7 ms·

The great Silicon Valley shake-out

101 points by rmason 4y ago

syspec 4y ago
https://archive.ph/HFvyc https://archive.ph/HFvyc
- tn890 4y ago
  Avoid a paywall only to be forced to complete a captcha in 4 (FOUR!) tries until successful. Sigh..I hate the internet these days.
  - Brajeshwar 4y ago
    I've had days when I had to fight the Cloudflare CAPTCHA to visit my own website. I, later, turn it to "Literally Off" (my site is static HTML). :-)
    - jgrahamc 4y ago
      That isn't a Cloudflare CAPTCHA. And, we are eliminating CAPTCHA: https://blog.cloudflare.com/end-cloudflare-captcha/ https://blog.cloudflare.com/end-cloudflare-captcha/
- frereubu 4y ago
  You can also just turn off JavaScript to read Economist articles.
  - FabHK 4y ago
    That's my solution for the NYT, but it didn't work for The Economist for me.
    - frereubu 4y ago
      Hmm. All I've done is turn off JS with uBlock Origin in Firefox, so if you're doing it through the browser, perhaps uBlock does something extra.
  - akhmatova 4y ago
    You can also just use the archive to avoid having to turn off JS.
- futureproofd 4y ago
  Admittedly I scrolled down to find the obligatory archive link to read this for free, but it's got me wondering now, how do the economist and other online publications make money if we can easily circumvent their paywall (assuming this is their main revenue driver)?
  - halper 4y ago
    Do not worry; I pay for you! Seriously, I presume that enough people pay that making it harder to circumvent the paywall is not a problem. Yet.
Xcelerate 4y ago
> It is buffeting young tech firms particularly hard because much of their value is derived from the prospect of profits far in the future, whose present value is being eroded by rising interest rates I wonder if this will benefit startups that are more bootstrap style. Does less funding necessary for anticipated future growth imply less damage during a recession? Also, I wonder if we’ll ever see a return of enthusiasm and investment in tech related to the hard sciences. That’s what I originally went into, but career growth and earning potential couldn’t match soft tech so I ended up pursuing that instead. I really miss the physical sciences though. Is the problem that anticipated returns on investment are so far in the future that investors don’t think they would see any benefit in their lifetime? Or is it that we’ve already obtained all the low hanging fruit and what’s left is incredibly difficult?
- marvin 4y ago
  >much of their value is derived from the prospect of profits far in the future, whose present value is being eroded by rising interest rates I've seen this finance meme over and over again, and it's mostly an irrelevant argument. Yes, of course interest rates affect the valuation of growth companies, but a successful startup might grow 1000x from early investment rounds to the time when it's an established company with lower growth and a world-dominating role in its domain. An interest rate increase on the order of 2% is laughably small in that context. What's probably going to happen is that valuations will be a bit lower at all stages, but why should that affect motivations and outcomes? The most motivated people aren't primarily in it for the money anyway, and there is plenty of room for getting rich. Tens of thousands of people got rich after the dotcom crash, and interest rates were much higher back then. Interest rates are just a minor scaling factor.
  - FabHK 4y ago
    > An interest rate increase on the order of 2% is laughably small in that context. When rates increase from 1% to 3%, the present value of a very long stream of future cashflows drops by a factor of three, which is not small. But you're right, it pales compared to the uncertainty embedded in the "1000x".
newaccount2021 4y ago
spaceman_2020 4y ago
Peter Zeihan makes an interesting observation: the 2010-2020 decade was the peak of baby boomer employment. Boomers are now entering retirement en masse. Without a source of income, these retirees - the wealthiest generation in America and much of the world - will shift their investments to less risky assets. This, along with higher interest rates, will starve the world of cheap capital. Wonder how much of an impact this has had. The risk profile of a 60 year old senior exec at a Fortune 500 company looks different from the risk profile of a 65 year old retiree.
- throwaway0a5e 4y ago
  Regardless of the source, the loose money floating around for a decade made a lot of terrible people wealthy enough to, in aggregate, do bad things to the economy and nation. I'm not gonna lose any sleep over the money chasing safer returns. God forbid some questionable business ideas at the margin don't get funded.
  - spaceman_2020 4y ago
    Here in India at least, it feels that the venture capital class has completely forgotten about the bottom 95% of the population. Almost all capital is chasing the lucrative top 5% with products specifically designed for them (like a credit card bill payment app - only 5% of the population even owns credit cards). Feels like a misallocation of capital if I'm honest that will just create more unequal and unhealthy societies.
    - jp57 4y ago
      I guess when the wealthiest 5% has the same population as all of France, it's hard to resist.
    - kwertyoowiyop 4y ago
      It’s easier to design a product whose target market is “people who spend a lot of money.”
    - thr0wawayf00 4y ago
deleted 4y ago
[deleted]
Proven 4y ago
timcavel 4y ago
[dead]
cs702 4y ago
