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Marc Andreessen Sounds Warning on Startups Burning Cash

117 points by stevenj 12y ago

cyphunk 12y ago
Reminder Andreessen is the same person that says Snowden is a traitor.
- thinkingkong 12y ago
  What does that have to do with white hot burn rates?
  - deleted 12y ago
    [deleted]
    - bdcravens 12y ago
      His firm's investments are the ultimate expression of opinion. So do we now question the validity of those investments? AirBnB, Coinbase, Digital Ocean, etc?
    - MichaelGG 12y ago
      If the only evidence on Marc was the Snowden info, sure, it might mean to discount his statements. But the rest of the information that we have of him as a VC totally outweighs his Snowden views to the point of irrelevancy.
- nilkn 12y ago
  Is this relevant? I don't agree with him about Snowden, but I don't see why his view on a political issue should be related to his view on burn rates. People can be wrong about some things and right about others. Everybody is wrong about some things -- but we cannot write off everything that everybody says, because sometimes people are right.
  - cyphunk 12y ago
    My statement is entirely irrelevant to this topic but I sacrifice Karma because I think it is important that this person not be able to get away from his statements on Snowden. He entirely ignores policy discussions that may have lead to Snowden, placing all blame on Snowden for the potential impact of the NSA's actions on the wider IT industry. Please feel free to down vote me, it would be the logical conclusion.
    - declan 12y ago
      Without expressing a position on Marc A's views on Snowden, I look at it a bit like Hollywood celebrities' views on politics. I may (arguably) care what a celeb says about a topic where he/she has demonstrated expertise, such as the craft of acting, but I would not expect them to have special expertise on vaccination, firearm policy, foreign policy, climatography, intelligence agencies, etc. Similarly, I care quite a bit what Marc A. thinks about VCs and startups and cash burn rates: he's a smart guy with lots of experience who is willing to speak his mind, a rare character trait nowadays. You can appreciate and even applaud that without endorsing his views on the possible legal fate of an ex-government contractor.
- todd3834 12y ago
  https://yourlogicalfallacyis.com/ad-hominem https://yourlogicalfallacyis.com/ad-hominem
- kenrikm 12y ago
  As an interesting factoid that may be it is in no way related to the point Andreessen is making. Startups are warming themselves by burning piles of money and a harsh winter is coming.
  - fleitz 12y ago
    The harsh winter in which you go back to making $120 K as a software engineer? In tech winter is not white walkers, it's a week of rain.
- JustSomeNobody 12y ago
  Don't. Just... don't. Keep it on topic. Edit: Why on Earth do I get down voted because I think it should be kept on topic??? Really???
  - cyphunk 12y ago
    i upvoted
  - SamReidHughes 12y ago
    You took the bait.
    - JustSomeNobody 12y ago
      Well, in that context, it makes sense that I would be downvoted!
- bdcravens 12y ago
  So does that discredit everything else he says? He very bullish on the disrupting capabilities of Bitcoin, for example.
austenallred 12y ago
Part of Marc Andreesen's tweetstorm yesterday said, "Worry." Andreesen hasn't said "worry" since 2008, so between that and the fact that he is generally very bullish and optimistic (to the point that when A16Z makes a bet they can put in an order of magnitude more money than other investors would), I began to stress out more than a little bit, especially having just closed our round. This may be anecdotal to my experience, but there was a time last year when the advice we were getting from mentors changed from, "Figure out how much cash you need to meet your next milestone and go raise that with a bit of cushion" to "Money is everywhere right now; get as much as you can and build the biggest war chest possible." Neither of these approaches are particularly wrong -- it would be weird to turn down money when it's on the table, but we opted to raise significantly less than what we could have raised, and keep our team where we wanted it instead of hiring enough people to become "sexy." Part of that is because we didn't raise at a super sexy Y-Combinator valuation and didn't want to give away the farm, and part of that was intentional. In short, we wouldn't know what to do with those people if we had them. To be clear, we still have plenty of money to get stuff done. We still can pay for all the tools we need, pay ourselves enough to not have to stress about cash, and can hire top talent. We just don't have more money than we know what to do with. We have three people working full-time on product right now, and that will grow to five in the next few months. If we had raised a $3 Million seed round (if you can still call that a "seed"), we would have felt compelled to go hire a dozen people. I can think of stuff we'd like to do, but it would probably be an absolute mess if we were building it all in parallel. There may be some companies for whom building a huge war chest makes sense, but the notion of raising money for the sake of raising money (because you can) seems odd and dangerous to me.
- ianphughes 12y ago
  You're correct that neither approach is wrong, especially since it might largely depend upon what type of business you're building. However, I think if you have no fear in your ability to raise funding, a business may relax in the real market discovery search. a super sexy valuation is always nice...but I think profitability is always in vogue. When I read this recent article[0] about what it MVP really means, it reminded me that some people in our industry forget that finding a market for your innovation is the lifeblood of long term success. [0]https://news.ycombinator.com/item?id=8356906 https://news.ycombinator.com/item?id=8356906
JustSomeNobody 12y ago
The problem is that nobody will listen. The reason nobody will listen is everyone has an "I better get mine while I can mentality" or a "Well, nobody else is going to listen, so I'll be at a disadvantage if I stop spending so much" mentality. If you look around and see the people you're competing with spending money like it's going out of style, you're going to do it too.
