>If you are in Silicon Valley and your customers are mostly well-paid consumers with no free time, or other venture-backed startups, well, I’d be worried.
That's the most beautifully I've heard this thought articulated. I constantly hear people in SV talk publically talk about how they're living years in the future due to getting services from startups that haven't yet hit other markets. These people are very wealthy and very short on free time; they incorrectly assume the rest of the world is as well. The reason Uber became so successful was because it became cheaper than a cab in most major markets with world class service. You have to really dig deep to justify most other on demand startups having the ability to jump the shark and it's because they don't have a plebeian offering.
The idea behind "living in the future" is that products generally get cheaper and easier to use as early adopters contribute feedback, founders learn more about their market, and outside capital puts more minds to work on the problem. Hence, products that are only for "wealthy folks in SV with no free time" eventually become cheap enough that everybody can use them.
Uber certainly followed this growth curve - it started out as a service to call a black car to drive you around town, something that even the founders called a luxury for 1%ers. So did computers as a whole ("I think there is a world market for maybe five computers." - Thomas Watson, 1943), smartphones (at $600, the iPhone was considered a toy for luxury consumers when it came out), Facebook (initially only for Harvard University undergraduates), and LinkedIn (started with wealthy professionals who had lots of contacts).
It doesn't mean all startup ideas for wealthy, time-poor consumers will cross the chasm, but it seems to be a lot more feasible to go from wealthy consumers to poor ones than the reverse.
(Interestingly, it's the opposite story with B2B startups, where it's easier to add functionality than cut prices or improve ease of use. Hence the low end eating the high end, per Innovator's Dilemma. Actually, this effect in B2B markets may be behind the cost-reduction effect in B2C markets, as consumer firms start finding cheaper alternative suppliers that have recently moved up-market.)
I agree with that, but I also have the experience of visiting my sister in 1995 and asking her if she understood the funny string at the bottom of a Toyota commercial that was a URL. She did not. And her only email address was one she had for work, because everyone else either wrote letters or talked with her on the phone.
The point I'm trying to make is that many things of the current wave will pass into obscurity and perhaps ridicule, however some core concepts may emerge as foundational for the next wave. Further, experience with those concepts in the Bay Area may inform what is core and what isn't, and so launch better products.
What do you mean by jump the shark there? Jumping the shark is normally a bad thing. It is a sign of the beginning of the end for a TV show or franchise.
Yes - much of the world is indeed willing to wait an hour to save a few dollars.
One lesson from 2001 is that Startups who Serve Startups tend to get hurt in the downturn as their customer are unable to pay them. Case in point Exodus. [0] This is especially relevant given the "Build something you want to use yourself" ethos.
The flip side is that if you make something that saves General Mills, Coca-Cola and P&G money, you'll always have a buyer.
The reason Uber became so successful was because it became cheaper than a cab in most major markets with world class service
I'm not sure that "cheaper than a cab" had anything to do with it. You're the first person I've ever heard to cite pricing as a reason why people use Uber; everybody I've spoken to has cited the quality of service as the reason.
What goes unspoken is how tiny the overall effect of this will be.
Yes, it will bring some concentrated pain to investors, CEOs, and employees of lots of companies. But how many people will be genuinely, life-alteringly affected by this? 1000? Maybe a few thousand? 1-2% of SF's population? By way of comparison Google has what, 50,000 employees?
I keep having to remind myself that the big companies are the elephants in the room compensation-, real estate- and traffic-wise. They employ hundreds of thousands of people and pay billions of dollars annually in wages. As much as I'd like an affordable place to live, none of this will move the needle that much for the average Bay Area resident.
Google has ~60,000 employees worldwide. From various online sources, they have +/- a few thousand who live in San Francisco. Twitter and Yelp and Square and Dropbox and AirBnB and the other unicorns each employ somewhere in the mid hundreds to low thousands (e.g. 500-2,000) -- again, worldwide. The local numbers are lower.
I don't know reliable this [1] is, but it suggests that there are ~50,000 tech employees total in SF, and the top 50 companies employ about 30,000 of those. So the big players have a lot of people, but it's not as dramatically skewed as you're thinking -- maybe 40% of tech employees work at smaller companies. That passes the smell test for me.
Even assuming that the big players wouldn't lay anyone off (they would; they always do) That's more than enough to make an economic dent in a downturn.
