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Andreessen Goes on Tweet Storm About Burn Rates, Says to Worry
- ojbyrne 12y agoIt sure seems to me that if anyone is responsible for excessive valuations, its a16z.
- fooaway 12y agogenius.
- kylelibra 12y agoHere's the entire tweet storm if you find the embedded storify version difficult to read: 1/Cash burn rates at startups: Recently @bgurley and @fredwilson have sounded a vivid alarm -- http://online.wsj.com/articles/venture-capitalist-sounds-alarm-on-silicon-valley-risk-1410740054 http://online.wsj.com/articles/venture-capitalist-sounds-ala... 2/I said at the time that I agree with much of what Bill says (https://twitter.com/pmarca/status/511617992757506048 https://twitter.com/pmarca/status/511617992757506048 …), and I want to expand on the topic further: 3/New founders in last 10 years have ONLY been in environment where money is always easy to raise at higher valuations. THAT WILL NOT LAST. 4/When the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rate co's will VAPORIZE. 5/High cash burn rates are dangerous in several ways beyond the obvious increased risk of running out of cash. Important to understand why: 6/First: High burn rate kills your ability to adapt as you learn & as market changes. Co becomes unwieldy, too big to easily change course. 7/Second: Hiring people is easy; layoffs are devastating. Hiring for startups is effectively one way street. Again, can't change once stuck. 8/Third: Your managers get trained and incented ONLY to hire, as answer to every question. Company bloats & becomes badly run at same time. 9/Fourth: Lots of people, big shiny office, high expense base = Fake "we've made it!" feeling. Removes pressure to deliver real results. 10/Fifth: More people multiplies communication overhead exponentially, slows everything down. Company bogs down, becomes bad place to work. 11/Sixth: Raising new money becomes harder & harder. You have bigger bulldog to feed, need more and more $ at higher and higher valuations. 12/Therefore you take on escalating risk of a catastrophic down round. High-cash-burn startups almost never survive down rounds. VAPORIZE. 13/Further, to get into this position, you probably had to raise too much $ at too high valuation before; escalates down round risk further. The blog post author then goes on some further back and forth about specifics.
- epistasis 12y agoStorify, or the embedding of it, hid some tweets from scrolling, I had to select-drag to make them visible: 14/Seventh: Even if you CAN raise an up round, you are increasingly likely to incur terrible structural terms like ratchets to chin the bar. 15/That nice hedge fund investor willing to hit your valuation bar? Imagine him owning 80% of co after down round. How nice will he be then? 16/Eighth: When market turns, M&A mostly stops. Nobody will want to buy your cash-incinerating startup. There will be no Plan B. VAPORIZE. 17/Finally, there are exceptions to all this. But if you're reading this, you're almost certainly not one. They are few and far between. 18/Worry.
- deleted 12y ago[deleted]
- ANTSANTS 12y agoI think it's funny that a "tweet storm" amounts to maybe two or three paragraphs of terse writing.
- jacques_chester 12y agoHere's my abridged version: 1. Spend less than you make. 2. That's it. You worked out business. And personal finance. And, depending on who you ask, public finance.
- mcosta 12y agoWhen you start you make 0. It is difficult to make less. And time is money.
- owenwil 12y agoCan't Marc Andressen just get a blog?
- jalonso510 12y agohe had a really great one for a long time but sadly i don't think its up anymore.
- jkestner 12y agoBuild a site that turns http://site/@twitterhandle http://site/@twitterhandle into a blog compiled of tweets from that Twitter user that start with [0-9]*/ , and maybe he'll fund it, if you don't spend it all on Herman Miller furniture.
- Blackthorn 12y agoVCs give startups money, complain about startups using that money. News at 11. Maybe they'll be a little more careful about who they give their money to next time. edit: To put it a little more kindly, if startups without viable business models keep getting gobs of money maybe the problem isn't the startup!
- thirdtruck 12y agoAgreed. "Why do these kids keep emptying the bowl of candy that I keep out on my porch?"
- notacoward 12y agoThe VCs own compensation structure practically guarantees that they will raise as much money as they can and invest it however they can, no matter how much they have to lower their standards. As in the semi-obvious biological analogy, they don't really care about what kind of offspring they're producing. They just want to reduce the per-company expenditure so they can invest in more companies. That's entirely what this is about. Any good that the "be very careful about hiring" advice does for the companies or founders is purely incidental.
- ultimape 12y agoSounds like a bit of a simplification though. There are surely more other incentives involved with what companies they fund.
- notacoward 12y agoNever trust a money-lender who says they want people to borrow less. They just want more people to borrow the same total amount, to change their own risk profile.
- ritchiea 12y agoCan someone tell me what changed? Hasn't this been the climate for a few years? Are people just now starting to get antsy and feel like things can't stay this way? Not because of any real metrics but a group shift in psychology? Just a few months ago I listened to a principal at a VC firm in NYC talk about how things aren't going to change anytime soon because a bunch of firms just raised new funds. Now he was primarily talking about seed rounds and as far as I can tell the concern about burn rates is targeted more at companies like Uber & Lyft that have raised nine figures. At the very least there appears to be a different climate around seed stage investments than there is around big growth stage C & D & beyond investments. But let's say the big late stage companies go up in smoke and there is a new reluctance to invest at later stages. Is there then an entire generation of companies that received seed funding when the market was hot that are now on quiet death marches? I suppose that's the disaster scenario.
