5 ms·
Sequoia Rings the Alarm Bell: Silicon Valley Is in Trouble
- lowkey 18y agoThis post sent a chill of reality down my spine. We are a cleantech startup currently in the process of raising our seed round. This tells me that the window may be closing fast. <rant/>Let me tell you after years of work to get to a truly fundable opportunity there is nothing more painful than watching it all slip away because the banks don't trust each other's balance sheets. I realize that there are bigger problems in the world right now than ours, just look at Iceland, but still this makes me want to go out and strangle a banker. </rant>
- river_styx 18y agoYour rant fails XML validation. I totally agree with it, though.
- deleted 18y ago[deleted]
- Prrometheus 18y agoCleantech is a luxury good, pursued by people and their politicians when they feel wealthy. I don't envy your situation at the moment.
- ALee 18y agoCompletely untrue when you look at technologies that can SAVE someone money. It makes sense given increase demand for fossil fuels, to provide a cheaper alternative. To be fair, I think you're referring to companies that are luxury goods, e.g. carbon offsets, and those could be argued are luxury goods (or rather goods for someone's conscience).
- Tichy 18y agoOnly a luxury good if you are allowed to freeride on society by dumping your dirt on it for free as an alternative to using clean technology.
- biohacker42 18y agoIndeed it's a luxury only because we've socialized the cost of the externality.
- DaniFong 18y agoNot all of it. Heating and gasoline prices are expensive. Energy in general is expensive. If it's possible to create a system cheaper than burning stuff we're in good shape.
- alecco 18y ago"strangle a banker"? Do you mean to strangle: a speculative investment banker, old time JP Morgan and pals who created the CDS and all that to buy companies cheap later (they've been doing that for over a century, ask Graham Bell), the irresponsible borrowers in US and UK (going bankrupt has a social cost, now a worldwide cost), the war profiteers (you know who), consumerism (non-durable goods are now only pollution), all the excess size strategy (from hummers to expensive corporate software), and finally, with honorable mention, the Sarbanes-Oxley dodging Hedge Funds. How is it that a country with close to a third of the world GDP could get so bad? How did you let that happen?
- anamax 18y ago> Sarbanes-Oxley dodging Hedge Funds Hedge funds aren't in trouble because US regulators couldn't make them buy dumb loan packages and the like. That's why the hedge funds have money to buy the good assets that are now on sale. However, I don't know why foreign buyers bought those things, so I'll just note that they often tell the US how much smarter they are....
- alecco 18y agoMost hedge funds are collapsing. The leverage trick is dead end since last year, and it brings debt. (transcript from Financial Times) http://www.freerepublic.com/focus/f-news/1988234/posts http://www.freerepublic.com/focus/f-news/1988234/posts "Their performance is shocking" http://www.ft.com/cms/s/d679aefe-8f93-11dd-9890-0000779fd18c,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F1%2Fd679aefe-8f93-11dd-9890-0000779fd18c.html&_i_referer=http%3A%2F%2Fftalphaville.ft.com%2Fblog%2F2008%2F10%2F02%2F16572%2Flex-on-hedge-funds%2F http://www.ft.com/cms/s/d679aefe-8f93-11dd-9890-0000779fd18c... For fun http://news.google.co.uk/news?hl=en&ned=uk&nolr=1&q=hedge+fund+ http://news.google.co.uk/news?hl=en&ned=uk&nolr=1...(bust|redemption|crash|leverage|short+selling)&btnG=Search Oh and the more ruthless ones, the ones short selling and even naked short selling on the stock market are only postponing the inevitable. Gordon Gekko would be proud.
- steveplace 18y agoIt makes me want to start a bank.