There are hints of systemic risk. Look at what's happening in Financial Services. Many firms (example: Deutsche Bank) are trading below their bottom in the financial crisis. A banking crash will have a big impact on real estate.
Of course, you probably need that decent advice because you listened to your VCs' previous decent advice in better economic conditions - "don't worry about profit, just grow grow grow as fast as you can."
The cynical side of me thinks that it's this flip-flopping between two extremes that ends up disproportionately benefitting investors, and that entrepreneurs would be better served by always assuming economic conditions will change and preparing accordingly.
I am a cynic about VCs "Talking their books" but this is a little different:
- The stock market is off 20%.
- Very few IPOs.
- Many hot IPOs are under the offering price.
- Most of the public market investors that have entered late in the game (Fidelity, etc) are marking down their positions, and holding off on new investments.
Every solid company should have a "What would we need to do to get cashflow positive?" scenario. It may damage longterm valuation (cutting growth does that) but at least it gives the existing investors an option: "We can enter survival mode and do X, or you can fund us with Y, and we can do Z"
If memory serves: Heidi Roizen had one of the best ROI track records during the Dot Bomb era, having exited most of her portfolio just before. Meanwhile, a friend mentioned that Benchmark had lost a whole fund. I don't have numbers in front of me and the Benchmark comment was hearsay -- so, please correct if I'm wrong. Point is: that some VCs were better at timing than others during a down cycle; I would pay very close attention to what Roizen has to say.
The cynical side of me wonders if all this is "helpful advice" from VCs is just designed to bring valuations down to earth.
I'm not really into conspiracy theories as a rule, but I will admit to having a similar thought. At the last, I find myself wondering if advice from VC's - especially regarding something like valuation - doesn't inherently tend to be self-serving on their part.
Remember, the objectives of a VC and the objectives of an entrepreneur aren't always aligned.
That said, you can't really argue with this part:
You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time.
When the market takes off again, I'm sure you'll see the flip-side posts from VCs, explaining how startups need to push for higher valuation and better terms, proving you wrong 8-).
On a related note, now's probably a good time to remind people of pg's famous "How Not To Die" essay, which is at least tangentially related to the topic at hand.
You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time. If you don’t, you have to get money from someone else to keep going. And, as I just said, that’s going to be way harder now. I’m embarrassed writing this because it is so flipping simple, yet it is amazing to me how many entrepreneurs are still talking about their plans to the next round. What if there is no next round? Don’t you still want to survive?
Yes, some companies are ‘moon shots’ (DFJ has a fair number of those in our portfolio) where this is simply not possible. But for the vast majority of startups, this should be possible.
What is the point of calling them start ups anymore. Remove the high risk/high reward aspect and new companies are simply small businesses that receive small business loans from banks. A lot of the "wow" factor of the startup ecosystem was the mind boggling user growth/high valuation/massive losses phenomenon that a few companies weathered through to IPO and monetization.
I think I saw someone advocating for better terminology on HN recently. I vote to call any close-to-profitable <2 yr old company a small business. Likewise, any portfolio that holds mostly safe small business loans and equity should simply be called a bank.
Leave the unicorn/VC/startup lingo in the past, or use it to describe actual risk profiles, and things will be a lot less confusing.
"If you show revenue, people will ask 'HOW MUCH?' and it will never be enough. The company that was the 100xer, the 1000xer is suddenly the 2x dog. But if you have NO revenue, you can say you're pre-revenue! You're a potential pure play... It's not about how much you earn, it's about how much you're worth. And who is worth the most? Companies that lose money!"
Can you really not tell the difference between the corner laundromat (a profitable small business) and Atlassian (a startup which was profitable for most of its history)?
Startups are companies designed to grow fast. [1] Frequently, that means spending more than comes in but it's definitely not a prerequisite.
Likewise, there are plenty of small businesses which take years to reach profitability (some never do)—that doesn't magically make them a startup.
Aspiring towards profitability does not mean abandoning plans for growth (if anything, it often means doubling down on revenue growth). Small businesses don't double in size, startups do. Very little of what's relevant to my mom's small landscaping business is relevant to a technology startup, even if both are aiming to be profitable.
What benefit do derive from purposefully distorting terminology?
