10 ms·

Winter Is Probably Coming Soon

106 points by devNoise 12y ago

barry-cotter 12y ago
Will any of the bootcamps survive, do you think? It seems unlikely given the stories I've read here, lsc hiring a former coworker (his technical superior) out of a sandwich shop, or tptacek having to move from San Francisco to Ann Arbor because there were no jobs going in San Francisco for someone who co-founded a large ISP and had lots of security publications. I'm sure it'll be bad enough in the US but I pity the graduates of General Assembly London or the Berlin bootcamp.
- enraged_camel 12y ago
  What about the bootcamps? A friend of mine is considering enrolling in one. Is it a bad idea?
  - nostrademons 12y ago
    It's not a bad idea for people who go through them and successfully get jobs before the crunch comes. As long as they can do the job and don't get laid off, they're way better off than they would be otherwise. (And even if they do get laid off, they're probably better off than they would be otherwise - they have tangible skills that will likely be in demand for a while.) It could be very bad for the boot camps themselves. The reason they have a business is because the demand for software engineers is red-hot right now; much of this demand comes from the easy availability of venture/seed money. Think what happened to telecoms, ISPs, and infrastructure providers at the end of the dot-com boom. It was not unusual to go from thriving repeat business to absolutely zero customers in six months.
    - timr 12y ago
      Yep. And even more to the point, there were a lot of people who were hired as "webmasters", and knew little more than some HTML. Those people were cut almost immediately when the crash came. It's not even a metaphor -- almost the exact same scenario played itself out in the late 90s. We know how it ends. It amazes me how resistant we are to learning from experience.
      - xcubed 12y ago
        Based on seeing the last crash- It's not really skill level that determines whether you keep a job. Having a good network and being able to hustle for opportunities are far bigger determinants. The quiet, 50th percentile engineer who hasn't had to look for a job in 10 years, doesn't know a lot of people, low-ish EQ, works for a company that's not well-known: most at risk of struggling to find a job if laid off or company goes under. Someone who knows little more than HTML but is a young, hustler type, big network, sociable, puts more energy into finding gigs - likely to get at least some contract work to sustain him through the
        xcubed 12y ago
        *downturn
      - computerjunkie 12y ago
        It amazes me how resistant we are to learning from experience Its been going on for a long time now, it doesn't phase me anymore.Its not just in technology, but in every other sector in the economy. A fine example is Wall Street.
ChuckMcM 12y ago
Winter is always coming. Gurley's analysis is spot on but it really talks about VC money not "real" money. Something not enough startups internalize has always been how "expensive" it is to use the dollars you get from investors to fund operations.
camillomiller 12y ago
I somehow hope it's gonna happen sooner than later, just because that way it could hurt a little less. What's not clear here is that the impact on global economy will be not that big. Anyway, if they're called venture capitalists, shouldn't they be able to look forward a little better than the market? That way they know what will happen if they keep going on like this. A quick deflation of the bubble, with some notable victims, would be better than a complete burst. Especially for VCs
seanmcdirmid 12y ago
Nice link baity title. I thought this was about the new Game of Thrones book being released soon.
- AVTizzle 12y ago
  Heh, I can see where the confusion would stem. Somehow though, maybe because this came a day or two after Suster's response to the Gurley interivew, I had a good idea going into it that the post had something to do with the impending VC crunch.
venus 12y ago
I hope so. Currently, VC money is a horrible market distortion that encourages what is basically dumping - companies with good products and actual business models being starved of oxygen by cashed-up competitors who simply give products away for free. I'm not even sure of the economic term for it but wouldn't be surprised if it's illegal in a few years, after we've gotten more sophisticated.
- api 12y ago
  A related argument had been made a lot lately about how "free" can lead to scummy business models like surveillance and manipulative black hat media tactics. You can do free sustainably if your costs are low and if you have something a tier up you can sell. That's freemium and it can work for some things. But if your costs are high or if a paid tier does not materialize... Now you have a big problem. You own a liability, one purchased via massive investment and employing many people. You must find a way to make it pay, so you start looking at what you have a little differently. Your users... Now there's a product. South Park parodied the grow-first-monetize-later gambit in the "underpants gnomes" episode: 1) collect underpants 2) ...? 3) profit! Nobody knew the second step back then. Of course now companies like Facebook have shown us what step two is. It's: 2) sniff underpants :)
  - deleted 12y ago
    [deleted]