When business people everywhere start worrying about the state of the economy, they quickly "put on hold" every costly initiative that is not critical to profitability, "until there's less uncertainty." Naturally, the first thing executives and managers do is review headcount and real estate to figure out which employees can be terminated and which locations can be closed without impacting revenues in the short to medium term. But then, they also: * put on hold all software development projects, software license upgrades, hardware purchases, and other tech expenditures that are not critical to the business; and * review all existing recurring expenses, including every SaaS subscription, with a fine-toothed comb, to see which of those expenses can be reduced or eliminated without impacting revenues in the short to medium term. As a consequence, many startups selling software, hardware, and all kinds of subscriptions see their sales pipeline and a big chunk of their revenues evaporate overnight, seemingly out of the blue. Startups whose customers are mostly other startups suffer the most. It can be very painful.
- erik_landerholm 4y ago
  It shakes out which products are necessary and which are nice-to-haves, but also can slow down the adoption of new necessary products for a while. This slow down, recession, will be the death of many saas companies who ran fast when money was cheap and have the bad luck to need money in 12 months or less. The amount of preemptive firing and layoffs to extend runway is just beginning.
FunnyBadger 4y ago
MOST Silicon Valley/San Francisco startups have negative ROI from the get go. It's often baked into an unviable business model. When I was getting my MBA at SCU, one of the assignments was to estimate the correct "fundamentals price" of various company stocks and what cash flow would be required to sustain that stock price. The technique is simply: the current stock price is the NPV (net present value) of future revenue cash flows. Because of the effects of discounting, you only really need to go 10-20 years into the future (the present value of future money approaches zero as time goes to infinity but it's already effectively zero at 10-20 years). The simplest solution is to assume constant revenue into the future so each each for 10-20 years is, say, $1M and that gives you a NPV that depends on an effective interest rate. But a start up starts at zero revenue at day zero and must increase that revenue and generally markets require exponential growth (which is what "X% growth" announced each year actually means mathematically - non-exponential growth would be 0% growth per year by mathematical necessity). So you have to give an "interest rate" of growth as another parameter in your estimate. How big is that? Well isn't NOT 5%, 10% or even 15% or 20%. Because if you wanted modest ROI like that, you'd NEVER invest in startups at all. You could invest in consumer credit card companies instead. No. You need 30%-100% growth per year of ACTUAL money revenue. Which is what makes startups so great for founders if they do well. The ROI is enough for everyone involved but more so for founders. In Silicon Valley's past, this was possible even with hardware. But in the 90s it became passe to require or expect that apparently. So what about Dot Com and later internet startups? Well, we did the analysis on Amazon back in the day and to justify their THEN stock price, you could set revenues growing at 100%-200% per year for the entire 20-30 year event horizon of the analysis AND STILL NOT COME CLOSE to justifying the stock price at the time. Fast forward to 2022, and note that companies like Twitter are still not profitable or having revenue growth levels to sustain its even now depressed stock price. The wrong lesson is to say that "Obviously fundamentals pricing doesn't matter" - instead it means they current wishful thinking of "animal spirit" pricing is dangerous. The main reason for the discrepancy is these irrational exuberance pricing driving the price: these are "value stocks" (as long as a bigger sucker, I mean buyer, can be found) BUT they are NOT investing in ANYTHING that can build greater revenues in any effective way. The problem is that the South Sea Corporations and Tulip markets were exactly that as well. The poster child for this lack of fundamentals is WeWork, which was NOT EVEN a growth tech play (with Moore's Law based value multiplication) but simply a real estate business no different from any REIT or property management business (fixed size pie) AND had anti-fundamentals (risk creation and wealth destruction at its core) baked into them financially in their core business model. But if you say "Moore's Law" enough times.... you get a Cargo Cult of delusion. Twitter and most other internet players are effectively similar in that it has no real value creation but plenty of risk-creating features to its business model with a high operating cost. And now even Amazon is floundering in many ways with it only sustained by its prior destruction of competitors. The Achilles heal of destroying your competitors is there are circumstances when customers will simply say no to buying what you are selling _without direct product substitution_ or by having them completely changing their economic allocations and choices entirely outside the market. That's already happening thanks to economic destruction and inflation - when people cancel Netflix accounts, often they are NOT substituting another streaming vendor - often they are changing what they do with their time! If these companies ACTUALLY provided value, they'd have some immunity to economic downturns if they were truly essential. But they are weak financially and they are far from essential so the result becomes dire. AND DESERVED if you haven't been focused on the fundamentals due to unethical get-rich-quick schemes and political distractions. Having "good times" for too long has also made them "fat, dumb and happy" and destroys the instincts and even core knowledge to insulate themselves to the current reality. That was the VALUE of cyclic economies pre-1980 - bad times forced to you remember and learn how to prepare for that reality. Just one of the many reasons why eliminating business cycles causes more harm than good.

