9 ms·

Did everybody see what just happened? The pendulum has swung.

300 points by jaf12duke 15y ago

pagekalisedown 15y ago
"Hot market" seems like an understatement. I'm still waiting for salaries to catch up tho.
- hkarthik 15y ago
  FTE salaries won't catch up until there's real money being made and profitable firms start competing for talent. A CEO with net profits of 10 mil/year is going to be a lot less stingy than a founder with 15 mil in funding. I hear that at this stage, the way to make money is to do hourly consulting at a high rate. That comes with its own issues, but if cash is your motivation, it is your best bet.
rhizome 15y ago
Grammatically, the first two paragraphs should be combined into one.
- stephengillie 15y ago
  Vulture Capitalism
canterburry 15y ago
Yeah...I see what just happened...we are back in 1999. Enjoy it while it lasts.
- joeguilmette 15y ago
  it's not entirely the same. while there are echoes, the few companies that are hitting the open market via IPO are not getting massively inflated stock prices. it'll be interesting to see how this little bubble bursts.
  - canterburry 15y ago
    http://www.youtube.com/watch?v=YuAJHaXKgFk&feature=colike http://www.youtube.com/watch?v=YuAJHaXKgFk&feature=colik...
    - corford 15y ago
      :) liked it. Although, here we are 5 years later and no bust yet...
    - kshitizanand 15y ago
      Funny!!
- tptacek 15y ago
  FIRST POST!
  - cperciva 15y ago
    2012 is the year of Linux on the desktop!
    - justauser 15y ago
      What's the keyword for this article on AOL?
    - ktsmith 15y ago
      Netcraft now confirms: BSD is dying.
    - saryant 15y ago
      I suppose we all ought to move back to Slashdot now.
  - daeken 15y ago
    I, for one, welcome our new entrepreneur overlords.
  - corford 15y ago
    In Soviet Russia, pendulum swings you.
    - PerryCox 15y ago
      Dear God am I on fucking reddit? I'm all for a little joking but this is ridiculous and adds nothing to the conversation.
      - tptacek 15y ago
        So do the "it's bubblicious!" comments this thread is responding to.
      - 15y ago
- Alex3917 15y ago
  This time the money is mostly coming from wealthy individuals. While some of these folks have certainly shown regrettable judgment, this is completely different than in 1999 when literally billions of dollars were flowing from institutional investors and the general public. If this trend continues for another 5 - 7 years then we may get back to where we were in 1999, but I don't think we're anywhere near there yet.
  - bentlegen 15y ago
    That's changing, and fast. In Canada, pensions and retirement funds are getting involved in the startup funding game - and that's up north where funding is dry to begin with. I'm sure the same is happening here. Source: http://business.financialpost.com/2012/03/29/vancouvers-hootsuite-gets-20m-omers-ventures-push/ http://business.financialpost.com/2012/03/29/vancouvers-hoot... "OMERS Ventures, a $180-million fund established by the Ontario Municipal Employees Retirement System last fall, said Thursday it has picked HootSuite Media Inc. as its first major funding recipient."
    - swalberg 15y ago
      Many pension funds have had some sort of high risk component to their portfolio. http://www.cppib.ca/News_Room/News_Releases/nr_02031001.html http://www.cppib.ca/News_Room/News_Releases/nr_02031001.html talks about the CPP's, which has been going on since 2005. I'd suspect we're only starting to hear about it because it's getting into our space. Disclaimer - I work for one of OMERS other (earlier) investments. I guess we're just not "major" :P
  - spullara 15y ago
    The JOBS act is going to let companies like these raise money on the internet from just about anyone.
    - tptacek 15y ago
      Yes, but at much lower levels. That's a valid concern with the JOBS crowdfunding provisions, though.
- motti_s 15y ago
  I don't think you can compare what we see now to the bubble days. Let's look at some key differences: - In the 90s there were 50 million internet users, now there are over 2 billion. The internet economy is huge. - It's becoming easier to get seed funding, but it hasn't become any easier to raise series A (some claim it's becoming harder due to the increased number of seed companies chasing those series A dollars). In the bubble days the madness went all the way to the IPO. - When the bubble burst, people lost faith in the future of technology, or at least in the rate at which it would advance. Now that phones have become computers, books have been digitized, and people rely on technology for every aspects of their lives (even to socialize!), it's pretty obvious that technology is here to stay. For sure we may see a down-swing. If macro economics go in shambles due a new war or an economic meltdown in Europe, then technology investment will suffer as well. But as opposed to the bubble days, I don't think technology investment will be the cause for such a down-swing. I think we have matured since the bubble and the fact that it was so traumatic (we're still discussing it aren't we?) also helps preventing it from re-occurring.
  - MrMan 15y ago