- sliverstorm 12y ago
  I used to think it was illegal under the anti-competitive regulations, but just based on proliferation of the strategy I'm not so sure anymore.
  - jiggy2011 12y ago
    Dumping is usually only illegal for foreign companies to do. The government doesn't care about two domestic firms competing with each other, what they are worried about is the Chinese government using it's vast resources to subsidise the dumping of millions of almost-free tablet computers onto the US market and putting Apple out of business.
api 12y ago
I don't think there is an overall tech bubble like 1999, but there may indeed be smaller scale bubbles in overheated or overhyped sectors. There are two areas of worry from what I see. One is free apps and services with high burn and no good path to revenue. Another is what looks to me like a mini-bubble in startups that cater to other startups. Scene-centric inbreeding like that is probably more worrisome than the overvalued pic sharing services.
- deleted 12y ago
  [deleted]
ojbyrne 12y ago
I feel like we've heard this before: 2008: http://techcrunch.com/2008/10/10/sequoia-capitals-56-slide-powerpoint-presentation-of-doom/ http://techcrunch.com/2008/10/10/sequoia-capitals-56-slide-p... 2011: http://www.startuplessonslearned.com/2011/08/winter-is-coming.html http://www.startuplessonslearned.com/2011/08/winter-is-comin... And it makes me think of 2 things: 1. "the market can remain irrational longer than you can remain solvent." 2. The way large companies use layoffs not to actually cut the total number of jobs, but to cut deadwood. This seems like the VC equivalent.
- minimaxi 12y ago
  You point out that we've been hearing VCs belly ache about the high prices they've been paying for many years, but I don't see how it follows that the market is irrational, but even if it is, in that case it'd make it easier to remain solvent. Which directly contradicts your second thought.
  - nostrademons 12y ago
    "The market can stay irrational longer than you can stay solvent" is a common saying in the financial world: it means that even if you're right that assets are overvalued, there's no guarantee that they'll come back down to earth in any reasonable length of time, and so betting against the market can often be a losing gamble even when you're right. In some senses the market is never "irrational", because a security is worth exactly what someone will pay for it, and so by definition it always has the right price. In other senses, the market is always "irrational", because its price is determined by the emotions of its participants and not any sort of rational analysis. (The whole reason markets are efficient is that they average out the misjudgments of many members, such that those who miss the mark too much drop out and cease to become participants.) I think Owen's point is that the sky is always falling. Bubble psychology and boom/bust cycles is a natural part of the operation of markets.
- timr 12y ago
  But the 2008 slide deck was right. It was comically easy to hire great people for a few years after Lehman. Rents were going down in San Francisco. SOMA wasn't a ghost town, exactly, but it was pretty empty compared to now. The bust was real. The rapid recovery in tech has more-or-less paralleled the rapid recovery in the stock market as a whole. There's no lesson to be learned from cynicism here, except that the tech industry probably never paid the full price for the last crash, because the "fix" for that was flooding the market with cheap capital, which makes risky investments look reasonable.
deleted 12y ago
[deleted]
mbesto 12y ago
I'm guessing it's in 18-24 months. Companies are still getting acquired left and right and BigCo still has cash to spend (especially Yahoo, Google, Facebook and Twitter). As long as BigCo is acquiring, VCs will continue pumping.
no_future 12y ago
Can somebody explain to me why every startup company(or at least every one that articles are written about) feels the need to raise as much VC as possible ASAP? There are so many options for developing scalable systems relatively easily and the cost of running an entirely web/software based company(read: 90% of the hot startups) today is comically low, especially with pay what you use PaaS/IaaS systems like those offered by Google and Amazon. If your product crashes and burns, you will be out a couple thousand dollars MAX + whatever time and effort you put in. If your product is successful, by the time running it on one of these platforms gets too expensive to pay for out of pocket(meaning you have a lot of users running up bandwidth/infrastructure costs), I'd guess that VC firms would be coming to you rather than you to them, and you would basically have more authority to dictate investment terms, and wouldn't have to slog around pitching to firm after firm - most of who will probably reject early stage investment in anything that isn't some rehashed social media dreck made by the white boys from Stanford. I've never pitched to a VC firm, but I don't believe that any pitch is better than "Hey my thing has 10,000 fucking users and we get a metric shitton of new signups every day". I don't think they would care if you were a hobo clown from Latvia who dropped out of elementary school if your product had users and pull, they'd throw money at you since they all want to jump in on the next big thing. This