101 points by rmason 4y ago

syspec 4y ago

https://archive.ph/HFvyc https://archive.ph/HFvyc

tn890 4y ago
Avoid a paywall only to be forced to complete a captcha in 4 (FOUR!) tries until successful. Sigh..I hate the internet these days.
- Brajeshwar 4y ago
  I've had days when I had to fight the Cloudflare CAPTCHA to visit my own website. I, later, turn it to "Literally Off" (my site is static HTML). :-)
  - jgrahamc 4y ago
    That isn't a Cloudflare CAPTCHA. And, we are eliminating CAPTCHA: https://blog.cloudflare.com/end-cloudflare-captcha/ https://blog.cloudflare.com/end-cloudflare-captcha/
frereubu 4y ago
You can also just turn off JavaScript to read Economist articles.
- FabHK 4y ago
  That's my solution for the NYT, but it didn't work for The Economist for me.
  - frereubu 4y ago
    Hmm. All I've done is turn off JS with uBlock Origin in Firefox, so if you're doing it through the browser, perhaps uBlock does something extra.
- akhmatova 4y ago
  You can also just use the archive to avoid having to turn off JS.
futureproofd 4y ago
Admittedly I scrolled down to find the obligatory archive link to read this for free, but it's got me wondering now, how do the economist and other online publications make money if we can easily circumvent their paywall (assuming this is their main revenue driver)?
- halper 4y ago
  Do not worry; I pay for you! Seriously, I presume that enough people pay that making it harder to circumvent the paywall is not a problem. Yet.