Doesn't matter what they're called. If you're running a startup right now and have the option to be profitable vs pursue expensive growth, OP says now is the time to choose profitability. The funding climate has changed and hence risk/reward ratio needs to be recalibrated. Whether this climate change is real or not is maybe up for debate but I'd guess that in most cases profitability is not orthogonal to growth. As a side note, getting profitable while maintaining growth would seem to put you in the best possible position to pursue more funding if you wanted it.
Edit: I'll also add that according to pg's "Startup = Growth" [0], profitability doesn't really come into the definition. Hence the existence of bootstrapped startups.
I started writing this then got distracted. Everyone not only needs to collectively define what a "startup" is, but more importantly, don't blow sunshine up my ass by telling me to act like an SMB. Because I don't run into many investors who get excited about my company's reasonable P&L. There's a significant difference between a company running like a small biz and a hyper-growth-at-all-costs one. It would be quite helpful to know which investors are interested in each, all the BS put to the side.
edit: I do realize (and hope) that the current financial environment helps to bring everyone back down to earth a bit.
A company that raises millions of dollars of equity funding to try to corner a market is not a "small business", and it's certainly not a smaller business for having non-trivial revenues so that any follow-on rounds are reinvested in expansion rather than survival.
The difference between a startup and a new small business is novelty. A startup is innovating, a small business is not. More so if a startup is establishing or growing a market versus competing in an existing market.
Granted, a lot of tech "startups" in SV are not innovating and should probably not be classified as true startups, nevertheless, that's the differentiating factor.
First, The idea of risk-reward trade-off is stupid. (This is demonstrated in my footnote.)[1]
Second: startups aren't startups because they have a high risk of failure. Simply because they expect to be much bigger in 24 months than they are today.
Someone making an app they want to sell on Android and iOS for $2 to all of the people who use smart phones is not a "small business", it's a startup. Why? Because there are 3 billion people on mobile phones.
At Internet-scale, there's really nothing between the two. There's no such thing as a mom and pop mobile game. Doesn't exist. If it's a mobile game, everyone can play it. Either you're in business around it or you aren't.
if you're in business on the world stage, you're not a small business, you're a startup. the only thing that matters is whether you would like to address the world's population or not.
i.e. whether you're "trying" (to hyper-grow.)
If you're trying to be much bigger later than you are now (by many orders of magnitude) then you're a startup. By the same token, anyone who has a plan to eventually make a million of anything is a startup. doesn't matter where you are today.
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[1] You can show yourself that risk/reward is not true. Suppose that I transport from the future to today the entire faculty of MIT and Cal Tech, who know all of the major technology breakthroughs that have happened between our time and theirs. It stands to reason that they are worth more the farther from the future you transport them. 12 months is worth less than 24 months is less than 72 months is a lot less than 70 years.
Does it stand to reason that the more value they're bringing with themselves, the higher the risk of failure?
No, of course not. It's just objectively higher value. So stop talking about risk/reward, I've just proven that it doesn't exist. The only thing that matters is the value you're bringing to the table. You don't automatically run a higher risk of failure if you bring the world $1 billion of value versus bringing the world $100,000 of value. Doesn't exist. No law makes this the case. Zuckerberg didn't suddenly increase his risk by 1,000,000 when he decided to target a million times as many people (the world's population versus Harvard's student body). It's just false. You don't need to go through a million zuckerbergs to get another facebook. You don't even have to go through fifty thousand of them. You just need people targeting the world's population who know what they're doing. This is why VC works.
> You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time. If you don’t, you have to get money from someone else to keep going. And, as I just said, that’s going to be way harder now. I’m embarrassed writing this because it is so flipping simple, yet it is amazing to me how many entrepreneurs are still talking about their plans to the next round. What if there is no next round? Don’t you still want to survive?
Sort of reminds me of the conversation with a senior developer I had the first time I joined a startup and my first company lunch at my first job.
Me: "So, we just spend whatever money the company makes"
him: "Correct"
Me: "what if the company is burning all the money it makes to grow as fast as possible, and they can't raise money anymore?"
him: "that will never happen"
Me: (concerned) "so the company is constantly breaking even"
him: "sometimes"
ME: (shocked) "so the company loses money some year, yet raises more money year after year so it can lose more money the following year than the last"
him: (annoyed) "you studied economics haven't you? you dont get it? everyone knows this is how you do startups what did they teach you in that shithole?"
(everyone else laughs)
end scene.