- ameister14 12y ago
  I disagree with that; people will still try to get theirs, but most people are smart enough to go for the PayPal model: get 100 million dollars right as the bubble pops and spend it wisely.
tadmilbourn 12y ago
I think this is the 4th major blog that I've seen just repost Andreesen's tweet stream. But, regardless of frothy times or not, the advice is solid. Keep your burn low. Run as lean as possible until you've figured out the business model.
- at-fates-hands 12y ago
  Shouldn't this be business 101? Plan for a downturn, use your resources wisely to avoid future disasters? Even after several market crashes, it's surprising to see so many businesses acting so recklessly with their capital. You would think being in the valley they would know better.
  - fleitz 12y ago
    It depends on the market conditions. VC funded startups are not a place where I think that really makes any sense. Most billion dollar startups haven't even been through an entire business cycle. The VC market is not looking for consistent year over year 8% growth for the next 40 years. If they wanted that they would have bought index funds and told startups to fuck off.
brianstorms 12y ago
Why now? What about all the years startups have been burning cash? It's nothing new. Parties, entitlements like free meals for employees, fancy offices and furniture, too much travel, ads and PR spending, fancy hardware... when a startup has zero or negligible revenue, this kind of excessive spending is absurd. Not clear why Marc thinks it's time to sound a warning now.
- jsonne 12y ago
  >ads and PR spending These are growth activities as opposed to the others you list. The truth is many products never have just organic "viral" growth. They need ads, sales, or both to drive it.
  - thedaveoflife 12y ago
    Some would argue all the things he mentioned are growth activities. Employees are a vital resource... taking care of them can be valuable and can attract new talent as well
  - fleitz 12y ago
    And most importantly PR people to spin massive ad buys as organic growth.
- latchkey 12y ago
  So that when his dire warnings come true, he can tell you 'he told you so'... =)
- randomdata 12y ago
  Maybe he is seeing new investment opportunities on the near horizon, perhaps including the rise in interest rates, which is expected at the beginning of next year? Tech has been one of the few places for people to put their money for quite a while, but it doesn't mean that will hold true forever. Commodities started heating up around the same time as this round of the tech industry "boom", and has pretty much crashed now.
  - 12y ago
7Figures2Commas 12y ago
It's quite amusing that the folks who have been investing in companies at exorbitant valuations and pushing for higher and higher growth as a prerequisite for additional funding are now worried that all the large sums they've aggressively invested are being spent on growth or things that create the appearance of growth. What did they expect? Comments like "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" are particularly interesting. The top-tier VC firms always talk about value add and active participation in their portfolio companies, and almost all of them look to have board representation in one form or another. But somehow one of the Valley's most prominent and connected VCs suggests that he doesn't know "who has been swimming without trunks on." Crazy.
- clairity 12y ago
  you make it sound like all the VCs got together and decided to make this happen. it's instead an artifact of the economic system we have. it's due to humans being involved, but not caused by individual humans. the car analogy would be the waves of stop-and-go traffic on a congested freeway, which is caused by variances in reaction times of people.
  - 7Figures2Commas 12y ago
    > you make it sound like all the VCs got together and decided to make this happen. it's instead an artifact of the economic system we have. it's due to humans being involved, but not caused by individual humans. "Your poor returns are an artifact of the economic system we have. The collapse in the value of your investments with our firm is due to humans being involved, but this was not caused by individual humans." - Every hedge fund manager, mutual fund manager, venture capitalist > the car analogy would be the waves of stop-and-go traffic on a congested freeway, which is caused by variances in reaction times of people. I think the pusherman analogy is more apt: he who sells crack gets crackheads.
stealthlogic 12y ago
Can Confirm, I work at a start-up and see it on a regular basis.
dmritard96 12y ago
I am not really qualified to determine whether there is a bubble nor do I believe there is much value in speculating constantly about it. If there is one, valuations will drop, cash will be harder to get. Its not going to change the kind of work I like to pursue or the work that makers, builders and engineers do. It will probably change how much everyone is stuffing in their pockets, fine. One glaringly bizarre thing from my perspective is why anyone would listen to VCs about whether we are or are not in a bubble. I'm sure there are other perspectives, but it would seem someone heavily invested in seeing valuations go up wouldn't want to ring alarm bells... I think instead I would rather gauge things by the numbers which unfortunately, are probably not frequent enough to reach true statistical significance to not have incredibly large confidence ranges. That being said, some of the money flying by on crunchbase every morning is ludicrous.
- smacktoward 12y ago
  > Its not going to change the kind of work I like to pursue or the work that makers, builders and engineers do. As someone who lived through the original dot-com bubble, I would respectfully argue that this viewpoint is naïve. There were lots of "makers, builders and engineers" who had to settle for things other than the work they liked to pursue for many years after it popped.
  - ianphughes 12y ago