Xcelerate 4y ago

> It is buffeting young tech firms particularly hard because much of their value is derived from the prospect of profits far in the future, whose present value is being eroded by rising interest rates I wonder if this will benefit startups that are more bootstrap style. Does less funding necessary for anticipated future growth imply less damage during a recession? Also, I wonder if we’ll ever see a return of enthusiasm and investment in tech related to the hard sciences. That’s what I originally went into, but career growth and earning potential couldn’t match soft tech so I ended up pursuing that instead. I really miss the physical sciences though. Is the problem that anticipated returns on investment are so far in the future that investors don’t think they would see any benefit in their lifetime? Or is it that we’ve already obtained all the low hanging fruit and what’s left is incredibly difficult?

marvin 4y ago
>much of their value is derived from the prospect of profits far in the future, whose present value is being eroded by rising interest rates I've seen this finance meme over and over again, and it's mostly an irrelevant argument. Yes, of course interest rates affect the valuation of growth companies, but a successful startup might grow 1000x from early investment rounds to the time when it's an established company with lower growth and a world-dominating role in its domain. An interest rate increase on the order of 2% is laughably small in that context. What's probably going to happen is that valuations will be a bit lower at all stages, but why should that affect motivations and outcomes? The most motivated people aren't primarily in it for the money anyway, and there is plenty of room for getting rich. Tens of thousands of people got rich after the dotcom crash, and interest rates were much higher back then. Interest rates are just a minor scaling factor.
- FabHK 4y ago
  > An interest rate increase on the order of 2% is laughably small in that context. When rates increase from 1% to 3%, the present value of a very long stream of future cashflows drops by a factor of three, which is not small. But you're right, it pales compared to the uncertainty embedded in the "1000x".

newaccount2021 4y ago

spaceman_2020 4y ago

Peter Zeihan makes an interesting observation: the 2010-2020 decade was the peak of baby boomer employment. Boomers are now entering retirement en masse. Without a source of income, these retirees - the wealthiest generation in America and much of the world - will shift their investments to less risky assets. This, along with higher interest rates, will starve the world of cheap capital. Wonder how much of an impact this has had. The risk profile of a 60 year old senior exec at a Fortune 500 company looks different from the risk profile of a 65 year old retiree.

throwaway0a5e 4y ago
Regardless of the source, the loose money floating around for a decade made a lot of terrible people wealthy enough to, in aggregate, do bad things to the economy and nation. I'm not gonna lose any sleep over the money chasing safer returns. God forbid some questionable business ideas at the margin don't get funded.
- spaceman_2020 4y ago
  Here in India at least, it feels that the venture capital class has completely forgotten about the bottom 95% of the population. Almost all capital is chasing the lucrative top 5% with products specifically designed for them (like a credit card bill payment app - only 5% of the population even owns credit cards). Feels like a misallocation of capital if I'm honest that will just create more unequal and unhealthy societies.
  - jp57 4y ago
    I guess when the wealthiest 5% has the same population as all of France, it's hard to resist.
  - kwertyoowiyop 4y ago
    It’s easier to design a product whose target market is “people who spend a lot of money.”
  - thr0wawayf00 4y ago

deleted 4y ago

[deleted]

Proven 4y ago

timcavel 4y ago

[dead]

cs702 4y ago

When business people everywhere start worrying about the state of the economy, they quickly "put on hold" every costly initiative that is not critical to profitability, "until there's less uncertainty." Naturally, the first thing executives and managers do is review headcount and real estate to figure out which employees can be terminated and which locations can be closed without impacting revenues in the short to medium term. But then, they also: * put on hold all software development projects, software license upgrades, hardware purchases, and other tech expenditures that are not critical to the business; and * review all existing recurring expenses, including every SaaS subscription, with a fine-toothed comb, to see which of those expenses can be reduced or eliminated without impacting revenues in the short to medium term. As a consequence, many startups selling software, hardware, and all kinds of subscriptions see their sales pipeline and a big chunk of their revenues evaporate overnight, seemingly out of the blue. Startups whose customers are mostly other startups suffer the most. It can be very painful.

erik_landerholm 4y ago
It shakes out which products are necessary and which are nice-to-haves, but also can slow down the adoption of new necessary products for a while. This slow down, recession, will be the death of many saas companies who ran fast when money was cheap and have the bad luck to need money in 12 months or less. The amount of preemptive firing and layoffs to extend runway is just beginning.