That was 4 years ago. I checked the glassdoor comments and boy I didn't think a 2.1 rating was possible on glassdoor because that would pretty much scare off anyone in the job market....and yup the company is going under exactly for the reasons I asked 4 years ago but was ridiculed at my 'ignorance'
another one bites the dust for vancouver's brain drained tech scene. thank god I won't have to work here again in the near future.
What? One of the advice is to get cash flow positive with the money you already have. Isn't that basic knowledge? You can't spend more than you have and you only ask for other people's money when you don't need it. Idk, maybe this is an american thing, with all the capital you have but here (Portugal) you can't get series A funding without being at least cash flow positive, no way.
The American VC market has been saturated and everyone with a spare dollar has been throwing cash into the market trying to find the next Google/Facebook/Twitter. A lot of institutional money started looking at the VC market as a way to maintain a 7-10% rate of return when traditional investment vehicles started going sideways.
You could get funding for a portable neighborhood pony washing service if you built an iPhone app backed by an AWS service and called it Uber for Pony Washers (or some such)if you looked hard enough.
As the article points out, this is changing. The boom part of the boom-bust equation is starting to flatline with IPOs happening less frequently and for less money and the institutional investors who get in later in the game to buy out the initial VCs being more gun shy about investing.
Net result for the market? Startups need to focus on being a functioning business generating positive cash flow rather than a money pit that occasionally generates a lottery ticket. Not everyone will succeed, but the changing economic climate will push a lot of the fair weather pony washing app founders out and leave the more seriously business minded people which should result in a new wave of solid companies capable of handling more strenuous economic conditions.
I think the startup world has become somewhat of a fork of how real companies should be built. Over the last few years companies have been investing into "scaling" and getting traction with no real revenue to substantiate any of the growth. That to me is backwards, and why those startups are fearing for their lives now.
Companies should be built with revenue (and profit) in mind, and in most cases those are the ones that thrive and succeed.
DFJ has had some great exits over the years. But looking at their current active portfolio, they're a little exposed.... and certainly not investing in any early rounds.
It's not surprising to hear they plan to slow down investing. But that's not necessarily a reflection of the overall market.
So the above is obviously written through a VC lens. Through an entrepreneur's lens - who also survived the dot-com bust (at etoys.com) and has since run several failed and now successful businesses - I'd add the following:
The most valuable advice in this post reminds me of Marc A's awesome blog entry. Quote:
"Companies that have a retention problem usually have a winning problem. Or rather, a "not winning" problem."
In my opinion winning is, ultimately, measured by how much cash you can generate. We stopped thinking about an exit a long time ago while in the deepest darkest part of the valley of the shadow of startup death. We were forced to do it because we ran out of money and no one cared about us. Then we started focusing completely on our customers and our income statement. As soon as we did that, amazing things started happening.
Cash, in this case and in this climate, is king. Or net income to be specific. If you're able to generate large amounts of cash and keep a lot of it, not a heck of a lot else matters. From my perspective the only problems that really remain is giving your team a great quality of life and serving your customers.
Cash takes away issues like the board bugging you, investors breathing down your neck or (worst case) wanting to play CEO, hiring problems, retention problems, funding, what business are we in problems, product problems (you're obviously killing it, so do more of that!), exec hires, issues with rebellious execs (you're killing it, so you're implicitly right) etc.
When you "go for growth" (numbers growth, not revenue) you give up all of the above and put yourself as a CEO or exec in a precarious position. Your arguments are no longer that defendable because growth means jack shit unless it generates cash or will very clearly ultimately generate cash.
Think about the CEO of Giphy who just raised something like $50M at something like a $300M valuation. It's like my wife and co-founder says: Doing that you turn a cash problem into a much bigger cash problem. I'd add that you also now have less equity and less influence. For the investors it's awesome - the biz will likely bulk up on talent and worst case will exit as a talent acquisition at $2M per engineer and the investors (who get paid first) will recover perhaps everything that way with little left over.
If I was early stage in this environment I'd do the following:
Stop dreaming about a Deus ex Machina that will reach down and save your sorry ass. Stop fantasizing about acquisitions. If you don't you're going to inadvertently turn acquirers into your target market instead of your real customers. And humans aren't good at focusing on two goals at once.