    One of the reasons it is different this time, but still a bubble, is that there is tons of cheap money flowing around the globe, and sophisticated investors are desperately looking for returns. Hedge funds have had big outflows in the last 3 years. That (risk-seeking)money has to slosh somewhere. The total size of the hedge fund world is larger than in 1999-2000. Also, the concentration of advertising dollars that flows through a few key companies - Facebook, Google, Microsoft, etc., is significant. Ad spending basically drives this whole thing from the revenue side. In 1999 there was less of this money in absolute terms and also the ad and marketing folks had not yet learned how to target ads to users online. So ads + Quantitative Easing (hope I am not getting too fast and loose here but this is shorthand) means that worthless companies like Instagram can seem strategic to ad delivery platforms like Facebook. And there is so much extra risk capital chasing deals that $1B is nothing to throw away. PG has been in the right place at the right time, but just because he and his partners do things differently in their business does not mean that the macro picture is not the most important factor. edit - we have not matured we have just gotten better at online advertising and marketing. But that is arguably a great efficiency for the post-industrial service economy.
iandanforth 15y ago
Out of curiosity, how many founders know who put up the money that the VC is dispensing? After a friends and family or Angel round, is their any connection between the investment and the people who stand to lose money?
- rdl 15y ago
  Traditional VCs don't really advertise their LPs (limited partners; source of funds) too much. Sequoia sometimes uses that most of their LPs are charitable foundations, schools, etc. as a marketing tactic, but it's Sequoia, so people probably make their decision based on it being Sequoia. Some of the super-angel type funds do -- I know Founder Collective emphasizes that their partners are mainly entrepreneurs. It's a Boston/NYC fund -- Chris Dixon and some other people.
jwwest 15y ago
How much of this is "dumb" money? A lot has been written on how well folks are doing fundraising, but not so much on what types of investors are willing to throw money on the basis of a 2 1/2 minute pitch just because it has Y Combinator attached. Investments are much more than just money (duh), you're also gaining an ally and potential business mentor. If I were to be offered 500k from an extremely smart person who has shown personal interest in my product versus 2mil from someone trying to play "startup darts", I'd take the 500k and work my ass off. It scares me how much money is being thrown at name dropping these days.
- negamax 15y ago
  I know it feels like another extreme to the problem of raising money. That's why the post title, I guess. Hopefully, we will strike a middle ground before things get shaken.
- ajross 15y ago
  I'm not sure that's the right metric for "dumb" money. Say, as a gedankenexperiment, that you're a very bright, very successful person interested for whatever reason in investing in a tech startup. But you don't know technology. Do you (A) spend hours trying to understand the technology before carefully investing your cash or (B) hop on the coat tails of a proven winner? That said: this has all the smell of Yet Another F'ing Bubble. PG and company should be very careful not to let this get out of hand. A big high profile wreck or two (YC-funded startup that takes 20M and bombs inside two years, say) would destroy the brand they've created.
- pg 15y ago
  investors are willing to throw money on the basis of a 2 1/2 minute pitch just because it has Y Combinator attached I wish we could claim that. But YC's brand is not that powerful. There are still startups that present at Demo Day and aren't able to raise money.
  - cperciva 15y ago
    Do you have any sense of how much this is a function of the demo and how much it's a function of the idea? Or put another way: At the start of the YC program, do you have any sense of which teams will have trouble raising further funding, or does that wait until they've spent a few months writing code?
subwindow 15y ago
This seems a little crazy. I think it should be hard for a company to raise money. Bad things always seem to happen when the money chases the startup. Frequently when money is hard to come by, the bad startups die early and everyone is better for it. Maybe that's just because I've tried several times and failed (3-6 years ago), and I'm being a grumpy old dude who thinks it should be this hard for everybody. But I'm not even that old (28) or that grumpy. I just have the wisdom of hindsight to know that my ideas and execution weren't that good, and it would've, ultimately, been a bad thing if they had gotten funding.
- soham 15y ago
  I think it is still hard for companies to raise money. While the article is excellent, it doesn't really note that there were several companies that applied to Y, but only 60 got in. (Disclaimer: No, I did not apply). It may have been easier for those 60 companies to raise more money now, but I doubt it was ever that easy and it will ever be to raise money.
- motti_s 15y ago