    It took several years around silicon valley for things to get interesting again. I think I became a better developer during that time because it forced me to do/learn things I might never have. Nevertheless, yes, it TOTALLY changed the kind of work many of us were doing at the time.
- clairity 12y ago
  you listen to VCs about this because their whole job is to be sensitive to any risks to their investments, including systemic and idiosyncratic risk. they also have more breadth across the early venture market than most people. that said, they're guessing based on what they see, so it's not a perfect predictor. you're at least getting a glimpse of what they see via articles like this though.
snake_plissken 12y ago
"Companies that spend money on fancy offices..." Start-ups actually do this? What's the value in a nice office when you are not established? Does it help to attract talent? Is it one of those everyone else does it things?
- spamizbad 12y ago
  > Start-ups actually do this? What's the value in a nice office when you are not established? To play devil's advocate: You want to invest in big, fancy offices because... - People will be more likely to stay longer each day - It helps recruit talent - It helps instill the "Company Culture" - We have to look successful to be successful
  - georgemcbay 12y ago
    Mostly the last one, IME. A misappropriation of the common "fake it til you make it" advice. The REALLY sad part is how many companies build out these offices that are expensive as hell, super nice inside and out and then (ignoring 40 years of studies) they structure them in large open floor plans designed to maximize noise and distraction and minimize the ability of developers to reach a useful state of flow.
    - techdragon 12y ago
      Yeah ... There's merit in having an open plan, but an open plan with no places to hide from the chaos is definitely going to be less efficient.
PublicEnemy111 12y ago
I do agree valuations are artificially inflated, but before you start drawing parallels to 1999 and every financial bubble of years past remember there are companies with real revenue streams. Sure, there are the snapchat valuations which have no basis, but do uber, airbnb, dropbox, and the like not deserve billion dollar valuations? Let's entertain the idea that we have another "catastrophic" event where every VC in the world wakes up to the realization that many of these companies are worthless. They can't liquidate their positions. The key idea here is that this is a private market. These startups can't go from $100 million -> $0 in a day. They will tighten their straps, let a few employees go, and extend that runway as long as they need to make revenue. IMHO the easy days will be over and now every founder will learn what its like to really run a startup - No more shots in the dark just because you can
- araes 12y ago
  The real concern isn't that belts will tighten. Its that something serious or startling will happen inducing panic. Its the worry that we're getting near a tipping point, where the balance is bad enough that a strong shock could send us over to dark days. On the second point, many of them absolutely can go from $100 million to $0 in a short time. Probably not the Dropbox(es) and Airbnb(s) of the world. But, those are only a tiny fraction of all startups. Imagine I'm only semi-major league, with good prospects, and I run a business being pushed to grow that's heavily leveraged on my financing rounds. I effectively keep payroll alive in quarter to half year cycles as we bring on more and more folks to fuel our growth. If the investors get spooked though, poof, it all collapses. They suddenly don't want my risk because all their charts and finance guys say the market outlook is bad. My actual income doesn't nearly cover my growth-oriented staff. I can't meet payroll, I can't pay my office rent, I can't keep the lights on. I have to let a ton of folks go which kills morale. I may struggle for a while with a skeleton staff to try and recover, I may even do so if I'm really good, but I've still had my legs taken out for a while.
  - notastartup 12y ago
    You know what's funny is that I already see this happening in lot of startups in Vancouver. It's not only just startups, but video game studios too. Most often is that founders or executives burn cash for the sake of short term gains without investing in the future. The future where Google suddenly open sources the app you been charging six digits for, the future where your competitors end up with most of your clients. Not pretty but it's a cutthroat environment when you decide to be a pig in a Wall Street sense, not as a derogatory term. Pigs get slaughtered, always, in any market. As soon as someone with an excel spreadsheet says the risk far outweigh the rewards, they close shop and blame the ruling party or the local tech labor market as being 'too expensive'. I can imagine what the impact would seeing that happen in large numbers in SV, that would have a ripple effect.
il 12y ago
The solution is simple: always treat each round of funding like it's the last money you'll ever get.
FollowSteph3 12y ago
The fact that the tv show Silicon Valley exists, as much as I love it, really shows that were in a big boom right now. It's starting to feel a lot like the dot com era again.
- FollowSteph3 12y ago
  Also for those of you who haven't watched it, they continually make fun of the valuations, ideas, and funding available. So when I say exists I mean not just that it exists at all, but what it's really about also ;)
dang 12y ago
https://news.ycombinator.com/item?id=8369734 https://news.ycombinator.com/item?id=8369734
cs702 12y ago