Then do absolutely everything you can to generate sustainable cash. Usually this means (if you're early stage) discovering who your customers are and what business you're in or (if you're later stage) serving the heck out of your customers and making sure that what you provide is worth more than each dollar they spend to acquire it. Then do more of that. If you're successful doing this, rather than raising money, you'll notice that the really big scary problems simply go away.
When a market like this turns, in order to survive, it is critical to redefine what success is going to look like for you – and your employees, and your investors, and your other stakeholders. Holding on to ‘old’ ideas about IPO dates, large exits and massive new up rounds can ultimately be demotivating to your team.
.
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Stop worrying about morale: Yes, you heard me right. I can’t tell you how many board meetings I’ve been in where the CEO is anguished over the impacts on morale that cost cutting or layoffs will bring about.
With these prospects, I wonder how will these CEOs keep all those underpaid and highly skilled young laborers working for him/her now?
The whole bit about "don't worry about morale"... Some engineers are replaceable, not all. If things get bad and you lose early/key people, there is a non-negligible hit. But, I think Ben and Mark at A2Z outlined a strategy harkening back to the last big hit -- build up the reserves in the bunker. If you think things will be bumpy for X-months out and you aren't cash flow positive, get the requisite amount in the bank ASAP.
"The sky is falling ..." No, it isn't. All there is, is that there seems to be less appetite for endlessly unprofitable ventures that get away with dismissing the idea that they should be bringing in more cash than they spend within a reasonable time frame. Furthermore, is the entire VC scene actually needed? Lots of startups do not make use of their services and are doing absolutely fine ...
During late nineties, my startup was providing technology consulting/development service to other dot-com startups. Demand for our consulting service was so high that our company resort to auction kind of process to select customers. Then dot-com bust happened, 97% of our customers had gone out of business, quickly, very quickly. Obviously, our company fortunes dwindled and never recovered from that.
I think people are ignoring the huge cash reserves that Google and Apple, among others, have. I fully expect more acquisitions if VC funding drops out.
Based on the rest of the comments here deriding the growth over revenue strategy I think it's very important to bring up that risk is proportional to reward, and by definition any business that can be cash flow positive early on is unlikely to be very risky - and thereby not really what VCs are in this business for.
This is based on the "Techcrunch" concept that being successful and continuing business for a startup depends heavily on external funds.
That couldn't be farther from the truth, for a real startup with a real business. Maybe growth will not be as fast without VC funds, but I don't think real businesses will notice shrinking investments.
>If you are in Silicon Valley and your customers are mostly well-paid consumers with no free time, or other venture-backed startups, well, I’d be worried.
This is the most shallow statement I have read this year. The needs of the rich today would be needs of less rich tomorrow. The author clearly missed out on the whole American dream concept. I'm sure some people felt the same way about refrigerator and cars.
You'd almost never create a market segment starting with the bottom end. Almost every product you touch, including the very screen you're staring at, was once made for the 1%.
And almost always the version for the 1% is expensive, won't see a version 2, and is a one time sale. It doesn't matter if your initial rich/busy customers are going out of business. If you found a need you're fulfilling, you will with a fairly high probability will continue to find customers through the generation.
Dot com bust did not kill Network Solutions/Verisign. Very, very important.
[+] [-] dsugarman|10 years ago|reply
That's the most beautifully I've heard this thought articulated. I constantly hear people in SV talk publically talk about how they're living years in the future due to getting services from startups that haven't yet hit other markets. These people are very wealthy and very short on free time; they incorrectly assume the rest of the world is as well. The reason Uber became so successful was because it became cheaper than a cab in most major markets with world class service. You have to really dig deep to justify most other on demand startups having the ability to jump the shark and it's because they don't have a plebeian offering.
[+] [-] nostrademons|10 years ago|reply
Uber certainly followed this growth curve - it started out as a service to call a black car to drive you around town, something that even the founders called a luxury for 1%ers. So did computers as a whole ("I think there is a world market for maybe five computers." - Thomas Watson, 1943), smartphones (at $600, the iPhone was considered a toy for luxury consumers when it came out), Facebook (initially only for Harvard University undergraduates), and LinkedIn (started with wealthy professionals who had lots of contacts).
It doesn't mean all startup ideas for wealthy, time-poor consumers will cross the chasm, but it seems to be a lot more feasible to go from wealthy consumers to poor ones than the reverse.