  I don't think it's that easy for all companies to raise money. In fact, I just watched an interview with Pinterest's founder who said that they were turned down by virtually the entire investor community. I think the pendulum has made a full swing for YC companies, but a partial one for others. Deciding what to invest in is hard, especially in the seed stage. With the market being so hot, investors have to decide quickly which makes it even harder. When investors are agreeing to an 8 million cap on a YC company and a 4 million cap on comparable non-YC company, they are essentially saying that the YC company is twice as likely to succeed, which I don't think is far-fetched. You may also wonder whether this anticipation fulfils itself (a company that seems more likely to succeed may get "better" investors, positive media coverage, early adopters, etc, which may end up helping it becoming successful). I also think that the increased popularity of convertible notes is a contributing factor. The 8 million cap only becomes 8 million valuation if the company raises the next round at 8 million or above, so in a way it has to live up to its promise in order for the increased cap to take an effect. And finally, if a company becomes the next Google then the valuation at the seed stage is insignificant. Therefore the valuation just represents the perceived probability of that happening.
Jabbles 15y ago
The author mentions the strategy of the VCs: to find the next billion-dollar company. One success of this magnitude will mask many, many failures. We should not look on a large seed round as saying "X is worth Y" (although by the definition of "worth", it is), but rather that "X has a not-insignificant chance of being worth 100Y in 5 years".
jacquesm 15y ago
Wise words and ones that anybody that ever wants to be funded or has attracted funding would do well to heed. YC has become a very strong brand, and one that attracts investors from all over the globe because they have proven that their method for picking winners works better than what those investors could ever achieve by themselves. Keep in mind that the factors that differentiates YC from all these other cats are very hard to replicate and so it is easier for them to ride on YCs coat tails than it is for them to copy the process. Hence the glut of money. This is good for everybody that gets 'in' to YC, they're more or less guaranteed to find funding and find it on their terms. For once the recipients of funding have a slightly stronger hand. Still, that won't change the long term outcome for the majority, the majority of such investments will still fail (and the investors are well aware of it), and a smaller portion will break even or make it big. Picking the winners out of the ones that got 'in' is just as hard (if not harder) than picking the ones that got 'in' in the first place. I like the tone of this article, it sends exactly the right message. Feet on the ground and get to work, being funded is not the end, it is the begin. And it definitely isn't a guarantee for success, that's up to you & your team, the market and timing. And you only control one of the three.
rasengan 15y ago
I strictly believe in bootstrapping a startup (most of them anyway). Hunger creates hunters. Hunters catch game.
- jsmith72 15y ago
  When it comes to funding there obviously isn't a one size fits all approach that will work for everyone. I've done the bootstrapping too many times and it works ok for little simple ideas or features companies. However it is not nearly as good for getting bigger concepts out there.
jack-r-abbit 15y ago
The pendulum will continue to swing back and forth. Is this going to be exactly like the "dot com bubble" of yore? Of course not. We had quite the cautious period after that burst. Surely we have learned from our mistakes. But learning from our mistakes only means we're less likely to make those same mistakes again. It's no guarantee that we won't make new mistakes. It will happen in some form. But I do have fond memories of some of the IPO parties and "just because we have buckets of cash" parties back in the day. They were great. But maybe they should have saved some of that money for the cold, long winter. Hindsight is 20/20. Let's see how this one plays out.
derefr 15y ago
Here's a question for the thread: I'm a Canadian citizen, and still in university (two years to go.) Which means that, as far as I'm aware in how US immigration works, I can't just bound on down to SV and start a company right this moment, no matter how hot the market is. So--should I be planning my next five years around chasing this thing, or will it pop before I get there? ;)
- pg 15y ago
  Don't base your plans on the funding market. Good startups can raise money in bad times (Airbnb raised its first round at the low point of the stock market in 2009) and bad startups can't raise money even in good times. So start a good company when you're ready to, and treat fundraising as a matter of secondary importance.
  - larrys 15y ago
    "Good startups can raise money in bad times (Airbnb raised its first round at the low point of the stock market in 2009) and bad startups can't raise money even in good times." There is a wide area in between "good" and "bad". And those startups would no question have an easier time in a frothy market and a harder pitch in bad times. This isn't an observation on how startups get funded. It is an observation based on years of selling things to people and the ease of doing so when things are on the way up as opposed to the way down. (As an example, right now, domain name valuations are up and I"m closing as many deals (on behalf of clients and others) that I can knowing it can change.)
- cperciva 15y ago
  You're allowed to start a company in Canada, you know. ;-)
