wonder if there would be room for some type of consulting in cost optimization field. Someone coming in and making inventory of data and services run and then recommending how to save on running costs and so on...

deleted 4y ago

[deleted]

zkirill 4y ago

> Good business will have the time of their life. Fast-growing, profitable startups will have the opportunity to buy out struggling competitors, invest in an environment where CAC will decrease, and hire people with fair compensation packages. What will qualify as "fast-growing" in this climate?

nbstme 4y ago
Thanks for your comment. Stocks got hammered but SaaS businesses continue to grow. Zoom is growing 50% YoY, Datadog 80% YoY...
- snehasish 4y ago
  Interested in what you think about startups like Flexport - 2021 3.3B in revenue (80% passthrough) = 660M net. Their last round in Jan 2022 was ~1B. So "hype ratio" < 2. Am I looking at this right?
- HFguy 4y ago
  They are certainly growing. But not much profits in many cases. The real question is can they generate a lot of cash once they are out of hyper growth mode? Or will they just never generate much cash flow ever?

gkop 4y ago

> The pundits lecture that it was caused by an acceleration of the use of software after covid It’s frustrating seeing this straw man BS come up here. Everyone (on HN as well as at large) knew it was the Fed’s historic low interest rates that meant the easy money..

nbstme 4y ago
Thanks for your comment. IMO, a lot of people thought, and still think, that the appreciation of stocks was due to an acceleration of the penetration of software. I think it's a valid viewpoint. Gartner expects public cloud spending to rise by 20% next year to $500 Billion. Even AWS, Azure, and Google Cloud continue to grow by more than 40%.

nathanaldensr 4y ago

Is Zoom really a "startup?" It seems to me a better title would be "panic in Greedland." This is all just greed and FOMO, with the latest targets being tech companies and crypto.

nbstme 4y ago
Startup = growth, and Zoom is growing by 55% yearly with $4bn of ARR. It's an impressive business (startup?)
- sofixa 4y ago
  So is AWS a startup too? I believe we call Zoom and similar scaleups, startup being more applicable to starting and up and coming companies.
- icedchai 4y ago
  Zoom is a 10 year old public company with a 30 billion dollar market cap and over 7000 employees. It is not a "startup" by any meaningful definition of the word.
deleted 4y ago
[deleted]

lumost 4y ago

One general concern that's bubbled around the FB's and SaaS's of the world. It's unclear how much of these very sound businesses revenue is due to profligate spending by startups. Smart SaaS businesses may find their top customers vanishing. It's easier to right size a smart business than a bad business, but we may see a (small) contagion.

nbstme 4y ago
Thanks for your comment. I agree for SaaS companies that mostly sell to startups, but SaaS selling to big enterprise customers should be fine.
HFguy 4y ago
It is obviously, very much company by company thing. However, I've seen some analyses that put it at between 35-50% for typical SasS (i.e., they are selling to each other and other start-ups). To me, if true, that seems like rough sledding for many firms in a funding down turn.

hahaxdxd123 4y ago

> Central bankers created a gigantic misallocation of resources - as they have always done since the dawn of time. Lmao, we came out of a once-in-a-century pandemic with nothing more than a couple scratches and minor inflation and you find a way to complain? The real misallocation would have been seeing profitable, healthy businesses die in the months following March 2020 - has everyone just forgotten the mass panic until the Fed stepped in? A couple overconfident hedge funds and bad SPACs who have already been brought back down to earth is a very small price to pay (I paid very little since I did not invest in meme stonks).

riku_iki 4y ago
> than a couple scratches and minor inflation and you find a way to complain? it had very big bill attached: +6T national debt, and maybe several dozens T funneled through cheap loans with twice inflated stocks and real estate, rich became much richer, and poor are screwed dramatically in exchange to $600 stimulus check.

anm89 4y ago

I think the way many people get schadenfreude watching crypto crash, I get equally watching startups crash. So many people were loudly proclaiming what geniuses they were for understanding that all the mattered were network effects and hyper growth and that cashflow was for suckers. And it's not that there aren't cases where that's a valid model but it was used in so many obviously stupid cases. So, just honestly kind of enjoyable to watch it crash and burn.

indus 4y ago

How is this rational that VCs that are calling out that “we are screwed” participated or encouraged startups to invest at those valuations.

heywoodlh 4y ago

I have been wondering this lately (naive question I am sure): is it possible for a company to hit a stable financial point and just stay there? Or is the only way to sustain a company in the US economy to always be growing?

karimmaassen 4y ago

Here's the thing: Finding a solution to a problem, then making it into a business that is sustainable (read: had money influx) during dire times (read: economic recession), is a very good and healthy beginning for your start-up. Doing startups when money is sloshing around, often leads to zombie companies that are on life support. The panic in startupland stems from the fact that most of them are cut off from said life support.