VC-funded startups have always burned cash at prodigious rates. There's nothing inherently worrisome about that. What worries Andreessen, Gurley, Wilson, and other investors with decades of experience is that many startups today are burning cash by spending on things that do not increase business value -- and in some cases actually destroy it -- without worrying for even a moment about the possibility of running out of money. In Andreessen's words: "Lots of people, big shiny office, high expense base = Fake 'we’ve made it!' feeling. Removes pressure to deliver real results."[1] In Gurley's words: "I think that Silicon Valley as a whole or that the venture-capital community or startup community is taking on an excessive amount of risk right now. Unprecedented since '99. In some ways less silly than '99 and in other ways more silly than in '99. ... For the first time since '99, in the past 12 months, I've been in board meetings where the company says, 'Our only option is a 10-year lease,' at record pricing on a per square foot basis here in San Francisco, which is two or three times what the rent was three years ago. And so this is why it's all cyclical—because the landlords get greedy. They wouldn't do a 10-year lease if they thought that the rates were low. So they're implicitly telling you they want to lock this in for 10 years, which is its own form of greed because what happened in '99 is half the companies went bankrupt and they couldn't pay the lease over the 10-year period."[2] In Wilson's words: "I’ve pushed back on long term leases that I thought were outrageous, I’ve pushed back on spending plans that I thought were too aggressive and too risky, I’ve made myself a pain in the ass to more than a few CEOs."[3] Their worry, in short, is that many VC-funded startups are burning cash stupidly. -- [1] https://twitter.com/pmarca/status/515219433695223809 https://twitter.com/pmarca/status/515219433695223809 [2] http://online.wsj.com/articles/venture-capitalist-sounds-alarm-on-silicon-valley-risk-1410740054 http://online.wsj.com/articles/venture-capitalist-sounds-ala... [3] http://avc.com/2014/09/burn-baby-burn/ http://avc.com/2014/09/burn-baby-burn/
- j_baker 12y ago
  Honestly? I don't buy it. The VCs are the ones that have been pouring cash into these companies so they can blow it on obscenely expensive parties and offices. I think they're just trying to deflect criticism away from themselves and onto the startups. I mean, there have also been plenty of startups in the past that have blown money and built a product that nobody will pay for. And VCs just pour more cash in.
emgeee 12y ago
I'd just like to point out that the "why now?" question is probably related to a major shift in America's monetary policy. Since the 2008 crash, the Fed has been using a policy of "Quantitive Easing" (QE) to keep interest rates artificially low and thus encourage lending and spending. It's been known for while that the Feds were looking to end this policy sometime this year and it's looking like the end of October will be that time. Although the Feds seem to indicate that they won't actually raise interest rates until sometime next year, halting QE will have the affect of making less money available for lending. No one is really sure what is going to happen but this is an event that will affect the economy as a whole. To me, it's sounding like one of the industries that could be particularly affected by this policy is Tech and the result will be a market correction in startup valuations. Links! http://www.investopedia.com/terms/q/quantitative-easing.asp http://www.investopedia.com/terms/q/quantitative-easing.asp http://www.economist.com/blogs/economist-explains/2014/01/economist-explains-7 http://www.economist.com/blogs/economist-explains/2014/01/ec... http://www.forbes.com/sites/investor/2014/09/23/the-end-of-the-qe-era-is-upon-us-whats-next/ http://www.forbes.com/sites/investor/2014/09/23/the-end-of-t... http://blogs.wsj.com/moneybeat/2014/08/05/goldman-sachs-heres-what-will-happen-when-fed-raises-interest-rates/ http://blogs.wsj.com/moneybeat/2014/08/05/goldman-sachs-here...
- acornax 12y ago
  They've actually been scaling QE back for quite a while now.
  - genwin 12y ago
    Is that a 1% drop every year? I don't know. I do know that interest rates on savings have stayed near zero.
    - refurb 12y ago
      No, the drop has been quite substantial. From what I can tell the Fed was buying $85B worth of bonds monthly at peak. It's down to ~$45B now and they are planning on a final $15B in October.
forgotAgain 12y ago
So the evaluation has been made that there is more to gain by protecting your reputation for the next boom-bust cycle then there is in wringing the last few million out of the current one.
notastartup 12y ago
So after such market correction in how investors value startups and software business in general, I suspect that there will be a starkly different valuation model, one that relies on net positive cash today and the prospect of net positive cash in the next quarter. Spending cash as soon as they come in won't be good enough for the next group of investors, to further weed out the cash burning companies, they will look for a more conservative and cash positive businesses. This would impact consumer centric startup models where valuation comes from having a large userbase more. Companies that pursue businesses wallets will have a more favorable valuation, possibly a lot larger than what was previously thought. Looks like a good future but not so much for if you are building the next facebook. Those days of sustaining high user base with little to no paying customers are gone. Market will no longer place favorable valuation on such operations. This is just what I'm predicting of course.
nemo44x 12y ago
The trade is getting crowded - that's the feeling I get from some higher profile VC funds complaining recently. Their buy-in's are getting more expensive as more private money from non-traditional VC funds moves into the sector due to continued low interest rates, a feeling the public markets are getting close to topping and the fact that each round seems to be up, up, up. This is forcing higher prices for the traditional VC funds which in turn makes them more conservative with how their money is spent. And because the money is so easy to acquire the start-up's are blowing it quickly. They are competing for a limited set of "top" employees which is driving labor costs up to potentially unsustainable levels. Money won't always be so easy. Use it carefully. However, I see the top VC's getting a bit upset they have more competition to invest in tomorrows potentially massive businesses at discounted rates.
simonswords82 12y ago
Southparks - Go Fund Yourself episode about startups is timely: http://www.hulu.com/watch/691075 http://www.hulu.com/watch/691075