confuses me as it would seem to be a counter trend to what I'd expect based on what stuff was like a few years ago, when infrastructure costs were much higher, there were much less options, and development was more difficult. Google and Facebook - both of which are practically the model now for successful web companies - were fairly bootstrapped(run out of garages and dorm rooms by a few friends who had scraped together money from friends and family) before getting VC funding, which they got after their products had received somewhat widespread hype/adoption. I don't even think it would have been difficult to raise money or make VC connections before the product even launched for these people, they were practically the definition of the white boys from Stanford - but they didn't. The founders of both of those companies still retain massive shares and control in them compared to what you would expect from almost any other type of company of their calibre. Neither of them had to resort to advertising before their companies got big. The excuse that seems to be given is that by getting VC you don't have to worry about profits and paying costs for a while and you can just focus purely on the product, but as I said before, the costs are minimal - if you had even a small amount of savings or hit a family member up for a loan, you could run for quite a while on Google App Engine and such and not really have to worry about cost. If your founders are even remotely technical, I don't see how you would need more staff members in your early stages, successful web/software companies love to brag about how early on their team consisted of 3 people who worked a million hours a week on the product subsisting on nothing but cocaine and melon rinds because they were so dedicated to the company. As a person who I guess would be considered technical(though if you ask me I'm just a monkey who doesn't have a clue what they are doing and just bangs rocks together and hacks at stuff till something working comes out), I simply don't see the appeal of begging a bunch of of suits - most of whom probably don't know a shit about computers - for venture funding, and having to sell large stakes of your company to get it when you don't absolutely need it at the time. The only reason I would postulate for this trend is an increasing amount of non-technical founders who need to pay for developers to make and maintain their product, but don't want to give these developers significant equity in the company. Almost all of the cofounders of Google and Facebook were highly technical and very driven and intelligent from what I can see, so I could easily believe that they were able to chug along on their own for a while without hiring more technical staff. I've put a couple of fairly popular and highly trafficked web projects(nothing huge, current one pushes about 2TB of bandwidth a day from 30k visitors, and costs about $100 a month to run on a dedicated server) together with some friends and am currently learning iOS dev, and I don't believe its a stretch at all to think that me and a buddy could build something like Snapchat or Instagram in a couple of weeks and throw it up on App Engine. I know almost nothing about finance and haven't ever managed or worked at a for really reals startup, so let me know if I'm way off here. I would just like to get some people's perspectives on this. Sorry for the rant.
bsder 12y ago
Translation: "Waaaaaah! I'm a VC; I'm not the only game in town anymore; and I have to pay money. Waaaaah!" Yeah, guess what? Nobody likes VC's. They screwed everybody over in the 1999-2000 bust, so those people have stayed away ever since. And, now, the stupid 20-somethings are starting figure the same thing out, are buckling down on very small amounts of money and cashing out to Yagglesoftazon ASAP since there is very little barrier to entry on something which is solely software.
pkorzeniewski 12y ago
I'm always amazed by stories of startups that generate almost no profit and yet burn millions of VC dollars. Yes, I know that VC count on that 1 out of 100 invested in companies to generate profit larger than all the other combined, but still it's a bit ridiculous and in my opinion not healthy for the industry. It's a different story if you've a bootstrapped, profitable company and want to boost the growth - you can negotiate better terms with the VC, because a) you've paying customers and have a proven business model and b) you don't need the VC money to survive, unlike a fresh company without any profits.
- jiggy2011 12y ago
  Some types of companies are harder to bootstrap in a way that is profitable from day 1, also the risk for a small bootstrapped company is they just prove the market for a VC backed juggernaut to come in and eat them alive.
  - pkorzeniewski 12y ago
    Yes, some types of companies need time to provide value, but in my opinion the vast majority of VC funded companies could easily be bootstrapped. I don't deny that the vision of receiving a fat check and being able to rent a beautiful office, buy the best equipment and hire a big team is tempting, but it's something for something - the main goal of VCs is to grow like crazy, without a sentiment. A bootstrapped company will grow slowly, but steadily, and I don't believe a VC backed competitor is a real threat in the long term. Sure, they can offer a similar product for free, but not forever - once the VC money is gone, they will need to get profitable. Fast. Without the VC money such company can dissapear the next month. Not to mention the interference of VCs how to run your company, which is of course expected - after all it's their money that keeps your company alive.