(Interestingly, it's the opposite story with B2B startups, where it's easier to add functionality than cut prices or improve ease of use. Hence the low end eating the high end, per Innovator's Dilemma. Actually, this effect in B2B markets may be behind the cost-reduction effect in B2C markets, as consumer firms start finding cheaper alternative suppliers that have recently moved up-market.)
[+] [-] ChuckMcM|10 years ago|reply
The point I'm trying to make is that many things of the current wave will pass into obscurity and perhaps ridicule, however some core concepts may emerge as foundational for the next wave. Further, experience with those concepts in the Bay Area may inform what is core and what isn't, and so launch better products.
[+] [-] glomph|10 years ago|reply
[+] [-] mathattack|10 years ago|reply
One lesson from 2001 is that Startups who Serve Startups tend to get hurt in the downturn as their customer are unable to pay them. Case in point Exodus. [0] This is especially relevant given the "Build something you want to use yourself" ethos.
The flip side is that if you make something that saves General Mills, Coca-Cola and P&G money, you'll always have a buyer.
[0] https://en.wikipedia.org/wiki/Exodus_Communications
[+] [-] lowglow|10 years ago|reply
[+] [-] cperciva|10 years ago|reply
I'm not sure that "cheaper than a cab" had anything to do with it. You're the first person I've ever heard to cite pricing as a reason why people use Uber; everybody I've spoken to has cited the quality of service as the reason.
[+] [-] eldavido|10 years ago|reply
Yes, it will bring some concentrated pain to investors, CEOs, and employees of lots of companies. But how many people will be genuinely, life-alteringly affected by this? 1000? Maybe a few thousand? 1-2% of SF's population? By way of comparison Google has what, 50,000 employees?
I keep having to remind myself that the big companies are the elephants in the room compensation-, real estate- and traffic-wise. They employ hundreds of thousands of people and pay billions of dollars annually in wages. As much as I'd like an affordable place to live, none of this will move the needle that much for the average Bay Area resident.
[+] [-] timr|10 years ago|reply
I don't know reliable this [1] is, but it suggests that there are ~50,000 tech employees total in SF, and the top 50 companies employ about 30,000 of those. So the big players have a lot of people, but it's not as dramatically skewed as you're thinking -- maybe 40% of tech employees work at smaller companies. That passes the smell test for me.
Even assuming that the big players wouldn't lay anyone off (they would; they always do) That's more than enough to make an economic dent in a downturn.
[1] http://www.bizjournals.com/sanfrancisco/blog/2014/02/jobs-at...
[+] [-] mathattack|10 years ago|reply
[+] [-] dasil003|10 years ago|reply
[+] [-] duaneb|10 years ago|reply
[deleted]
[+] [-] tarr11|10 years ago|reply
[+] [-] gyardley|10 years ago|reply
Of course, you probably need that decent advice because you listened to your VCs' previous decent advice in better economic conditions - "don't worry about profit, just grow grow grow as fast as you can."
The cynical side of me thinks that it's this flip-flopping between two extremes that ends up disproportionately benefitting investors, and that entrepreneurs would be better served by always assuming economic conditions will change and preparing accordingly.
[+] [-] mathattack|10 years ago|reply
- The stock market is off 20%.
- Very few IPOs.
- Many hot IPOs are under the offering price.
- Most of the public market investors that have entered late in the game (Fidelity, etc) are marking down their positions, and holding off on new investments.
Every solid company should have a "What would we need to do to get cashflow positive?" scenario. It may damage longterm valuation (cutting growth does that) but at least it gives the existing investors an option: "We can enter survival mode and do X, or you can fund us with Y, and we can do Z"
[+] [-] musesum|10 years ago|reply
[+] [-] mindcrime|10 years ago|reply
I'm not really into conspiracy theories as a rule, but I will admit to having a similar thought. At the last, I find myself wondering if advice from VC's - especially regarding something like valuation - doesn't inherently tend to be self-serving on their part.
Remember, the objectives of a VC and the objectives of an entrepreneur aren't always aligned.
That said, you can't really argue with this part:
You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time.
[+] [-] davidjgraph|10 years ago|reply
[+] [-] tdaltonc|10 years ago|reply
[+] [-] davemel37|10 years ago|reply
[+] [-] draw_down|10 years ago|reply
Contrarian takes aren't necessarily correct by the virtue of their contrarianism.
