29 ms·

How long will the seed-stage bubble last?

42 points by elsewhen 14y ago

asanwal 14y ago
There really is no Seed Stage bubble because there is no market mechanism that will force a "correction". First, if you add up all the seed investments happening in tech and assume that 100% fail, the money lost would be the equivalent to a few medium to large'ish VC funds failing. It's not a huge deal in terms of $. But 100% failing is not going to happen. So there will be stories of some angel or seed investor making a killer return on a deal and that brings more people into the market trying to emulate that. So even though some angels/seed investors will get totally washed out and stop making investments, there will be a new supply coming in. The "corrections" will be mini-corrections, i.e. people stopping angel or seed investing cuz they didn't make money. But there will always be someone new who fancies themselves as a "smarter picker" of companies and who will continue to make these investments. The only thing IMO that could trigger a correction would be if all the prominent seed & angel investors came out and said they're stopping making investments. That would change the supply/demand characteristics as well as the overall sentiment towards these deals, but that is not going to happen because each thinks they are smarter than the other, has better proprietary dealflow, is more disciplined, etc. We're seeing (my company sells data to investors) lots of people try to set up Seed VC funds these days ($25 to $100M) so this appears to just be getting started to be honest.
- ChuckMcM 14y ago
  Exactly right, calling it a 'bubble' is just trendy. As long as there are more jobs than qualified engineers acquihires will be a way to get talent. And looking at the 12 - 24month forward engineering graduation rate its looking like this trend probably has at least 5 years of legs to it.
  - gruseom 14y ago
    It's fascinating how the economics of the market for programming talent and the economics of startups are intertwined.
    - eli_gottlieb 14y ago
      It's the old Ricardo's Law of Rents in action. The barrier to entry for a programmer to shift from worker to capitalist is very, very low, so many try it.
      - gruseom 14y ago
        Thanks - that's an interesting connection that was far from obvious to me.
- TheEzEzz 14y ago
  Can you elaborate on how this reasoning doesn't apply to the first dotcom bubble? Is it that more companies were publicly traded during the first dotcom bubble? How do companies like Zynga and Facebook factor in to your analysis? (I was just a kid during the dotcom bubble, so I appreciate any insight you can shed.)
  - jfarmer 14y ago
    The first bubble was characterized by massive speculation in public tech stocks completely detached from fundamentals. Facebook, Groupon, and Zynga getting kicked in the nuts on the public market is the opposite of that.
  - dm8 14y ago
    Facebook et. al. are generating healthy revenues and profits. That was not the case in first dot com bubble. During first dot com bubble going public was just fashionable. Now it's very very hard to get company to an IPO.
  - asanwal 14y ago
    I left a similar comment below. I believe it's different because returns data for seed investing is so opaque In the stock market, you have a very public scorecard at the end of each day telling you and those who know what you've invested in how you are doing. With seed investing, there is no such mechanism and the time horizon is much longer. Not a daily scorecard but one over many years. Add to this that the scoring is imperfect, ie prone to spin as failed companies get dressed up as acquisitions instead of asset sales for example. For this reason, this trend for seed investing will carry on much longer. As for Facebook and Zynga, they may sour opinions on certain sectors of tech but then you see folks like LinkedIn, jive, etc doing well after going public, this just highlights that not everyone can be above average. I personally think there will be a huge shift in companies targeting the enterprise but that's a story for a different day.
- eli_gottlieb 14y ago