    - jiggy2011 12y ago
      Sure, but by the time they have folded you're already out of business!
zxcvvcxz 12y ago
I think it's fair to say that this analysis applies better to web/app companies. There's just a fundamental problem with raising (and burning) millions trying to grow a site for inbound marketing, or an app for dating, or what have you, even though these are great ideas and things that people want: You likely won't be able to generate real revenue on something whose value is so immediately replicable or replaceable. There needs to be a caveat to "build something people want": there has to be some barrier so that others can't compete so easily. Customer and market understanding is one, and that's certainly helped. But again, the replication model, which will drive down profits for everyone, kicks in. Technical superiority is a possible solution, but most web/app products simply wouldn't benefit from this because their functionality is trivial. Of course, there are exceptions. Unicorns. Things like Whatsapp, Twitter, and Salesforce come to mind. Obviously their initial products were replicable, but the winner-takes-all network effects (and eventual "platform dynamics") create that lock-in. For every one of them, 1000s of similar companies fail. The problem is when VC money is chasing those 1000s of likely-to-fail-I-might-do-it-too companies. They're more likely to fail than laundromats, but they're burning millions in an attempt to be those "winners". Easier than investing in clean energy though. Fundamentally, as a society we need some technical advancement to create meaningful economic growth. We can't just keep advertising and selling the same stuff to each other. When a sector is running dry on innovation opportunities (i.e. webs/apps) maybe it's time to look elsewhere. Or stick around and wait for unicorns. Meh. For now though, how people want to misappropriate (in my opinion) their money is their choice, as long as most of this doesn't get dumped on John Smith from The Public like it did in 2000.
- mempko 12y ago
  Truth is, it is not their money. They are borrowing it at low rates. The most important point is that the private capital is fuelled by cheap public money. When that money dries up, so will the funding for the startup scene.
  - zxcvvcxz 12y ago
    Could you explain to me the funding chain a little better? From what I understand, VCs raise money from "Limited Partners", but I never understood who those guys were and how they got their money. Pension funds and such?
dasil003 12y ago
Of course a VC does not want you wasting his money and will finger wag all day long to try to make entrepreneurs behave. However his analysis focusing on isolated economic indicators is missing the forest for the trees (presumably willfully). Why is money cheap? Because investors have no place to put their money. The accelerating consolidation of wealth within the super rich (ie. the 0.01% funding VCs) and the pathetic amount of tax and philanthropy mean they have nowhere to put their money. It is going to be impossible to get the returns they demand because of the decimation of the middle class and on a larger scale the impossibility of sustaining 20th century level growth over the long term. Tech is a long way from being an unattractive investment because it still provides the best avenue to scaling a business quickly. It will survive a tremendous amount of douchebag entrepreneur cash burning simply because there's no better game out there, and until society comes to term with what's actually happening economically rather than wishfully believing the juked stats the government puts out to get re-elected I don't see any better investment opportunities coming along. Let the party continue...
- jeffreyrogers 12y ago
  You can still put money in an index fund (e.g. anything from Vanguard) and get reasonable returns (better than most investors at least).
  - gphil 12y ago
    Indeed, the risk-adjusted returns for VC as an asset class are bad compared to other options. I think there's more to the story than "the rich are running out of places to put their money."
  - mathattack 12y ago
    You can, but many investors are concerned about the stock market as a whole being overpriced. "Bonds are overpriced, Commodities are overpriced, Equities are overpriced, and Real Estate is overpriced. When rates go up they will all tank." Of course this is a first world problem. I used to say "Invest in your own human capital" but I took a look at the cost of private schools nowadays, and they're overpriced too. :-)
KonoHito 12y ago
Any evidence the party is coming to an end? Actually for me it is getting a bit ridiculous when an app like Yo can get like a million dollars when it goes viral without anyone actually figuring out what's so great about it. It does seem like growth is triumphing over other metrics, like revenue, or common sense. Of course if we go by that measure, companies like facebook will never survive at all, not sure how this is gonna play out.
recalibrator 12y ago
Stupidity and greed are year round.