  - derefr 15y ago
    You did bootstrap Tarsnap, though, yes? Would you have considered the same Canadian-corporation route if your idea had required investment funding to get off the ground?
jroseattle 15y ago
While true, I'm not sure the bubblicious times of the late 90s apply here. Isn't some of this the effect of the rise of incubators like Y-Combinator? With YC, investors also have the benefit of knowing/believing that Paul Graham, et. al, have already vetted the team & idea substantively that the risk factor is lower (at least, perceived lower.) So, while there may be more dollars chasing fewer deals, some of that is the captive audience effect. The advice offered is still good, no matter the environment.
nirvana 15y ago
This is one of the reasons I'm kinda ambivalent about taking money. I've been working for startups since the 1990s (and starting companies too). I've seen the down years in 1995, 2001-2003, 2008-2009, and I've seen the manias of 1997-2000, 2004-2007, 2010-2012, and it just leaves me really concerned that taking VC money is a whole lot about timing. I want to build a business, not get rich with a stock market (e.g.: selling stock to VCs with perfect timing.) This plus the generally hostile and irrational terms VCs require (liquidation preferences, etc) have had me focusing on making our business profitable from day one. (or at least from day one after the product launches.) On the other hand-- man, it would really be great to have $500k in the bank to hire some people so we could grow really fast. But we're not there yet-- that would be a bad investment because we're still doing customer development, we're still trying to discover our business, so to speak. I feel like, if I go down the path of trying to raise money now, I'll be spending a lot of time doing something that doesn't help us discover that business. But if I don't, who knows what things will be like in a while, if it turns out that we really could use that money. In the end, though, I side on the idea that money can be a nice accelerant, if it is gotten on good terms (terms are more important than valuation) from good people (and how in the hell do you figure out who those people are? I have seen a lot of damage done by investors in my career.) But at the end of the day, if the company is profitable, you can plow %100 of those profits into growth. If the company isn't profitable, the only way to survive is outside investment. I don't want my companies future in the hands of other people, so I'm pursuing a highly profitable business that is super capital efficient and doesn't require outside funding to launch. I strongly recommend others consider this approach as well. Yeah, you might get into YC and then not need this, but if you don't, find a business model that makes you ramen profitable right away.
- EricDeb 15y ago
  On the flip side, wouldn't one round of "getting rich with a stock market" allow you to totally fund the business you want to on your own terms?
  - drumdance 15y ago
    Sure, but it's not either/or. My last company was very profitable but is not going to IPO any time soon or get bought for a crazy valuation. However, I cashed out enough to fund my current company. I don't have millions in the bank, but I have enough to give me a 2 year runway and still live a comfortable lifestyle. "Go for broke" companies usually end up just broke. But if you can build a profitable business that finances future endeavors. Last year I had an epiphany that I'll be working in small tech startups for the rest of my life, and that I will enjoy it very much so long as the bills are paid. If I could repeat the last five years 4-5 more times I'll be very happy, even if not a jillionaire.
mmayernick 15y ago
Great thoughts, Jason. Your point about the change in valuations is more than an observations, though. Implicitly, it suggests that valuations are less a function of the companies themselves and more a consequence of exogenous macroeconomic and industry specific factors. This is sort of a scary realization to me, because it means that "crushing it" isn't a strategy to preserving valuation. Perhaps the Dropboxes of the world will always be able to name their price, but for the rest of us valuations will come tumbling down if the outlook turns negative on the startup asset class or economic activity broadly. Startups taking a more conservative approach to valuation and amount of capital to raise may be much better positioned to raise subsequent rounds of financing when the market, as all markets do, regresses to the mean.
jsmith72 15y ago
It seems to me that this situation only exists for those well connected in the Bay Area. Perhaps smart money will be looking for new areas that are still underfunded.
treelovinhippie 15y ago
Meanwhile in Australia... Zzzz...
Porter_423 15y ago
The real reason investors "blindly" toss money at YC companies (and the reason the ivy league "credential" phenomenon exists) is because people like using heuristics to evaluate decisions. An ivy league degree or membership in a YC class both serve the same purpose - they communicate to the world a minimum level of quality that should be expected from their alumni. While the investors still need to perform due diligence on their investments, the YC brand name automatically filters down their search because the portfolio companies have passed such strict admission processes.