  There really is no Seed Stage bubble because there is no market mechanism that will force a "correction". The market will not sustain unending losses. A field in which most investments have a negative expected value will eventually find itself without investments. It's still not different, this time.
  - asanwal 14y ago
    Agree actually. The problem with seed stage financing is the opacity of the returns data. In the stock market, you have a very public scorecard at the end of each day telling you and those who know what you've invested in how you are doing. With seed investing, there is no such mechanism and the time horizon is much longer. Not a daily scorecard but one over many years. Add to this that the scoring is imperfect, ie prone to spin as failed companies get dressed up as acquisitions instead of asset sales for example.
dm8 14y ago
Andrew, why do you call there is a bubble? From what I know, it's still very hard to raise seed money. Last week, founder of Launchbit posted her seed round on her blog (and it made it to HN front page), it didn't seem easy at all. You are the man in the investor's arena, so I'm curious to know what has become easier (in obtaining seed funding) compared to say 5 years back.
rdudekul 14y ago
"we’re currently in a golden age for early stage startups, and the early stage market will stay hot for at least the next 3-5 years" "VCs are seeding deals without any price sensitivity, and a lot of angels seeing exits even when the teams fail" "Angels are willing to invest because they have downside protection due to acquihires" "downside protection is driven by acquihires from companies paying $1M-3M per engineer" Fascinating observations. For me this is not a bubble. It is a fail safe investment opportunity. If you are an accredited investor just sign up for AngelList and start investing in seed rounds for startups that you understand. There is too much upside and too little downside. No wonder the funding environment for seed stage startups is red hot.
cageface 14y ago
The downside protection is driven by acquihires from companies like Twitter, Facebook, Groupon, and others which are paying $1M-$3M per engineer. All these companies seem to be headed for a dose of some very strong medicine though. Without the acquihire safety net I think the seed stage investment game looks a lot less certain. Of course, all the traditional investment vehicles look even less appealing lately.
- alttab 14y ago
  I notice many players these days that their entire strategy is based on aqui-hire. Essentially building a "feature company" and trying to grab a user base to piss off the company that "should have the feature anyway". If you ask me, thats a rather narrow game plan and it leaves a lot of risk in case something changes. If the "target company" implements the feature themselves, well, then you either need to pivot or continue in the delusion that the company can stand on its own (hint: It wont because it wasn't ever part of the plan).
pg 14y ago
"Given that this whole ecosystem is supported by the team acquisitions..." If that's what he's starting from, you can't trust any of the conclusions here. We make next to nothing from HR acquisitions.
- j_baker 14y ago
  They're probably better deals than if the companies went under. I think his point is that the possibility of an acquihire removes a good deal of risk.
  - pg 14y ago
    HR acquisitions have such an insignificant effect on returns that they're indistinguishable from failures.
  - pmjordan 14y ago
    This is from the point of view of an outsider, but I get the impression that YC's operational costs are substantial at this point. Aquihires might look good based on cash valuation of YC investments, but that hides the investment of intangibles and overhead, which I could easily imagine to dwarf the cash injection. Additionally, a set of founders tied up in a big company are probably less able to contribute to the alumni network.
j_baker 14y ago
I nominate the title for the loaded question of the month club. When will the author stop beating his wife?
justincormack 14y ago
I think the seed-stage boom is because companies generally need much less money than they used to. There are no significant costs except salaries for software businesses. So why take more money? It is more a reflection that the larger VCs have less opportunities, so seed stage will continue to grow.