FunnyBadger 4y ago

MOST Silicon Valley/San Francisco startups have negative ROI from the get go. It's often baked into an unviable business model. When I was getting my MBA at SCU, one of the assignments was to estimate the correct "fundamentals price" of various company stocks and what cash flow would be required to sustain that stock price. The technique is simply: the current stock price is the NPV (net present value) of future revenue cash flows. Because of the effects of discounting, you only really need to go 10-20 years into the future (the present value of future money approaches zero as time goes to infinity but it's already effectively zero at 10-20 years). The simplest solution is to assume constant revenue into the future so each each for 10-20 years is, say, $1M and that gives you a NPV that depends on an effective interest rate. But a start up starts at zero revenue at day zero and must increase that revenue and generally markets require exponential growth (which is what "X% growth" announced each year actually means mathematically - non-exponential growth would be 0% growth per year by mathematical necessity). So you have to give an "interest rate" of growth as another parameter in your estimate. How big is that? Well isn't NOT 5%, 10% or even 15% or 20%. Because if you wanted modest ROI like that, you'd NEVER invest in startups at all. You could invest in consumer credit card companies instead. No. You need 30%-100% growth per year of ACTUAL money revenue. Which is what makes startups so great for founders if they do well. The ROI is enough for everyone involved but more so for founders. In Silicon Valley's past, this was possible even with hardware. But in the 90s it became passe to require or expect that apparently. So what about Dot Com and later internet startups? Well, we did the analysis on Amazon back in the day and to justify their THEN stock price, you could set revenues growing at 100%-200% per year for the entire 20-30 year event horizon of the analysis AND STILL NOT COME CLOSE to justifying the stock price at the time. Fast forward to 2022, and note that companies like Twitter are still not profitable or having revenue growth levels to sustain its even now depressed stock price. The wrong lesson is to say that "Obviously fundamentals pricing doesn't matter" - instead it means they current wishful thinking of "animal spirit" pricing is dangerous. The main reason for the discrepancy is these irrational exuberance pricing driving the price: these are "value stocks" (as long as a bigger sucker, I mean buyer, can be found) BUT they are NOT investing in ANYTHING that can build greater revenues in any effective way. The problem is that the South Sea Corporations and Tulip markets were exactly that as well. The poster child for this lack of fundamentals is WeWork, which was NOT EVEN a growth tech play (with Moore's Law based value multiplication) but simply a real estate business no different from any REIT or property management business (fixed size pie) AND had anti-fundamentals (risk creation and wealth destruction at its core) baked into them financially in their core business model. But if you say "Moore's Law" enough times.... you get a Cargo Cult of delusion. Twitter and most other internet players are effectively similar in that it has no real value creation but plenty of risk-creating features to its business model with a high operating cost. And now even Amazon is floundering in many ways with it only sustained by its prior destruction of competitors. The Achilles heal of destroying your competitors is there are circumstances when customers will simply say no to buying what you are selling _without direct product substitution_ or by having them completely changing their economic allocations and choices entirely outside the market. That's already happening thanks to economic destruction and inflation - when people cancel Netflix accounts, often they are NOT substituting another streaming vendor - often they are changing what they do with their time! If these companies ACTUALLY provided value, they'd have some immunity to economic downturns if they were truly essential. But they are weak financially and they are far from essential so the result becomes dire. AND DESERVED if you haven't been focused on the fundamentals due to unethical get-rich-quick schemes and political distractions. Having "good times" for too long has also made them "fat, dumb and happy" and destroys the instincts and even core knowledge to insulate themselves to the current reality. That was the VALUE of cyclic economies pre-1980 - bad times forced to you remember and learn how to prepare for that reality. Just one of the many reasons why eliminating business cycles causes more harm than good.