- bokonist 18y agoThe recent IPO drought has been very disturbing. But does anyone know if the reason companies have not been IPOing? Is it a lack of cash flow and profits? Are the newest round of tech startups not making money? Or are the companies as good as ever, but investor interest has disappeared? If the profits are there, tech companies could just start paying dividends, and the investors will come. I'd buy stock in a tech company that paid a 4% dividend yield that grew each year. But buying stock in a non-dividend paying tech company is a game for speculators. The market for speculation is down, and I don't expect to see it come back any time soon.
- lowkey 18y agoI really like the way you think. It's true that the stock market has become one big ponzi scheme over the past few decades. Dividends seem to have gone out of style, leaving capital appreciation by selling to a 'greater fool' as the only way to profit. I suspect that this train of thinking will change, but not right away. Give us 2-3 years of nuclear winter in the markets and things may change. Hey anything is possible, even MSFT now pays a dividend.
- netcan 18y agoEven MSFT pays only 1.3% p/a. Even in that case, it's a gesture. What if startups directly paid investors. Gave them back their money + some or paid dividends or something like that. Theoretically, that should be just a different way of doing approximately the same thing.
- trevelyan 18y agoI welcome any changes that make bandwagon VC less profitable and dominant. This will encourage other forms and structures of funding more friendly to people who are actually building businesses.
- fallentimes 18y agoThat's what's funny - most VCs aren't profitable - at least not to their investors. They make their money administrating. That's why the best VC firms, and hedge funds for that matter, waive or reduce their admin fee (normally ~2%).
- SwellJoe 18y agoYou realize, I hope, that Sequoia cannot be accused of either being a "bandwagon VC" or not being profitable. Sequoia is, by most measures one of the best, if not the best, VCs in the world, in terms of success and respect from peers and the companies they fund. So, pick on the VC model all you like...but this is an article about something Sequoia has said that effects pretty much all of us. If Sequoia-backed companies are being told to tighten their belts, then we'd all be smart to do the same. Sequoia hasn't gotten to where they are by investing in companies that waste money...so the assumption that they're saying, "Stop wasting money, as you've been doing lately." probably isn't the right way to take this advice. It should probably be taken as, "I know you all run a tight ship, and you're doing the best you can to maximize returns without being wasteful, but now might be the time to focus on outlasting your competitors, rather than outgrowing them." The companies that survive will be the ones that will be best placed to become market leaders when the market begins to recover. That's the points I'm taking away from this, anyway. I guess I could be wrong.
- fallentimes 18y agoDefinitely. I've met them and I'm well aware who they are and what they've done. I was _not_ talking about Sequoia or any of the VCs listed here: http://ycombinator.com/topvcs.html http://ycombinator.com/topvcs.html (I know for a fact Greylock doesn't take a management fee). That list is roughly the smart money even if it is somewhat dated. On the hedge fund front, Clarium has reduced management fees and higher performance payouts. Those types of VCs and hedge funds are few and far between, however. I was talking about the industry in general. Love the outlast instead of outgrow quote. I think your last paragraph is dead on.
- mjnaus 18y agoIf you need your investors to tell you to buckle up and cut costs because hard times are ahead, you're probably not the most suitable person to run a company and you might want to consider getting out asap...
- aditya 18y agoThe average Sequoia startup raises a lot of money, so it makes sense for them to sound all kinds of alarms, if you started out being frugal and efficient you're already trying to survive. If you're a mega startup with Aerons, yeah okay.
- SwellJoe 18y agoDon't pick on Aerons. My back has been thanking me every day since I acquired an Aeron from the Arthur Anderson bankruptcy auction many years ago. Given how long these things last, and how little they cost relative to the cost of employee retention, even new, I think it's a no-brainer. Good chairs are mandatory.