106 points by devNoise 12y ago

Will any of the bootcamps survive, do you think? It seems unlikely given the stories I've read here, lsc hiring a former coworker (his technical superior) out of a sandwich shop, or tptacek having to move from San Francisco to Ann Arbor because there were no jobs going in San Francisco for someone who co-founded a large ISP and had lots of security publications. I'm sure it'll be bad enough in the US but I pity the graduates of General Assembly London or the Berlin bootcamp.

enraged_camel 12y ago
What about the bootcamps? A friend of mine is considering enrolling in one. Is it a bad idea?
- nostrademons 12y ago
  It's not a bad idea for people who go through them and successfully get jobs before the crunch comes. As long as they can do the job and don't get laid off, they're way better off than they would be otherwise. (And even if they do get laid off, they're probably better off than they would be otherwise - they have tangible skills that will likely be in demand for a while.) It could be very bad for the boot camps themselves. The reason they have a business is because the demand for software engineers is red-hot right now; much of this demand comes from the easy availability of venture/seed money. Think what happened to telecoms, ISPs, and infrastructure providers at the end of the dot-com boom. It was not unusual to go from thriving repeat business to absolutely zero customers in six months.
  - timr 12y ago
    Yep. And even more to the point, there were a lot of people who were hired as "webmasters", and knew little more than some HTML. Those people were cut almost immediately when the crash came. It's not even a metaphor -- almost the exact same scenario played itself out in the late 90s. We know how it ends. It amazes me how resistant we are to learning from experience.
    - xcubed 12y ago
      Based on seeing the last crash- It's not really skill level that determines whether you keep a job. Having a good network and being able to hustle for opportunities are far bigger determinants. The quiet, 50th percentile engineer who hasn't had to look for a job in 10 years, doesn't know a lot of people, low-ish EQ, works for a company that's not well-known: most at risk of struggling to find a job if laid off or company goes under. Someone who knows little more than HTML but is a young, hustler type, big network, sociable, puts more energy into finding gigs - likely to get at least some contract work to sustain him through the
      - xcubed 12y ago
        *downturn
    - computerjunkie 12y ago
      It amazes me how resistant we are to learning from experience Its been going on for a long time now, it doesn't phase me anymore.Its not just in technology, but in every other sector in the economy. A fine example is Wall Street.

ChuckMcM 12y ago

Winter is always coming. Gurley's analysis is spot on but it really talks about VC money not "real" money. Something not enough startups internalize has always been how "expensive" it is to use the dollars you get from investors to fund operations.

camillomiller 12y ago

I somehow hope it's gonna happen sooner than later, just because that way it could hurt a little less. What's not clear here is that the impact on global economy will be not that big. Anyway, if they're called venture capitalists, shouldn't they be able to look forward a little better than the market? That way they know what will happen if they keep going on like this. A quick deflation of the bubble, with some notable victims, would be better than a complete burst. Especially for VCs

seanmcdirmid 12y ago

Nice link baity title. I thought this was about the new Game of Thrones book being released soon.

AVTizzle 12y ago
Heh, I can see where the confusion would stem. Somehow though, maybe because this came a day or two after Suster's response to the Gurley interivew, I had a good idea going into it that the post had something to do with the impending VC crunch.

venus 12y ago

I hope so. Currently, VC money is a horrible market distortion that encourages what is basically dumping - companies with good products and actual business models being starved of oxygen by cashed-up competitors who simply give products away for free. I'm not even sure of the economic term for it but wouldn't be surprised if it's illegal in a few years, after we've gotten more sophisticated.

api 12y ago
A related argument had been made a lot lately about how "free" can lead to scummy business models like surveillance and manipulative black hat media tactics. You can do free sustainably if your costs are low and if you have something a tier up you can sell. That's freemium and it can work for some things. But if your costs are high or if a paid tier does not materialize... Now you have a big problem. You own a liability, one purchased via massive investment and employing many people. You must find a way to make it pay, so you start looking at what you have a little differently. Your users... Now there's a product. South Park parodied the grow-first-monetize-later gambit in the "underpants gnomes" episode: 1) collect underpants 2) ...? 3) profit! Nobody knew the second step back then. Of course now companies like Facebook have shown us what step two is. It's: 2) sniff underpants :)
- deleted 12y ago
  [deleted]
sliverstorm 12y ago
I used to think it was illegal under the anti-competitive regulations, but just based on proliferation of the strategy I'm not so sure anymore.
- jiggy2011 12y ago
  Dumping is usually only illegal for foreign companies to do. The government doesn't care about two domestic firms competing with each other, what they are worried about is the Chinese government using it's vast resources to subsidise the dumping of millions of almost-free tablet computers onto the US market and putting Apple out of business.