300 points by jaf12duke 15y ago

pagekalisedown 15y ago

"Hot market" seems like an understatement. I'm still waiting for salaries to catch up tho.

hkarthik 15y ago
FTE salaries won't catch up until there's real money being made and profitable firms start competing for talent. A CEO with net profits of 10 mil/year is going to be a lot less stingy than a founder with 15 mil in funding. I hear that at this stage, the way to make money is to do hourly consulting at a high rate. That comes with its own issues, but if cash is your motivation, it is your best bet.

rhizome 15y ago

Grammatically, the first two paragraphs should be combined into one.

stephengillie 15y ago
Vulture Capitalism

canterburry 15y ago

Yeah...I see what just happened...we are back in 1999. Enjoy it while it lasts.

joeguilmette 15y ago
it's not entirely the same. while there are echoes, the few companies that are hitting the open market via IPO are not getting massively inflated stock prices. it'll be interesting to see how this little bubble bursts.
- canterburry 15y ago
  http://www.youtube.com/watch?v=YuAJHaXKgFk&feature=colike http://www.youtube.com/watch?v=YuAJHaXKgFk&feature=colik...
  - corford 15y ago
    :) liked it. Although, here we are 5 years later and no bust yet...
  - kshitizanand 15y ago
    Funny!!
tptacek 15y ago
FIRST POST!
- cperciva 15y ago
  2012 is the year of Linux on the desktop!
  - justauser 15y ago
    What's the keyword for this article on AOL?
  - ktsmith 15y ago
    Netcraft now confirms: BSD is dying.
  - saryant 15y ago
    I suppose we all ought to move back to Slashdot now.
- daeken 15y ago
  I, for one, welcome our new entrepreneur overlords.
- corford 15y ago
  In Soviet Russia, pendulum swings you.
  - PerryCox 15y ago
    Dear God am I on fucking reddit? I'm all for a little joking but this is ridiculous and adds nothing to the conversation.
    - tptacek 15y ago
      So do the "it's bubblicious!" comments this thread is responding to.
    - 15y ago
Alex3917 15y ago
This time the money is mostly coming from wealthy individuals. While some of these folks have certainly shown regrettable judgment, this is completely different than in 1999 when literally billions of dollars were flowing from institutional investors and the general public. If this trend continues for another 5 - 7 years then we may get back to where we were in 1999, but I don't think we're anywhere near there yet.
- bentlegen 15y ago
  That's changing, and fast. In Canada, pensions and retirement funds are getting involved in the startup funding game - and that's up north where funding is dry to begin with. I'm sure the same is happening here. Source: http://business.financialpost.com/2012/03/29/vancouvers-hootsuite-gets-20m-omers-ventures-push/ http://business.financialpost.com/2012/03/29/vancouvers-hoot... "OMERS Ventures, a $180-million fund established by the Ontario Municipal Employees Retirement System last fall, said Thursday it has picked HootSuite Media Inc. as its first major funding recipient."
  - swalberg 15y ago
    Many pension funds have had some sort of high risk component to their portfolio. http://www.cppib.ca/News_Room/News_Releases/nr_02031001.html http://www.cppib.ca/News_Room/News_Releases/nr_02031001.html talks about the CPP's, which has been going on since 2005. I'd suspect we're only starting to hear about it because it's getting into our space. Disclaimer - I work for one of OMERS other (earlier) investments. I guess we're just not "major" :P
- spullara 15y ago
  The JOBS act is going to let companies like these raise money on the internet from just about anyone.
  - tptacek 15y ago
    Yes, but at much lower levels. That's a valid concern with the JOBS crowdfunding provisions, though.
motti_s 15y ago
I don't think you can compare what we see now to the bubble days. Let's look at some key differences: - In the 90s there were 50 million internet users, now there are over 2 billion. The internet economy is huge. - It's becoming easier to get seed funding, but it hasn't become any easier to raise series A (some claim it's becoming harder due to the increased number of seed companies chasing those series A dollars). In the bubble days the madness went all the way to the IPO. - When the bubble burst, people lost faith in the future of technology, or at least in the rate at which it would advance. Now that phones have become computers, books have been digitized, and people rely on technology for every aspects of their lives (even to socialize!), it's pretty obvious that technology is here to stay. For sure we may see a down-swing. If macro economics go in shambles due a new war or an economic meltdown in Europe, then technology investment will suffer as well. But as opposed to the bubble days, I don't think technology investment will be the cause for such a down-swing. I think we have matured since the bubble and the fact that it was so traumatic (we're still discussing it aren't we?) also helps preventing it from re-occurring.
- MrMan 15y ago
  One of the reasons it is different this time, but still a bubble, is that there is tons of cheap money flowing around the globe, and sophisticated investors are desperately looking for returns. Hedge funds have had big outflows in the last 3 years. That (risk-seeking)money has to slosh somewhere. The total size of the hedge fund world is larger than in 1999-2000. Also, the concentration of advertising dollars that flows through a few key companies - Facebook, Google, Microsoft, etc., is significant. Ad spending basically drives this whole thing from the revenue side. In 1999 there was less of this money in absolute terms and also the ad and marketing folks had not yet learned how to target ads to users online. So ads + Quantitative Easing (hope I am not getting too fast and loose here but this is shorthand) means that worthless companies like Instagram can seem strategic to ad delivery platforms like Facebook. And there is so much extra risk capital chasing deals that $1B is nothing to throw away. PG has been in the right place at the right time, but just because he and his partners do things differently in their business does not mean that the macro picture is not the most important factor. edit - we have not matured we have just gotten better at online advertising and marketing. But that is arguably a great efficiency for the post-industrial service economy.