117 points by stevenj 12y ago

cyphunk 12y ago

Reminder Andreessen is the same person that says Snowden is a traitor.

thinkingkong 12y ago
What does that have to do with white hot burn rates?
- deleted 12y ago
  [deleted]
  - bdcravens 12y ago
    His firm's investments are the ultimate expression of opinion. So do we now question the validity of those investments? AirBnB, Coinbase, Digital Ocean, etc?
  - MichaelGG 12y ago
    If the only evidence on Marc was the Snowden info, sure, it might mean to discount his statements. But the rest of the information that we have of him as a VC totally outweighs his Snowden views to the point of irrelevancy.
nilkn 12y ago
Is this relevant? I don't agree with him about Snowden, but I don't see why his view on a political issue should be related to his view on burn rates. People can be wrong about some things and right about others. Everybody is wrong about some things -- but we cannot write off everything that everybody says, because sometimes people are right.
- cyphunk 12y ago
  My statement is entirely irrelevant to this topic but I sacrifice Karma because I think it is important that this person not be able to get away from his statements on Snowden. He entirely ignores policy discussions that may have lead to Snowden, placing all blame on Snowden for the potential impact of the NSA's actions on the wider IT industry. Please feel free to down vote me, it would be the logical conclusion.
  - declan 12y ago
    Without expressing a position on Marc A's views on Snowden, I look at it a bit like Hollywood celebrities' views on politics. I may (arguably) care what a celeb says about a topic where he/she has demonstrated expertise, such as the craft of acting, but I would not expect them to have special expertise on vaccination, firearm policy, foreign policy, climatography, intelligence agencies, etc. Similarly, I care quite a bit what Marc A. thinks about VCs and startups and cash burn rates: he's a smart guy with lots of experience who is willing to speak his mind, a rare character trait nowadays. You can appreciate and even applaud that without endorsing his views on the possible legal fate of an ex-government contractor.
todd3834 12y ago
https://yourlogicalfallacyis.com/ad-hominem https://yourlogicalfallacyis.com/ad-hominem
kenrikm 12y ago
As an interesting factoid that may be it is in no way related to the point Andreessen is making. Startups are warming themselves by burning piles of money and a harsh winter is coming.
- fleitz 12y ago
  The harsh winter in which you go back to making $120 K as a software engineer? In tech winter is not white walkers, it's a week of rain.
JustSomeNobody 12y ago
Don't. Just... don't. Keep it on topic. Edit: Why on Earth do I get down voted because I think it should be kept on topic??? Really???
- cyphunk 12y ago
  i upvoted
- SamReidHughes 12y ago
  You took the bait.
  - JustSomeNobody 12y ago
    Well, in that context, it makes sense that I would be downvoted!
bdcravens 12y ago
So does that discredit everything else he says? He very bullish on the disrupting capabilities of Bitcoin, for example.

austenallred 12y ago

Part of Marc Andreesen's tweetstorm yesterday said, "Worry." Andreesen hasn't said "worry" since 2008, so between that and the fact that he is generally very bullish and optimistic (to the point that when A16Z makes a bet they can put in an order of magnitude more money than other investors would), I began to stress out more than a little bit, especially having just closed our round. This may be anecdotal to my experience, but there was a time last year when the advice we were getting from mentors changed from, "Figure out how much cash you need to meet your next milestone and go raise that with a bit of cushion" to "Money is everywhere right now; get as much as you can and build the biggest war chest possible." Neither of these approaches are particularly wrong -- it would be weird to turn down money when it's on the table, but we opted to raise significantly less than what we could have raised, and keep our team where we wanted it instead of hiring enough people to become "sexy." Part of that is because we didn't raise at a super sexy Y-Combinator valuation and didn't want to give away the farm, and part of that was intentional. In short, we wouldn't know what to do with those people if we had them. To be clear, we still have plenty of money to get stuff done. We still can pay for all the tools we need, pay ourselves enough to not have to stress about cash, and can hire top talent. We just don't have more money than we know what to do with. We have three people working full-time on product right now, and that will grow to five in the next few months. If we had raised a $3 Million seed round (if you can still call that a "seed"), we would have felt compelled to go hire a dozen people. I can think of stuff we'd like to do, but it would probably be an absolute mess if we were building it all in parallel. There may be some companies for whom building a huge war chest makes sense, but the notion of raising money for the sake of raising money (because you can) seems odd and dangerous to me.

ianphughes 12y ago
You're correct that neither approach is wrong, especially since it might largely depend upon what type of business you're building. However, I think if you have no fear in your ability to raise funding, a business may relax in the real market discovery search. a super sexy valuation is always nice...but I think profitability is always in vogue. When I read this recent article[0] about what it MVP really means, it reminded me that some people in our industry forget that finding a market for your innovation is the lifeblood of long term success. [0]https://news.ycombinator.com/item?id=8356906 https://news.ycombinator.com/item?id=8356906