- alex_c 18y agoWell, I missed out on Aerons the first time through. Maybe I'll find some cheap ones in half a year or so. :p
- SwellJoe 18y agoThere is a whole economy surrounding Aerons. You can buy them used, at any time, for about $750-$800. That's not the bargain that they were during the dotcom bust (I bought mine for $365 plus auctioneers fees), but it's $350-$500 off of new retail, and well worth it. Steelcase leap chairs aint half bad either, and can be had slightly cheaper, though there seem to be a lot less of them on the market. Interestingly, I also bought a Keilhauer chair at the same auction where I bought the Aeron--it was $35 plus auctioneers fees, and it's a $900 chair new (and a very fine chair in its own right)...quality chairs that aren't Aerons are also available. I definitely don't suggest sitting in a crappy chair while you wait around to save $200 or $300. I wouldn't, anyway, and when we start hiring, we certainly won't make people sit in crappy chairs.
- alex_c 18y agoI'll have to try one of those someday. I've been sitting on what looks like a cheap Aeron knockoff (~CAD$250 - http://www.staples.ca/ENG/Catalog/cat_sku.asp?CatIds=88,91,94&webid=562167&affixedcode=WW http://www.staples.ca/ENG/Catalog/cat_sku.asp?CatIds=88,91,9...) for about 5 years now, and I'm very satisfied with it - especially compared to other chairs I've tried. I'm really curious if the Aeron is actually worth a 5x price tag compared to a chair I'm already happy with.
- gscott 18y agoInstead of big exits over a long period of time with big funding rounds you have shorter exits for less money with less and smaller funding rounds. I think this has already been happening. It is nice to have big well funded unprofitable ventures out there to employ people (like ning.com) but with fewer of those around the corner the job market is probably not going to look too good.
- netcan 18y agoyou think the small investment- small exit complex is more stable or more recession proof?
- gscott 18y agoYes it is a lot like KB Homes trying to stay in business by building smaller houses. They are having success with that while the bigger houses just are not selling or are selling at a loss. There have been a lot of "small" exits (small as in tens of millions instead of hundreds of millions). I believe it is better to have an exit, regain all of the money you spent + take away a couple of extra million then going for broke.
- netcan 18y agoBetter? Sure. But I'm not sure if your example holds. I don't know the situation, but I'll guess that building smaller homes is producing a type of product that is more recession proof. Similar to producing household or business basics, or (even better) cheaper substitutes. I'm not sure you have an equivalence here. The small startup/small exit "industry" can be thought of as producing small businesses for purchase. Therefore, it is subject to the market for small businesses. I agree that the demand in this market is somewhat independent of the demand in mega-acquisition or IPO markets, but I think it's a big statement to say it is more recession proof.
- deleted 18y ago[deleted]
- motoko 18y agoI'd be worried if YC canceled their program. Otherwise, I'll abide.
- ojbyrne 18y agoCall me a marxist, but the first thought that came to mind when I read this, is "Are the LPs (correction: GPs) at Sequoia going to get frugal?" Is Mike Moritz going to reduce his (most likely seven digit) salary?
- ericwan 18y agoMike Moritz is a general partner but not an LP I think... an LP is the institutional or individual investors who put money in the fund.
- ojbyrne 18y agoOops. You're correct. Sorry. I edited it but in a way that still makes your comment relevant.
- Prrometheus 18y agoSince the general partner has full liability for all financial obligations, I imagine the general partner would be another limited liability type firm and Moritz would be an executive hired by the general partner entity.
- Prrometheus 18y agoI don't see what that has to do with the companies his firm funds, marxist.
- newt0311 18y agoAren't these guys paid as a percentage of profits and funds managed? In that case, presumably, there will be fewer startups when there is less funding implying fewer gains which implies a lower salary for him.
- ALee 18y agoCurious to hear what the investors, PG, and others think on HN- it's not as if VCs stopped deals that they had already signed off on. Are their LPs revolting? If that's the case, then it means there is less cash to go around. If you're still a bad-ass startup, it still seems that your valuation would still be relatively the same at such an early stage, right?
- biohacker42 18y agoGood question. I wonder if we'll see a shift from what pg advocates, to what DHH advocates? Small steady profits vs. high growth and buyout.
