14 ms·

VC-funded startups have always burned cash at prodigious rates. There's nothing inherently worrisome about that. What worries Andreessen, Gurley, Wilson, and

by 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.
- cblock811 12y ago
  > 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. No VC will ever say they invested in a company "so they can blow it". They invest so the company can spend on marketing/distribution, product, etc. Not on just-for-fun items. I work in a startup and we keep ourselves in check. If we weren't managing our finances it would be our fault first. Mayyyybe blame the VC's indirectly for who they invested in.
  - Fomite 12y ago
    > No VC will ever say they invested in a company "so they can blow it". They invest so the company can spend on marketing/distribution, product, etc. Not on just-for-fun items. They'll call it "Recruitment and Retention"
dkural 12y ago
Just tweeted about this last night: 1/ The data does not support that there is much of a start-up bubble - if you dig into Ernst & Young VC report: http://www.ey.com/Publication/vwLUAssets/EY_-_Venture_Capital_Insights_2Q14_-_August/%24FILE/Venture-Capital-Insights-2Q14-August.pdf http://www.ey.com/Publication/vwLUAssets/EY_-_Venture_Capita... 2/ The seed glut has subsided & declining for a while across both enterprise + consumer segments, in # of deals, and total $ (page 32) 3/ Meanwhile, VC exits from acquisitions at an all time high, $32.8B from first half of 2014, compared to $43B all of 2013 (page 17) 4/ All numbers are USA btw. Same is true for VC IPO exits, first half of 2014 $5.1B vs $8.2B for entire 2013. 5/ For US seed investments median $ raised in enterprise seg was highest in 04&05 for the past 10y. Post-05, its consistently below $1M mark 6/ Median amounts raised is lower for Series A & B as well, in the US and have been dropping since 2008 - page 46. 7/ In conclusion, substantially more exit $$ and lower median $ in. No bubble. If your CEO is spending too much money, it's your problem.
- foobarqux 12y ago
  > In conclusion, substantially more exit $$ and lower median $ in. That's a bizarre way of defining a bubble.
  - dkural 12y ago
    A16Z, Bill Gurley etc. saying startups are spending too much money, and in inefficient ways, and thus there is a burn-rate bubble. I'm running with their definition and saying that, if 1) VCs give less money to companies - i.e. their max is spending is capped, 2) the companies are able to exit for more $, this issue is certainly not showing up in the data.
    - api 12y ago
      Bubble is perhaps an overused term. It has a specific meaning: an investment feedback loop driven by herd effects coupled with a hidden underlying reality of diminishing returns. There may be a bit of that, but the thing I hear Andressen and others complaining about is like you say, burn. In that case it's a case of a liquor store owner complaining about drunkenness. VC money fuels a culture of hyper-deflationary short term "dumping" of free stuff into the market to fuel short term exponential growth. This is basically killing any opportunity for revenue anywhere but the extreme enterprise high end-- where costs are highest, sales cycles are slow, and huge teams with high burn rates are needed to address the market. Rinse and repeat. I'm not sure that's a bubble... More like a tragedy of the commons.

by cs702 12y ago

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.

cblock811 12y ago
> 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. No VC will ever say they invested in a company "so they can blow it". They invest so the company can spend on marketing/distribution, product, etc. Not on just-for-fun items. I work in a startup and we keep ourselves in check. If we weren't managing our finances it would be our fault first. Mayyyybe blame the VC's indirectly for who they invested in.
- Fomite 12y ago
  > No VC will ever say they invested in a company "so they can blow it". They invest so the company can spend on marketing/distribution, product, etc. Not on just-for-fun items. They'll call it "Recruitment and Retention"

dkural 12y ago

Just tweeted about this last night: 1/ The data does not support that there is much of a start-up bubble - if you dig into Ernst & Young VC report: http://www.ey.com/Publication/vwLUAssets/EY_-_Venture_Capital_Insights_2Q14_-_August/%24FILE/Venture-Capital-Insights-2Q14-August.pdf http://www.ey.com/Publication/vwLUAssets/EY_-_Venture_Capita... 2/ The seed glut has subsided & declining for a while across both enterprise + consumer segments, in # of deals, and total $ (page 32) 3/ Meanwhile, VC exits from acquisitions at an all time high, $32.8B from first half of 2014, compared to $43B all of 2013 (page 17) 4/ All numbers are USA btw. Same is true for VC IPO exits, first half of 2014 $5.1B vs $8.2B for entire 2013. 5/ For US seed investments median $ raised in enterprise seg was highest in 04&05 for the past 10y. Post-05, its consistently below $1M mark 6/ Median amounts raised is lower for Series A & B as well, in the US and have been dropping since 2008 - page 46. 7/ In conclusion, substantially more exit $$ and lower median $ in. No bubble. If your CEO is spending too much money, it's your problem.

foobarqux 12y ago
> In conclusion, substantially more exit $$ and lower median $ in. That's a bizarre way of defining a bubble.
- dkural 12y ago
  A16Z, Bill Gurley etc. saying startups are spending too much money, and in inefficient ways, and thus there is a burn-rate bubble. I'm running with their definition and saying that, if 1) VCs give less money to companies - i.e. their max is spending is capped, 2) the companies are able to exit for more $, this issue is certainly not showing up in the data.
  - api 12y ago
    Bubble is perhaps an overused term. It has a specific meaning: an investment feedback loop driven by herd effects coupled with a hidden underlying reality of diminishing returns. There may be a bit of that, but the thing I hear Andressen and others complaining about is like you say, burn. In that case it's a case of a liquor store owner complaining about drunkenness. VC money fuels a culture of hyper-deflationary short term "dumping" of free stuff into the market to fuel short term exponential growth. This is basically killing any opportunity for revenue anywhere but the extreme enterprise high end-- where costs are highest, sales cycles are slow, and huge teams with high burn rates are needed to address the market. Rinse and repeat. I'm not sure that's a bubble... More like a tragedy of the commons.