JustSomeNobody 12y ago

The problem is that nobody will listen. The reason nobody will listen is everyone has an "I better get mine while I can mentality" or a "Well, nobody else is going to listen, so I'll be at a disadvantage if I stop spending so much" mentality. If you look around and see the people you're competing with spending money like it's going out of style, you're going to do it too.

ameister14 12y ago
I disagree with that; people will still try to get theirs, but most people are smart enough to go for the PayPal model: get 100 million dollars right as the bubble pops and spend it wisely.

tadmilbourn 12y ago

I think this is the 4th major blog that I've seen just repost Andreesen's tweet stream. But, regardless of frothy times or not, the advice is solid. Keep your burn low. Run as lean as possible until you've figured out the business model.

at-fates-hands 12y ago
Shouldn't this be business 101? Plan for a downturn, use your resources wisely to avoid future disasters? Even after several market crashes, it's surprising to see so many businesses acting so recklessly with their capital. You would think being in the valley they would know better.
- fleitz 12y ago
  It depends on the market conditions. VC funded startups are not a place where I think that really makes any sense. Most billion dollar startups haven't even been through an entire business cycle. The VC market is not looking for consistent year over year 8% growth for the next 40 years. If they wanted that they would have bought index funds and told startups to fuck off.

brianstorms 12y ago

Why now? What about all the years startups have been burning cash? It's nothing new. Parties, entitlements like free meals for employees, fancy offices and furniture, too much travel, ads and PR spending, fancy hardware... when a startup has zero or negligible revenue, this kind of excessive spending is absurd. Not clear why Marc thinks it's time to sound a warning now.

jsonne 12y ago
>ads and PR spending These are growth activities as opposed to the others you list. The truth is many products never have just organic "viral" growth. They need ads, sales, or both to drive it.
- thedaveoflife 12y ago
  Some would argue all the things he mentioned are growth activities. Employees are a vital resource... taking care of them can be valuable and can attract new talent as well
- fleitz 12y ago
  And most importantly PR people to spin massive ad buys as organic growth.
latchkey 12y ago
So that when his dire warnings come true, he can tell you 'he told you so'... =)
randomdata 12y ago
Maybe he is seeing new investment opportunities on the near horizon, perhaps including the rise in interest rates, which is expected at the beginning of next year? Tech has been one of the few places for people to put their money for quite a while, but it doesn't mean that will hold true forever. Commodities started heating up around the same time as this round of the tech industry "boom", and has pretty much crashed now.
- 12y ago

7Figures2Commas 12y ago

It's quite amusing that the folks who have been investing in companies at exorbitant valuations and pushing for higher and higher growth as a prerequisite for additional funding are now worried that all the large sums they've aggressively invested are being spent on growth or things that create the appearance of growth. What did they expect? Comments like "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" are particularly interesting. The top-tier VC firms always talk about value add and active participation in their portfolio companies, and almost all of them look to have board representation in one form or another. But somehow one of the Valley's most prominent and connected VCs suggests that he doesn't know "who has been swimming without trunks on." Crazy.

clairity 12y ago
you make it sound like all the VCs got together and decided to make this happen. it's instead an artifact of the economic system we have. it's due to humans being involved, but not caused by individual humans. the car analogy would be the waves of stop-and-go traffic on a congested freeway, which is caused by variances in reaction times of people.
- 7Figures2Commas 12y ago
  > you make it sound like all the VCs got together and decided to make this happen. it's instead an artifact of the economic system we have. it's due to humans being involved, but not caused by individual humans. "Your poor returns are an artifact of the economic system we have. The collapse in the value of your investments with our firm is due to humans being involved, but this was not caused by individual humans." - Every hedge fund manager, mutual fund manager, venture capitalist > the car analogy would be the waves of stop-and-go traffic on a congested freeway, which is caused by variances in reaction times of people. I think the pusherman analogy is more apt: he who sells crack gets crackheads.

stealthlogic 12y ago

Can Confirm, I work at a start-up and see it on a regular basis.

dmritard96 12y ago

I am not really qualified to determine whether there is a bubble nor do I believe there is much value in speculating constantly about it. If there is one, valuations will drop, cash will be harder to get. Its not going to change the kind of work I like to pursue or the work that makers, builders and engineers do. It will probably change how much everyone is stuffing in their pockets, fine. One glaringly bizarre thing from my perspective is why anyone would listen to VCs about whether we are or are not in a bubble. I'm sure there are other perspectives, but it would seem someone heavily invested in seeing valuations go up wouldn't want to ring alarm bells... I think instead I would rather gauge things by the numbers which unfortunately, are probably not frequent enough to reach true statistical significance to not have incredibly large confidence ranges. That being said, some of the money flying by on crunchbase every morning is ludicrous.

smacktoward 12y ago
> Its not going to change the kind of work I like to pursue or the work that makers, builders and engineers do. As someone who lived through the original dot-com bubble, I would respectfully argue that this viewpoint is naïve. There were lots of "makers, builders and engineers" who had to settle for things other than the work they liked to pursue for many years after it popped.
- ianphughes 12y ago
  It took several years around silicon valley for things to get interesting again. I think I became a better developer during that time because it forced me to do/learn things I might never have. Nevertheless, yes, it TOTALLY changed the kind of work many of us were doing at the time.
clairity 12y ago
you listen to VCs about this because their whole job is to be sensitive to any risks to their investments, including systemic and idiosyncratic risk. they also have more breadth across the early venture market than most people. that said, they're guessing based on what they see, so it's not a perfect predictor. you're at least getting a glimpse of what they see via articles like this though.