42 points by elsewhen 14y ago

There really is no Seed Stage bubble because there is no market mechanism that will force a "correction". First, if you add up all the seed investments happening in tech and assume that 100% fail, the money lost would be the equivalent to a few medium to large'ish VC funds failing. It's not a huge deal in terms of $. But 100% failing is not going to happen. So there will be stories of some angel or seed investor making a killer return on a deal and that brings more people into the market trying to emulate that. So even though some angels/seed investors will get totally washed out and stop making investments, there will be a new supply coming in. The "corrections" will be mini-corrections, i.e. people stopping angel or seed investing cuz they didn't make money. But there will always be someone new who fancies themselves as a "smarter picker" of companies and who will continue to make these investments. The only thing IMO that could trigger a correction would be if all the prominent seed & angel investors came out and said they're stopping making investments. That would change the supply/demand characteristics as well as the overall sentiment towards these deals, but that is not going to happen because each thinks they are smarter than the other, has better proprietary dealflow, is more disciplined, etc. We're seeing (my company sells data to investors) lots of people try to set up Seed VC funds these days ($25 to $100M) so this appears to just be getting started to be honest.

ChuckMcM 14y ago
Exactly right, calling it a 'bubble' is just trendy. As long as there are more jobs than qualified engineers acquihires will be a way to get talent. And looking at the 12 - 24month forward engineering graduation rate its looking like this trend probably has at least 5 years of legs to it.
- gruseom 14y ago
  It's fascinating how the economics of the market for programming talent and the economics of startups are intertwined.
  - eli_gottlieb 14y ago
    It's the old Ricardo's Law of Rents in action. The barrier to entry for a programmer to shift from worker to capitalist is very, very low, so many try it.
    - gruseom 14y ago
      Thanks - that's an interesting connection that was far from obvious to me.
TheEzEzz 14y ago
Can you elaborate on how this reasoning doesn't apply to the first dotcom bubble? Is it that more companies were publicly traded during the first dotcom bubble? How do companies like Zynga and Facebook factor in to your analysis? (I was just a kid during the dotcom bubble, so I appreciate any insight you can shed.)
- jfarmer 14y ago
  The first bubble was characterized by massive speculation in public tech stocks completely detached from fundamentals. Facebook, Groupon, and Zynga getting kicked in the nuts on the public market is the opposite of that.
- dm8 14y ago
  Facebook et. al. are generating healthy revenues and profits. That was not the case in first dot com bubble. During first dot com bubble going public was just fashionable. Now it's very very hard to get company to an IPO.
- asanwal 14y ago
  I left a similar comment below. I believe it's different because returns data for seed investing is so opaque In the stock market, you have a very public scorecard at the end of each day telling you and those who know what you've invested in how you are doing. With seed investing, there is no such mechanism and the time horizon is much longer. Not a daily scorecard but one over many years. Add to this that the scoring is imperfect, ie prone to spin as failed companies get dressed up as acquisitions instead of asset sales for example. For this reason, this trend for seed investing will carry on much longer. As for Facebook and Zynga, they may sour opinions on certain sectors of tech but then you see folks like LinkedIn, jive, etc doing well after going public, this just highlights that not everyone can be above average. I personally think there will be a huge shift in companies targeting the enterprise but that's a story for a different day.
eli_gottlieb 14y ago
There really is no Seed Stage bubble because there is no market mechanism that will force a "correction". The market will not sustain unending losses. A field in which most investments have a negative expected value will eventually find itself without investments. It's still not different, this time.
- asanwal 14y ago
  Agree actually. The problem with seed stage financing is the opacity of the returns data. In the stock market, you have a very public scorecard at the end of each day telling you and those who know what you've invested in how you are doing. With seed investing, there is no such mechanism and the time horizon is much longer. Not a daily scorecard but one over many years. Add to this that the scoring is imperfect, ie prone to spin as failed companies get dressed up as acquisitions instead of asset sales for example.

dm8 14y ago

Andrew, why do you call there is a bubble? From what I know, it's still very hard to raise seed money. Last week, founder of Launchbit posted her seed round on her blog (and it made it to HN front page), it didn't seem easy at all. You are the man in the investor's arena, so I'm curious to know what has become easier (in obtaining seed funding) compared to say 5 years back.

rdudekul 14y ago

"we’re currently in a golden age for early stage startups, and the early stage market will stay hot for at least the next 3-5 years" "VCs are seeding deals without any price sensitivity, and a lot of angels seeing exits even when the teams fail" "Angels are willing to invest because they have downside protection due to acquihires" "downside protection is driven by acquihires from companies paying $1M-3M per engineer" Fascinating observations. For me this is not a bubble. It is a fail safe investment opportunity. If you are an accredited investor just sign up for AngelList and start investing in seed rounds for startups that you understand. There is too much upside and too little downside. No wonder the funding environment for seed stage startups is red hot.

cageface 14y ago

The downside protection is driven by acquihires from companies like Twitter, Facebook, Groupon, and others which are paying $1M-$3M per engineer. All these companies seem to be headed for a dose of some very strong medicine though. Without the acquihire safety net I think the seed stage investment game looks a lot less certain. Of course, all the traditional investment vehicles look even less appealing lately.

alttab 14y ago
I notice many players these days that their entire strategy is based on aqui-hire. Essentially building a "feature company" and trying to grab a user base to piss off the company that "should have the feature anyway". If you ask me, thats a rather narrow game plan and it leaves a lot of risk in case something changes. If the "target company" implements the feature themselves, well, then you either need to pivot or continue in the delusion that the company can stand on its own (hint: It wont because it wasn't ever part of the plan).

pg 14y ago

"Given that this whole ecosystem is supported by the team acquisitions..." If that's what he's starting from, you can't trust any of the conclusions here. We make next to nothing from HR acquisitions.

j_baker 14y ago
They're probably better deals than if the companies went under. I think his point is that the possibility of an acquihire removes a good deal of risk.
- pg 14y ago
  HR acquisitions have such an insignificant effect on returns that they're indistinguishable from failures.
- pmjordan 14y ago
  This is from the point of view of an outsider, but I get the impression that YC's operational costs are substantial at this point. Aquihires might look good based on cash valuation of YC investments, but that hides the investment of intangibles and overhead, which I could easily imagine to dwarf the cash injection. Additionally, a set of founders tied up in a big company are probably less able to contribute to the alumni network.

j_baker 14y ago

I nominate the title for the loaded question of the month club. When will the author stop beating his wife?

justincormack 14y ago

I think the seed-stage boom is because companies generally need much less money than they used to. There are no significant costs except salaries for software businesses. So why take more money? It is more a reflection that the larger VCs have less opportunities, so seed stage will continue to grow.