api 12y ago

I don't think there is an overall tech bubble like 1999, but there may indeed be smaller scale bubbles in overheated or overhyped sectors. There are two areas of worry from what I see. One is free apps and services with high burn and no good path to revenue. Another is what looks to me like a mini-bubble in startups that cater to other startups. Scene-centric inbreeding like that is probably more worrisome than the overvalued pic sharing services.

deleted 12y ago
[deleted]

ojbyrne 12y ago

I feel like we've heard this before: 2008: http://techcrunch.com/2008/10/10/sequoia-capitals-56-slide-powerpoint-presentation-of-doom/ http://techcrunch.com/2008/10/10/sequoia-capitals-56-slide-p... 2011: http://www.startuplessonslearned.com/2011/08/winter-is-coming.html http://www.startuplessonslearned.com/2011/08/winter-is-comin... And it makes me think of 2 things: 1. "the market can remain irrational longer than you can remain solvent." 2. The way large companies use layoffs not to actually cut the total number of jobs, but to cut deadwood. This seems like the VC equivalent.

minimaxi 12y ago
You point out that we've been hearing VCs belly ache about the high prices they've been paying for many years, but I don't see how it follows that the market is irrational, but even if it is, in that case it'd make it easier to remain solvent. Which directly contradicts your second thought.
- nostrademons 12y ago
  "The market can stay irrational longer than you can stay solvent" is a common saying in the financial world: it means that even if you're right that assets are overvalued, there's no guarantee that they'll come back down to earth in any reasonable length of time, and so betting against the market can often be a losing gamble even when you're right. In some senses the market is never "irrational", because a security is worth exactly what someone will pay for it, and so by definition it always has the right price. In other senses, the market is always "irrational", because its price is determined by the emotions of its participants and not any sort of rational analysis. (The whole reason markets are efficient is that they average out the misjudgments of many members, such that those who miss the mark too much drop out and cease to become participants.) I think Owen's point is that the sky is always falling. Bubble psychology and boom/bust cycles is a natural part of the operation of markets.
timr 12y ago
But the 2008 slide deck was right. It was comically easy to hire great people for a few years after Lehman. Rents were going down in San Francisco. SOMA wasn't a ghost town, exactly, but it was pretty empty compared to now. The bust was real. The rapid recovery in tech has more-or-less paralleled the rapid recovery in the stock market as a whole. There's no lesson to be learned from cynicism here, except that the tech industry probably never paid the full price for the last crash, because the "fix" for that was flooding the market with cheap capital, which makes risky investments look reasonable.

deleted 12y ago

[deleted]

mbesto 12y ago

I'm guessing it's in 18-24 months. Companies are still getting acquired left and right and BigCo still has cash to spend (especially Yahoo, Google, Facebook and Twitter). As long as BigCo is acquiring, VCs will continue pumping.