- ojbyrne 12y ago"group shift in psychology" is a nice phrase.
- ranvir 12y agoYes, I believe that's exactly what's happening. Investors as a whole are able to shape their own reality: If enough of them talk about valuations taking a southward turn or a "bubble popping," then it can quickly become a self-fulfilling prophecy. The opposite case is also true, of course.
- klochner 12y agoThis largely applies to companies with high burn rate (pmarca acknowledged as much in a later response). Even at the seed stage, you're not on any death march if making it to break even is a priority (rather than just continually raising more money).
- jpmattia 12y ago> Can someone tell me what changed? At a macro-level: The Federal Reserve started tapering the amount of money being printed. They have also signaled that interest rates are rising. Both of those things affect the money flow to the VCs, as well as the exit options in the public markets. In truth: People should be happy that the party has gone on for as long as it has.
- trhway 12y agoa16z is scared of how high stakes got at the game he has helped to escalate the stakes at. He is getting out priced by new money coming into the Valley, and the only way he can stay in the game is to increase stakes (funding/valuations) even more. Unfortunately, at this level of funding/valuations the start-ups receiving them stop being lean/agile in any sense and become a fat small BigCo-s which just burn the incoming cash with obvious end-of-game.
- idlewords 12y ago"An army of words escorting a corporal of thought"
- idbfs 12y ago10/Fifth: More people multiplies communication overhead exponentially, slows everything down. Company bogs down, becomes bad place to work. Warning: pedantic. Adding people increases communication overhead quadratically, not exponentially. To see why, consider the complete graph on n vertices (people), K_n. The number of edges (lines of communication) in K_n is n(n-1)/2, i.e., proportional to n^2.
- dragonwriter 12y agoThis assumes that "communication overhead" is proportional to the number of dyads; I can certainly see why one might suspect that to be the case, but I certainly don't see that it is implausible that that overhead would expand faster than that (I don't see an obvious theoretical foundation for literally "exponential" growth, but I wouldn't reject it out of hand, either. Of course, you'd probably want a clearer operationalizations of "overhead" to answer that question.)
- otakucode 12y agoTechnology is still freaking people out. I suppose it's understandable. For centuries, humanity progressed with just incremental little improvements in productivity from year to year... then automation technology and computers show up and everything explodes. Workers are able to produce 10x or 20x or 200x as much in the same time period. Wages were the first to go, immediately divorcing themselves from any relationship to the amount of value the worker produces for the company. This sounds to me like an outgrowth of that. "Can this little bit of software really be worth THAT much?" When it sparks exponential growth and enables a company to be active in a global marketplace with a handful of employees, yes, it absolutely can be. But with a voluntarily blinded eye turned to the actual value of software, everything looks the same. An app to waste a few hours in entertainment, or a system to automate part of customer service? Which one can make a ton of money? He may be quite right though. I've lost track of how often I read stories about a startup and then am absolutely gob-smacked at the number of employees they bring on. They start a project that could be easily and competently handled by maybe 15 people, and they hire 1500. What most of those people are doing is anyones guess, probably marketing and design work that should have been done by contracted remote-work freelancers I suppose. They continue ignoring everything and pretending like this is 1975, like offices are something more than a gigantic drain on efficiency with no payoff. And they plunk themselves down in Silicon Valley, paying $28000/mo to rent an efficiency apartment above a garage. The actual WORK, the production of value, seems completely ignored next to the rush of "playing the game." If there is an invisible hand guiding the market, we will see "companies" as such evaporate eventually. They no longer offer any value. They used to offer almost all the value, by solving the problem of distribution, both of work to workers and product to customers. Thanks to the Internet and software, distribution is a solved problem. It's nearly worthless because anyone can do it. All that efficiency that companies could afford while standing between a worker and an end customer, skimming 90% off of every transaction between them, is going to become their death. Hooking workers up with people who need the product of their work will be handled by software, putting together teams automatically, managing reputation and portfolios to provide good fits to whoever needs a team of a certain type. Without companies there to take almost all of the value being exchanged, workers will find it only necessary to work occasionally. The massive productivity improvements that have occurred since 1980, like a secretary going from being able to answer 20 letters a day to handling 300 emails before lunch, which were collected exclusively by the company owners and upper management will make it so terribly easy for people to make a decent living without working much. And when people do work, they'll do it from home because there's simply no reason to gather them together in the same building which costs more and lowers their productivity. For work that requires heavy tools and things of that nature, I expect people will open community workshops where people can lease workspace and equipment. The industries where the service actually HAS to be carried out in person have proven fairly resistant to takeover by small numbers of large corporate concerns. There are always independent plumbers, hairdressers, and restaurants everywhere. Thanks to the Internet, essentially everything escapes from this need for fragile centralization. Just ignore me, I grew up online in the 1990s...
- iaw 12y agoEvery investment vehicle is overvalued which led to a glut in, amongst other things, venture capital. With more capital available than needed for viable business models, a lot of founders created innovative new ways to spend venture capital and soak up the available cash. What's funny is that a founder of an unprofitable VC backed startup generally still makes substantially more money than most people. What does it matter if they're spending a ton? The people who ran Groupon into the ground walked away and got other jobs, it wasn't their money...
- jcrawfordor 12y agoSomebody get this man a blog, stat!
- cyphunk 12y agoReminder, Andreessen is the same person that says Snowden is a traitor. He blames Snowden for hurting the tech industry, with no thought of the stake government institutions may hold in this issue.