iandanforth 15y ago

Out of curiosity, how many founders know who put up the money that the VC is dispensing? After a friends and family or Angel round, is their any connection between the investment and the people who stand to lose money?

rdl 15y ago
Traditional VCs don't really advertise their LPs (limited partners; source of funds) too much. Sequoia sometimes uses that most of their LPs are charitable foundations, schools, etc. as a marketing tactic, but it's Sequoia, so people probably make their decision based on it being Sequoia. Some of the super-angel type funds do -- I know Founder Collective emphasizes that their partners are mainly entrepreneurs. It's a Boston/NYC fund -- Chris Dixon and some other people.

jwwest 15y ago

How much of this is "dumb" money? A lot has been written on how well folks are doing fundraising, but not so much on what types of investors are willing to throw money on the basis of a 2 1/2 minute pitch just because it has Y Combinator attached. Investments are much more than just money (duh), you're also gaining an ally and potential business mentor. If I were to be offered 500k from an extremely smart person who has shown personal interest in my product versus 2mil from someone trying to play "startup darts", I'd take the 500k and work my ass off. It scares me how much money is being thrown at name dropping these days.

negamax 15y ago
I know it feels like another extreme to the problem of raising money. That's why the post title, I guess. Hopefully, we will strike a middle ground before things get shaken.
ajross 15y ago
I'm not sure that's the right metric for "dumb" money. Say, as a gedankenexperiment, that you're a very bright, very successful person interested for whatever reason in investing in a tech startup. But you don't know technology. Do you (A) spend hours trying to understand the technology before carefully investing your cash or (B) hop on the coat tails of a proven winner? That said: this has all the smell of Yet Another F'ing Bubble. PG and company should be very careful not to let this get out of hand. A big high profile wreck or two (YC-funded startup that takes 20M and bombs inside two years, say) would destroy the brand they've created.
pg 15y ago
investors are willing to throw money on the basis of a 2 1/2 minute pitch just because it has Y Combinator attached I wish we could claim that. But YC's brand is not that powerful. There are still startups that present at Demo Day and aren't able to raise money.
- cperciva 15y ago
  Do you have any sense of how much this is a function of the demo and how much it's a function of the idea? Or put another way: At the start of the YC program, do you have any sense of which teams will have trouble raising further funding, or does that wait until they've spent a few months writing code?

subwindow 15y ago

This seems a little crazy. I think it should be hard for a company to raise money. Bad things always seem to happen when the money chases the startup. Frequently when money is hard to come by, the bad startups die early and everyone is better for it. Maybe that's just because I've tried several times and failed (3-6 years ago), and I'm being a grumpy old dude who thinks it should be this hard for everybody. But I'm not even that old (28) or that grumpy. I just have the wisdom of hindsight to know that my ideas and execution weren't that good, and it would've, ultimately, been a bad thing if they had gotten funding.