no_future 12y ago

Can somebody explain to me why every startup company(or at least every one that articles are written about) feels the need to raise as much VC as possible ASAP? There are so many options for developing scalable systems relatively easily and the cost of running an entirely web/software based company(read: 90% of the hot startups) today is comically low, especially with pay what you use PaaS/IaaS systems like those offered by Google and Amazon. If your product crashes and burns, you will be out a couple thousand dollars MAX + whatever time and effort you put in. If your product is successful, by the time running it on one of these platforms gets too expensive to pay for out of pocket(meaning you have a lot of users running up bandwidth/infrastructure costs), I'd guess that VC firms would be coming to you rather than you to them, and you would basically have more authority to dictate investment terms, and wouldn't have to slog around pitching to firm after firm - most of who will probably reject early stage investment in anything that isn't some rehashed social media dreck made by the white boys from Stanford. I've never pitched to a VC firm, but I don't believe that any pitch is better than "Hey my thing has 10,000 fucking users and we get a metric shitton of new signups every day". I don't think they would care if you were a hobo clown from Latvia who dropped out of elementary school if your product had users and pull, they'd throw money at you since they all want to jump in on the next big thing. This confuses me as it would seem to be a counter trend to what I'd expect based on what stuff was like a few years ago, when infrastructure costs were much higher, there were much less options, and development was more difficult. Google and Facebook - both of which are practically the model now for successful web companies - were fairly bootstrapped(run out of garages and dorm rooms by a few friends who had scraped together money from friends and family) before getting VC funding, which they got after their products had received somewhat widespread hype/adoption. I don't even think it would have been difficult to raise money or make VC connections before the product even launched for these people, they were practically the definition of the white boys from Stanford - but they didn't. The founders of both of those companies still retain massive shares and control in them compared to what you would expect from almost any other type of company of their calibre. Neither of them had to resort to advertising before their companies got big. The excuse that seems to be given is that by getting VC you don't have to worry about profits and paying costs for a while and you can just focus purely on the product, but as I said before, the costs are minimal - if you had even a small amount of savings or hit a family member up for a loan, you could run for quite a while on Google App Engine and such and not really have to worry about cost. If your founders are even remotely technical, I don't see how you would need more staff members in your early stages, successful web/software companies love to brag about how early on their team consisted of 3 people who worked a million hours a week on the product subsisting on nothing but cocaine and melon rinds because they were so dedicated to the company. As a person who I guess would be considered technical(though if you ask me I'm just a monkey who doesn't have a clue what they are doing and just bangs rocks together and hacks at stuff till something working comes out), I simply don't see the appeal of begging a bunch of of suits - most of whom probably don't know a shit about computers - for venture funding, and having to sell large stakes of your company to get it when you don't absolutely need it at the time. The only reason I would postulate for this trend is an increasing amount of non-technical founders who need to pay for developers to make and maintain their product, but don't want to give these developers significant equity in the company. Almost all of the cofounders of Google and Facebook were highly technical and very driven and intelligent from what I can see, so I could easily believe that they were able to chug along on their own for a while without hiring more technical staff. I've put a couple of fairly popular and highly trafficked web projects(nothing huge, current one pushes about 2TB of bandwidth a day from 30k visitors, and costs about $100 a month to run on a dedicated server) together with some friends and am currently learning iOS dev, and I don't believe its a stretch at all to think that me and a buddy could build something like Snapchat or Instagram in a couple of weeks and throw it up on App Engine. I know almost nothing about finance and haven't ever managed or worked at a for really reals startup, so let me know if I'm way off here. I would just like to get some people's perspectives on this. Sorry for the rant.

bsder 12y ago

Translation: "Waaaaaah! I'm a VC; I'm not the only game in town anymore; and I have to pay money. Waaaaah!" Yeah, guess what? Nobody likes VC's. They screwed everybody over in the 1999-2000 bust, so those people have stayed away ever since. And, now, the stupid 20-somethings are starting figure the same thing out, are buckling down on very small amounts of money and cashing out to Yagglesoftazon ASAP since there is very little barrier to entry on something which is solely software.

pkorzeniewski 12y ago

I'm always amazed by stories of startups that generate almost no profit and yet burn millions of VC dollars. Yes, I know that VC count on that 1 out of 100 invested in companies to generate profit larger than all the other combined, but still it's a bit ridiculous and in my opinion not healthy for the industry. It's a different story if you've a bootstrapped, profitable company and want to boost the growth - you can negotiate better terms with the VC, because a) you've paying customers and have a proven business model and b) you don't need the VC money to survive, unlike a fresh company without any profits.

jiggy2011 12y ago
Some types of companies are harder to bootstrap in a way that is profitable from day 1, also the risk for a small bootstrapped company is they just prove the market for a VC backed juggernaut to come in and eat them alive.
- pkorzeniewski 12y ago
  Yes, some types of companies need time to provide value, but in my opinion the vast majority of VC funded companies could easily be bootstrapped. I don't deny that the vision of receiving a fat check and being able to rent a beautiful office, buy the best equipment and hire a big team is tempting, but it's something for something - the main goal of VCs is to grow like crazy, without a sentiment. A bootstrapped company will grow slowly, but steadily, and I don't believe a VC backed competitor is a real threat in the long term. Sure, they can offer a similar product for free, but not forever - once the VC money is gone, they will need to get profitable. Fast. Without the VC money such company can dissapear the next month. Not to mention the interference of VCs how to run your company, which is of course expected - after all it's their money that keeps your company alive.
  - jiggy2011 12y ago
    Sure, but by the time they have folded you're already out of business!