[+] [-] mindcrime|10 years ago|reply
http://www.paulgraham.com/die.html
[+] [-] roymurdock|10 years ago|reply
Yes, some companies are ‘moon shots’ (DFJ has a fair number of those in our portfolio) where this is simply not possible. But for the vast majority of startups, this should be possible.
What is the point of calling them start ups anymore. Remove the high risk/high reward aspect and new companies are simply small businesses that receive small business loans from banks. A lot of the "wow" factor of the startup ecosystem was the mind boggling user growth/high valuation/massive losses phenomenon that a few companies weathered through to IPO and monetization.
I think I saw someone advocating for better terminology on HN recently. I vote to call any close-to-profitable <2 yr old company a small business. Likewise, any portfolio that holds mostly safe small business loans and equity should simply be called a bank.
Leave the unicorn/VC/startup lingo in the past, or use it to describe actual risk profiles, and things will be a lot less confusing.
[+] [-] sharkweek|10 years ago|reply
https://www.youtube.com/watch?v=BzAdXyPYKQo
[+] [-] morgante|10 years ago|reply
Startups are companies designed to grow fast. [1] Frequently, that means spending more than comes in but it's definitely not a prerequisite.
Likewise, there are plenty of small businesses which take years to reach profitability (some never do)—that doesn't magically make them a startup.
Aspiring towards profitability does not mean abandoning plans for growth (if anything, it often means doubling down on revenue growth). Small businesses don't double in size, startups do. Very little of what's relevant to my mom's small landscaping business is relevant to a technology startup, even if both are aiming to be profitable.
What benefit do derive from purposefully distorting terminology?
[1] http://www.paulgraham.com/growth.html
[+] [-] rgbrgb|10 years ago|reply
Edit: I'll also add that according to pg's "Startup = Growth" [0], profitability doesn't really come into the definition. Hence the existence of bootstrapped startups.
[0]: http://www.paulgraham.com/growth.html
[+] [-] Disruptive_Dave|10 years ago|reply
edit: I do realize (and hope) that the current financial environment helps to bring everyone back down to earth a bit.
[+] [-] notahacker|10 years ago|reply
[+] [-] InclinedPlane|10 years ago|reply
Granted, a lot of tech "startups" in SV are not innovating and should probably not be classified as true startups, nevertheless, that's the differentiating factor.
[+] [-] andreasklinger|10 years ago|reply
given that more and more startups go niche + traction first and often are ok w/ staying there there is also the need for a different finance model imo
[+] [-] logicallee|10 years ago|reply
First, The idea of risk-reward trade-off is stupid. (This is demonstrated in my footnote.)[1]
Second: startups aren't startups because they have a high risk of failure. Simply because they expect to be much bigger in 24 months than they are today.
Someone making an app they want to sell on Android and iOS for $2 to all of the people who use smart phones is not a "small business", it's a startup. Why? Because there are 3 billion people on mobile phones.
At Internet-scale, there's really nothing between the two. There's no such thing as a mom and pop mobile game. Doesn't exist. If it's a mobile game, everyone can play it. Either you're in business around it or you aren't.
if you're in business on the world stage, you're not a small business, you're a startup. the only thing that matters is whether you would like to address the world's population or not.
i.e. whether you're "trying" (to hyper-grow.)
If you're trying to be much bigger later than you are now (by many orders of magnitude) then you're a startup. By the same token, anyone who has a plan to eventually make a million of anything is a startup. doesn't matter where you are today.
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[1] You can show yourself that risk/reward is not true. Suppose that I transport from the future to today the entire faculty of MIT and Cal Tech, who know all of the major technology breakthroughs that have happened between our time and theirs. It stands to reason that they are worth more the farther from the future you transport them. 12 months is worth less than 24 months is less than 72 months is a lot less than 70 years.
Does it stand to reason that the more value they're bringing with themselves, the higher the risk of failure?
No, of course not. It's just objectively higher value. So stop talking about risk/reward, I've just proven that it doesn't exist. The only thing that matters is the value you're bringing to the table. You don't automatically run a higher risk of failure if you bring the world $1 billion of value versus bringing the world $100,000 of value. Doesn't exist. No law makes this the case. Zuckerberg didn't suddenly increase his risk by 1,000,000 when he decided to target a million times as many people (the world's population versus Harvard's student body). It's just false. You don't need to go through a million zuckerbergs to get another facebook. You don't even have to go through fifty thousand of them. You just need people targeting the world's population who know what they're doing. This is why VC works.