soham 15y ago
I think it is still hard for companies to raise money. While the article is excellent, it doesn't really note that there were several companies that applied to Y, but only 60 got in. (Disclaimer: No, I did not apply). It may have been easier for those 60 companies to raise more money now, but I doubt it was ever that easy and it will ever be to raise money.
motti_s 15y ago
I don't think it's that easy for all companies to raise money. In fact, I just watched an interview with Pinterest's founder who said that they were turned down by virtually the entire investor community. I think the pendulum has made a full swing for YC companies, but a partial one for others. Deciding what to invest in is hard, especially in the seed stage. With the market being so hot, investors have to decide quickly which makes it even harder. When investors are agreeing to an 8 million cap on a YC company and a 4 million cap on comparable non-YC company, they are essentially saying that the YC company is twice as likely to succeed, which I don't think is far-fetched. You may also wonder whether this anticipation fulfils itself (a company that seems more likely to succeed may get "better" investors, positive media coverage, early adopters, etc, which may end up helping it becoming successful). I also think that the increased popularity of convertible notes is a contributing factor. The 8 million cap only becomes 8 million valuation if the company raises the next round at 8 million or above, so in a way it has to live up to its promise in order for the increased cap to take an effect. And finally, if a company becomes the next Google then the valuation at the seed stage is insignificant. Therefore the valuation just represents the perceived probability of that happening.

Jabbles 15y ago

The author mentions the strategy of the VCs: to find the next billion-dollar company. One success of this magnitude will mask many, many failures. We should not look on a large seed round as saying "X is worth Y" (although by the definition of "worth", it is), but rather that "X has a not-insignificant chance of being worth 100Y in 5 years".

jacquesm 15y ago

Wise words and ones that anybody that ever wants to be funded or has attracted funding would do well to heed. YC has become a very strong brand, and one that attracts investors from all over the globe because they have proven that their method for picking winners works better than what those investors could ever achieve by themselves. Keep in mind that the factors that differentiates YC from all these other cats are very hard to replicate and so it is easier for them to ride on YCs coat tails than it is for them to copy the process. Hence the glut of money. This is good for everybody that gets 'in' to YC, they're more or less guaranteed to find funding and find it on their terms. For once the recipients of funding have a slightly stronger hand. Still, that won't change the long term outcome for the majority, the majority of such investments will still fail (and the investors are well aware of it), and a smaller portion will break even or make it big. Picking the winners out of the ones that got 'in' is just as hard (if not harder) than picking the ones that got 'in' in the first place. I like the tone of this article, it sends exactly the right message. Feet on the ground and get to work, being funded is not the end, it is the begin. And it definitely isn't a guarantee for success, that's up to you & your team, the market and timing. And you only control one of the three.

rasengan 15y ago

I strictly believe in bootstrapping a startup (most of them anyway). Hunger creates hunters. Hunters catch game.

jsmith72 15y ago
When it comes to funding there obviously isn't a one size fits all approach that will work for everyone. I've done the bootstrapping too many times and it works ok for little simple ideas or features companies. However it is not nearly as good for getting bigger concepts out there.

jack-r-abbit 15y ago

The pendulum will continue to swing back and forth. Is this going to be exactly like the "dot com bubble" of yore? Of course not. We had quite the cautious period after that burst. Surely we have learned from our mistakes. But learning from our mistakes only means we're less likely to make those same mistakes again. It's no guarantee that we won't make new mistakes. It will happen in some form. But I do have fond memories of some of the IPO parties and "just because we have buckets of cash" parties back in the day. They were great. But maybe they should have saved some of that money for the cold, long winter. Hindsight is 20/20. Let's see how this one plays out.

derefr 15y ago

Here's a question for the thread: I'm a Canadian citizen, and still in university (two years to go.) Which means that, as far as I'm aware in how US immigration works, I can't just bound on down to SV and start a company right this moment, no matter how hot the market is. So--should I be planning my next five years around chasing this thing, or will it pop before I get there? ;)

pg 15y ago
Don't base your plans on the funding market. Good startups can raise money in bad times (Airbnb raised its first round at the low point of the stock market in 2009) and bad startups can't raise money even in good times. So start a good company when you're ready to, and treat fundraising as a matter of secondary importance.
- larrys 15y ago
  "Good startups can raise money in bad times (Airbnb raised its first round at the low point of the stock market in 2009) and bad startups can't raise money even in good times." There is a wide area in between "good" and "bad". And those startups would no question have an easier time in a frothy market and a harder pitch in bad times. This isn't an observation on how startups get funded. It is an observation based on years of selling things to people and the ease of doing so when things are on the way up as opposed to the way down. (As an example, right now, domain name valuations are up and I"m closing as many deals (on behalf of clients and others) that I can knowing it can change.)
cperciva 15y ago
You're allowed to start a company in Canada, you know. ;-)
- derefr 15y ago
  You did bootstrap Tarsnap, though, yes? Would you have considered the same Canadian-corporation route if your idea had required investment funding to get off the ground?