zxcvvcxz 12y ago

I think it's fair to say that this analysis applies better to web/app companies. There's just a fundamental problem with raising (and burning) millions trying to grow a site for inbound marketing, or an app for dating, or what have you, even though these are great ideas and things that people want: You likely won't be able to generate real revenue on something whose value is so immediately replicable or replaceable. There needs to be a caveat to "build something people want": there has to be some barrier so that others can't compete so easily. Customer and market understanding is one, and that's certainly helped. But again, the replication model, which will drive down profits for everyone, kicks in. Technical superiority is a possible solution, but most web/app products simply wouldn't benefit from this because their functionality is trivial. Of course, there are exceptions. Unicorns. Things like Whatsapp, Twitter, and Salesforce come to mind. Obviously their initial products were replicable, but the winner-takes-all network effects (and eventual "platform dynamics") create that lock-in. For every one of them, 1000s of similar companies fail. The problem is when VC money is chasing those 1000s of likely-to-fail-I-might-do-it-too companies. They're more likely to fail than laundromats, but they're burning millions in an attempt to be those "winners". Easier than investing in clean energy though. Fundamentally, as a society we need some technical advancement to create meaningful economic growth. We can't just keep advertising and selling the same stuff to each other. When a sector is running dry on innovation opportunities (i.e. webs/apps) maybe it's time to look elsewhere. Or stick around and wait for unicorns. Meh. For now though, how people want to misappropriate (in my opinion) their money is their choice, as long as most of this doesn't get dumped on John Smith from The Public like it did in 2000.

mempko 12y ago
Truth is, it is not their money. They are borrowing it at low rates. The most important point is that the private capital is fuelled by cheap public money. When that money dries up, so will the funding for the startup scene.
- zxcvvcxz 12y ago
  Could you explain to me the funding chain a little better? From what I understand, VCs raise money from "Limited Partners", but I never understood who those guys were and how they got their money. Pension funds and such?

dasil003 12y ago

Of course a VC does not want you wasting his money and will finger wag all day long to try to make entrepreneurs behave. However his analysis focusing on isolated economic indicators is missing the forest for the trees (presumably willfully). Why is money cheap? Because investors have no place to put their money. The accelerating consolidation of wealth within the super rich (ie. the 0.01% funding VCs) and the pathetic amount of tax and philanthropy mean they have nowhere to put their money. It is going to be impossible to get the returns they demand because of the decimation of the middle class and on a larger scale the impossibility of sustaining 20th century level growth over the long term. Tech is a long way from being an unattractive investment because it still provides the best avenue to scaling a business quickly. It will survive a tremendous amount of douchebag entrepreneur cash burning simply because there's no better game out there, and until society comes to term with what's actually happening economically rather than wishfully believing the juked stats the government puts out to get re-elected I don't see any better investment opportunities coming along. Let the party continue...

jeffreyrogers 12y ago
You can still put money in an index fund (e.g. anything from Vanguard) and get reasonable returns (better than most investors at least).
- gphil 12y ago
  Indeed, the risk-adjusted returns for VC as an asset class are bad compared to other options. I think there's more to the story than "the rich are running out of places to put their money."
- mathattack 12y ago
  You can, but many investors are concerned about the stock market as a whole being overpriced. "Bonds are overpriced, Commodities are overpriced, Equities are overpriced, and Real Estate is overpriced. When rates go up they will all tank." Of course this is a first world problem. I used to say "Invest in your own human capital" but I took a look at the cost of private schools nowadays, and they're overpriced too. :-)

KonoHito 12y ago

Any evidence the party is coming to an end? Actually for me it is getting a bit ridiculous when an app like Yo can get like a million dollars when it goes viral without anyone actually figuring out what's so great about it. It does seem like growth is triumphing over other metrics, like revenue, or common sense. Of course if we go by that measure, companies like facebook will never survive at all, not sure how this is gonna play out.

recalibrator 12y ago

Stupidity and greed are year round.