- sabat 18y agoDr Ray Stantz: Fire and brimstone coming down from the skies! Rivers and seas boiling! Dr. Egon Spengler: Forty years of darkness! Earthquakes, volcanoes... Winston Zeddemore: The dead rising from the grave! Dr. Peter Venkman: Human sacrifice, dogs and cats living together... mass hysteria! No one knows what is going to happen. Not Mike Moritz, not John Doer, not Guy Kawasaki. It doesn't surprise me that Sequoia is telling its startups to be frugal, but they should be doing that anyway. Startups that run in anything but Frugal Mode are begging for failure. Until society entirely breaks down -- government has dissolved, people running wild in the streets, tent cities springing up by the thousands, people fighting over who gets the last mudcakes -- business will continue. Unemployment could reach as high as 10 percent, but business needs will still exist, as will the need for innovation that saves money and increases efficiency. Outright panic caused by petulant bankers is not only annoying, it's downright stupid.
- pmorici 18y agoWell we have the tent cities.... http://www.msnbc.msn.com/id/26776283/ http://www.msnbc.msn.com/id/26776283/
- ojbyrne 18y agoYep, 2 years ago all the exact same people were talking Web 2.0! Change the World! Everyone can be the next YouTube! You'd be a moron to stay in your secure job when you could be a billionaire! They're no more believable now than they were then.
- known 18y agoEntrepreneurship for people who can think and act "out of the box". And society should appreciate these risks.
- quasimojo 18y agoyeah like starting a website is real "out of the box" thinking in the bay area
- puzzle-out 18y agoThe main costs of say a YC startup are living costs - in a downturn, these should drop. Raising second round funding will be more difficult, sure. But in times of trouble, people cut back on bars and stay in, and will spend even more leisure time online. I see the ecommerce space surviving this very nicely; ads will take a big hit; and god be praised there will be less unjustifiable multi-millino M and A's of small start-ups that have not even reached revenue stage - start up entrepreneurs will be forced to actually build a business!
- sfamiliar 18y agoi can see articles like this, and other chicken little articles and notices applying to big-funding startups, but what i haven't seen is how this applies to the little guys. me and my partners launched very recently (and were reviewed here, flowmingle.com for the curious), and we are currently unfunded. we're in the very very early stages of seeking funding, but on the scale of bubble money we're not looking for much -- just enough to move the servers to EngineYard and get a few ad campaigns out in a few major markets to start building a user base. so in our case, i have a day job, and that job helps support the crew, both of which live very lean. i have the highest expense set (and the most experience, and can generate the highest salary) so i'm the one who works. what does this mean for the little guys? is there still money out there for people who don't need a dump truck full, but still have a phenomenal idea? these are the questions i'm looking to have answered. someone want to write that article? (xp)
- quasimojo 18y agowell if all you want is hosting fees and money for ramen, you don't need funding at all. just use your VISA.
- kingkongrevenge 18y agoI've seen no discussion on targeting international customers. In the intermediate term this is a global recession. But I believe it will be longer and worse in the US than in many other places. It would be prudent to consider reducing exposure to the US in your plan.
- anamax 18y ago> But I believe [the recession] will be longer and worse in the US than in many other places. Why?
- quasimojo 18y agoeven without the downturn, a reality check was coming. literally hundreds of little websites have been surviving due to only one factor: costs have dropped so low for producing a website that you can run it on poverty wages for years. in the 90s this wasn't the case...higher burn rates put more companies under quickly. and the web economy is maturing in ways that just aren't friendly to small sites. google has become an accretion disc for all ad revenue that even other big websites can't compete with. the major sites are paying good wages to good talent...increasingly engineers will take $120k for 9-5 from yahoo over a lottery ticket and slave labor from a startup the recession will just wake most "founder" types up to the reality that their payday will never emerge
- joanou 18y agoThis is great news for those who opted for the slower route of developing services/solutions without external funding. It has the effect of reducing competition within the marketplace. It will also divert developers to projects with better business models.