snake_plissken 12y ago

"Companies that spend money on fancy offices..." Start-ups actually do this? What's the value in a nice office when you are not established? Does it help to attract talent? Is it one of those everyone else does it things?

spamizbad 12y ago
> Start-ups actually do this? What's the value in a nice office when you are not established? To play devil's advocate: You want to invest in big, fancy offices because... - People will be more likely to stay longer each day - It helps recruit talent - It helps instill the "Company Culture" - We have to look successful to be successful
- georgemcbay 12y ago
  Mostly the last one, IME. A misappropriation of the common "fake it til you make it" advice. The REALLY sad part is how many companies build out these offices that are expensive as hell, super nice inside and out and then (ignoring 40 years of studies) they structure them in large open floor plans designed to maximize noise and distraction and minimize the ability of developers to reach a useful state of flow.
  - techdragon 12y ago
    Yeah ... There's merit in having an open plan, but an open plan with no places to hide from the chaos is definitely going to be less efficient.

PublicEnemy111 12y ago

I do agree valuations are artificially inflated, but before you start drawing parallels to 1999 and every financial bubble of years past remember there are companies with real revenue streams. Sure, there are the snapchat valuations which have no basis, but do uber, airbnb, dropbox, and the like not deserve billion dollar valuations? Let's entertain the idea that we have another "catastrophic" event where every VC in the world wakes up to the realization that many of these companies are worthless. They can't liquidate their positions. The key idea here is that this is a private market. These startups can't go from $100 million -> $0 in a day. They will tighten their straps, let a few employees go, and extend that runway as long as they need to make revenue. IMHO the easy days will be over and now every founder will learn what its like to really run a startup - No more shots in the dark just because you can

araes 12y ago
The real concern isn't that belts will tighten. Its that something serious or startling will happen inducing panic. Its the worry that we're getting near a tipping point, where the balance is bad enough that a strong shock could send us over to dark days. On the second point, many of them absolutely can go from $100 million to $0 in a short time. Probably not the Dropbox(es) and Airbnb(s) of the world. But, those are only a tiny fraction of all startups. Imagine I'm only semi-major league, with good prospects, and I run a business being pushed to grow that's heavily leveraged on my financing rounds. I effectively keep payroll alive in quarter to half year cycles as we bring on more and more folks to fuel our growth. If the investors get spooked though, poof, it all collapses. They suddenly don't want my risk because all their charts and finance guys say the market outlook is bad. My actual income doesn't nearly cover my growth-oriented staff. I can't meet payroll, I can't pay my office rent, I can't keep the lights on. I have to let a ton of folks go which kills morale. I may struggle for a while with a skeleton staff to try and recover, I may even do so if I'm really good, but I've still had my legs taken out for a while.
- notastartup 12y ago
  You know what's funny is that I already see this happening in lot of startups in Vancouver. It's not only just startups, but video game studios too. Most often is that founders or executives burn cash for the sake of short term gains without investing in the future. The future where Google suddenly open sources the app you been charging six digits for, the future where your competitors end up with most of your clients. Not pretty but it's a cutthroat environment when you decide to be a pig in a Wall Street sense, not as a derogatory term. Pigs get slaughtered, always, in any market. As soon as someone with an excel spreadsheet says the risk far outweigh the rewards, they close shop and blame the ruling party or the local tech labor market as being 'too expensive'. I can imagine what the impact would seeing that happen in large numbers in SV, that would have a ripple effect.

il 12y ago

The solution is simple: always treat each round of funding like it's the last money you'll ever get.

FollowSteph3 12y ago

The fact that the tv show Silicon Valley exists, as much as I love it, really shows that were in a big boom right now. It's starting to feel a lot like the dot com era again.

FollowSteph3 12y ago
Also for those of you who haven't watched it, they continually make fun of the valuations, ideas, and funding available. So when I say exists I mean not just that it exists at all, but what it's really about also ;)

dang 12y ago

https://news.ycombinator.com/item?id=8369734 https://news.ycombinator.com/item?id=8369734