jroseattle 15y ago

While true, I'm not sure the bubblicious times of the late 90s apply here. Isn't some of this the effect of the rise of incubators like Y-Combinator? With YC, investors also have the benefit of knowing/believing that Paul Graham, et. al, have already vetted the team & idea substantively that the risk factor is lower (at least, perceived lower.) So, while there may be more dollars chasing fewer deals, some of that is the captive audience effect. The advice offered is still good, no matter the environment.

nirvana 15y ago

This is one of the reasons I'm kinda ambivalent about taking money. I've been working for startups since the 1990s (and starting companies too). I've seen the down years in 1995, 2001-2003, 2008-2009, and I've seen the manias of 1997-2000, 2004-2007, 2010-2012, and it just leaves me really concerned that taking VC money is a whole lot about timing. I want to build a business, not get rich with a stock market (e.g.: selling stock to VCs with perfect timing.) This plus the generally hostile and irrational terms VCs require (liquidation preferences, etc) have had me focusing on making our business profitable from day one. (or at least from day one after the product launches.) On the other hand-- man, it would really be great to have $500k in the bank to hire some people so we could grow really fast. But we're not there yet-- that would be a bad investment because we're still doing customer development, we're still trying to discover our business, so to speak. I feel like, if I go down the path of trying to raise money now, I'll be spending a lot of time doing something that doesn't help us discover that business. But if I don't, who knows what things will be like in a while, if it turns out that we really could use that money. In the end, though, I side on the idea that money can be a nice accelerant, if it is gotten on good terms (terms are more important than valuation) from good people (and how in the hell do you figure out who those people are? I have seen a lot of damage done by investors in my career.) But at the end of the day, if the company is profitable, you can plow %100 of those profits into growth. If the company isn't profitable, the only way to survive is outside investment. I don't want my companies future in the hands of other people, so I'm pursuing a highly profitable business that is super capital efficient and doesn't require outside funding to launch. I strongly recommend others consider this approach as well. Yeah, you might get into YC and then not need this, but if you don't, find a business model that makes you ramen profitable right away.

EricDeb 15y ago
On the flip side, wouldn't one round of "getting rich with a stock market" allow you to totally fund the business you want to on your own terms?
- drumdance 15y ago
  Sure, but it's not either/or. My last company was very profitable but is not going to IPO any time soon or get bought for a crazy valuation. However, I cashed out enough to fund my current company. I don't have millions in the bank, but I have enough to give me a 2 year runway and still live a comfortable lifestyle. "Go for broke" companies usually end up just broke. But if you can build a profitable business that finances future endeavors. Last year I had an epiphany that I'll be working in small tech startups for the rest of my life, and that I will enjoy it very much so long as the bills are paid. If I could repeat the last five years 4-5 more times I'll be very happy, even if not a jillionaire.

mmayernick 15y ago

Great thoughts, Jason. Your point about the change in valuations is more than an observations, though. Implicitly, it suggests that valuations are less a function of the companies themselves and more a consequence of exogenous macroeconomic and industry specific factors. This is sort of a scary realization to me, because it means that "crushing it" isn't a strategy to preserving valuation. Perhaps the Dropboxes of the world will always be able to name their price, but for the rest of us valuations will come tumbling down if the outlook turns negative on the startup asset class or economic activity broadly. Startups taking a more conservative approach to valuation and amount of capital to raise may be much better positioned to raise subsequent rounds of financing when the market, as all markets do, regresses to the mean.

jsmith72 15y ago

It seems to me that this situation only exists for those well connected in the Bay Area. Perhaps smart money will be looking for new areas that are still underfunded.

treelovinhippie 15y ago

Meanwhile in Australia... Zzzz...

Porter_423 15y ago

The real reason investors "blindly" toss money at YC companies (and the reason the ivy league "credential" phenomenon exists) is because people like using heuristics to evaluate decisions. An ivy league degree or membership in a YC class both serve the same purpose - they communicate to the world a minimum level of quality that should be expected from their alumni. While the investors still need to perform due diligence on their investments, the YC brand name automatically filters down their search because the portfolio companies have passed such strict admission processes.