cs702 12y ago

VC-funded startups have always burned cash at prodigious rates. There's nothing inherently worrisome about that. What worries Andreessen, Gurley, Wilson, and other investors with decades of experience is that many startups today are burning cash by spending on things that do not increase business value -- and in some cases actually destroy it -- without worrying for even a moment about the possibility of running out of money. In Andreessen's words: "Lots of people, big shiny office, high expense base = Fake 'we’ve made it!' feeling. Removes pressure to deliver real results."[1] In Gurley's words: "I think that Silicon Valley as a whole or that the venture-capital community or startup community is taking on an excessive amount of risk right now. Unprecedented since '99. In some ways less silly than '99 and in other ways more silly than in '99. ... For the first time since '99, in the past 12 months, I've been in board meetings where the company says, 'Our only option is a 10-year lease,' at record pricing on a per square foot basis here in San Francisco, which is two or three times what the rent was three years ago. And so this is why it's all cyclical—because the landlords get greedy. They wouldn't do a 10-year lease if they thought that the rates were low. So they're implicitly telling you they want to lock this in for 10 years, which is its own form of greed because what happened in '99 is half the companies went bankrupt and they couldn't pay the lease over the 10-year period."[2] In Wilson's words: "I’ve pushed back on long term leases that I thought were outrageous, I’ve pushed back on spending plans that I thought were too aggressive and too risky, I’ve made myself a pain in the ass to more than a few CEOs."[3] Their worry, in short, is that many VC-funded startups are burning cash stupidly. -- [1] https://twitter.com/pmarca/status/515219433695223809 https://twitter.com/pmarca/status/515219433695223809 [2] http://online.wsj.com/articles/venture-capitalist-sounds-alarm-on-silicon-valley-risk-1410740054 http://online.wsj.com/articles/venture-capitalist-sounds-ala... [3] http://avc.com/2014/09/burn-baby-burn/ http://avc.com/2014/09/burn-baby-burn/

j_baker 12y ago
Honestly? I don't buy it. The VCs are the ones that have been pouring cash into these companies so they can blow it on obscenely expensive parties and offices. I think they're just trying to deflect criticism away from themselves and onto the startups. I mean, there have also been plenty of startups in the past that have blown money and built a product that nobody will pay for. And VCs just pour more cash in.

emgeee 12y ago

I'd just like to point out that the "why now?" question is probably related to a major shift in America's monetary policy. Since the 2008 crash, the Fed has been using a policy of "Quantitive Easing" (QE) to keep interest rates artificially low and thus encourage lending and spending. It's been known for while that the Feds were looking to end this policy sometime this year and it's looking like the end of October will be that time. Although the Feds seem to indicate that they won't actually raise interest rates until sometime next year, halting QE will have the affect of making less money available for lending. No one is really sure what is going to happen but this is an event that will affect the economy as a whole. To me, it's sounding like one of the industries that could be particularly affected by this policy is Tech and the result will be a market correction in startup valuations. Links! http://www.investopedia.com/terms/q/quantitative-easing.asp http://www.investopedia.com/terms/q/quantitative-easing.asp http://www.economist.com/blogs/economist-explains/2014/01/economist-explains-7 http://www.economist.com/blogs/economist-explains/2014/01/ec... http://www.forbes.com/sites/investor/2014/09/23/the-end-of-the-qe-era-is-upon-us-whats-next/ http://www.forbes.com/sites/investor/2014/09/23/the-end-of-t... http://blogs.wsj.com/moneybeat/2014/08/05/goldman-sachs-heres-what-will-happen-when-fed-raises-interest-rates/ http://blogs.wsj.com/moneybeat/2014/08/05/goldman-sachs-here...

acornax 12y ago
They've actually been scaling QE back for quite a while now.
- genwin 12y ago
  Is that a 1% drop every year? I don't know. I do know that interest rates on savings have stayed near zero.
  - refurb 12y ago
    No, the drop has been quite substantial. From what I can tell the Fed was buying $85B worth of bonds monthly at peak. It's down to ~$45B now and they are planning on a final $15B in October.

forgotAgain 12y ago

So the evaluation has been made that there is more to gain by protecting your reputation for the next boom-bust cycle then there is in wringing the last few million out of the current one.

notastartup 12y ago

So after such market correction in how investors value startups and software business in general, I suspect that there will be a starkly different valuation model, one that relies on net positive cash today and the prospect of net positive cash in the next quarter. Spending cash as soon as they come in won't be good enough for the next group of investors, to further weed out the cash burning companies, they will look for a more conservative and cash positive businesses. This would impact consumer centric startup models where valuation comes from having a large userbase more. Companies that pursue businesses wallets will have a more favorable valuation, possibly a lot larger than what was previously thought. Looks like a good future but not so much for if you are building the next facebook. Those days of sustaining high user base with little to no paying customers are gone. Market will no longer place favorable valuation on such operations. This is just what I'm predicting of course.

nemo44x 12y ago

The trade is getting crowded - that's the feeling I get from some higher profile VC funds complaining recently. Their buy-in's are getting more expensive as more private money from non-traditional VC funds moves into the sector due to continued low interest rates, a feeling the public markets are getting close to topping and the fact that each round seems to be up, up, up. This is forcing higher prices for the traditional VC funds which in turn makes them more conservative with how their money is spent. And because the money is so easy to acquire the start-up's are blowing it quickly. They are competing for a limited set of "top" employees which is driving labor costs up to potentially unsustainable levels. Money won't always be so easy. Use it carefully. However, I see the top VC's getting a bit upset they have more competition to invest in tomorrows potentially massive businesses at discounted rates.

simonswords82 12y ago

Southparks - Go Fund Yourself episode about startups is timely: http://www.hulu.com/watch/691075 http://www.hulu.com/watch/691075