[+] [-] jorgecurio|10 years ago|reply
Sort of reminds me of the conversation with a senior developer I had the first time I joined a startup and my first company lunch at my first job.
Me: "So, we just spend whatever money the company makes"
him: "Correct"
Me: "what if the company is burning all the money it makes to grow as fast as possible, and they can't raise money anymore?"
him: "that will never happen"
Me: (concerned) "so the company is constantly breaking even"
him: "sometimes"
ME: (shocked) "so the company loses money some year, yet raises more money year after year so it can lose more money the following year than the last"
him: (annoyed) "you studied economics haven't you? you dont get it? everyone knows this is how you do startups what did they teach you in that shithole?"
(everyone else laughs)
end scene.
That was 4 years ago. I checked the glassdoor comments and boy I didn't think a 2.1 rating was possible on glassdoor because that would pretty much scare off anyone in the job market....and yup the company is going under exactly for the reasons I asked 4 years ago but was ridiculed at my 'ignorance'
another one bites the dust for vancouver's brain drained tech scene. thank god I won't have to work here again in the near future.
[+] [-] Ftuuky|10 years ago|reply
[+] [-] floppydisk|10 years ago|reply
You could get funding for a portable neighborhood pony washing service if you built an iPhone app backed by an AWS service and called it Uber for Pony Washers (or some such)if you looked hard enough.
As the article points out, this is changing. The boom part of the boom-bust equation is starting to flatline with IPOs happening less frequently and for less money and the institutional investors who get in later in the game to buy out the initial VCs being more gun shy about investing.
Net result for the market? Startups need to focus on being a functioning business generating positive cash flow rather than a money pit that occasionally generates a lottery ticket. Not everyone will succeed, but the changing economic climate will push a lot of the fair weather pony washing app founders out and leave the more seriously business minded people which should result in a new wave of solid companies capable of handling more strenuous economic conditions.
[+] [-] arielm|10 years ago|reply
Companies should be built with revenue (and profit) in mind, and in most cases those are the ones that thrive and succeed.
[+] [-] matchagaucho|10 years ago|reply
It's not surprising to hear they plan to slow down investing. But that's not necessarily a reflection of the overall market.
http://dfjgrowth.com/portfolio
[+] [-] carsongross|10 years ago|reply
Annual income twenty pounds, annual expenditure twenty pounds nought and six, result: misery."
--Wilkins Micawber
[+] [-] mmaunder|10 years ago|reply
The most valuable advice in this post reminds me of Marc A's awesome blog entry. Quote:
"Companies that have a retention problem usually have a winning problem. Or rather, a "not winning" problem."
http://pmarchive.com/guide_to_big_companies_part2.html
In my opinion winning is, ultimately, measured by how much cash you can generate. We stopped thinking about an exit a long time ago while in the deepest darkest part of the valley of the shadow of startup death. We were forced to do it because we ran out of money and no one cared about us. Then we started focusing completely on our customers and our income statement. As soon as we did that, amazing things started happening.
Cash, in this case and in this climate, is king. Or net income to be specific. If you're able to generate large amounts of cash and keep a lot of it, not a heck of a lot else matters. From my perspective the only problems that really remain is giving your team a great quality of life and serving your customers.
Cash takes away issues like the board bugging you, investors breathing down your neck or (worst case) wanting to play CEO, hiring problems, retention problems, funding, what business are we in problems, product problems (you're obviously killing it, so do more of that!), exec hires, issues with rebellious execs (you're killing it, so you're implicitly right) etc.
When you "go for growth" (numbers growth, not revenue) you give up all of the above and put yourself as a CEO or exec in a precarious position. Your arguments are no longer that defendable because growth means jack shit unless it generates cash or will very clearly ultimately generate cash.
Think about the CEO of Giphy who just raised something like $50M at something like a $300M valuation. It's like my wife and co-founder says: Doing that you turn a cash problem into a much bigger cash problem. I'd add that you also now have less equity and less influence. For the investors it's awesome - the biz will likely bulk up on talent and worst case will exit as a talent acquisition at $2M per engineer and the investors (who get paid first) will recover perhaps everything that way with little left over.
If I was early stage in this environment I'd do the following:
Stop dreaming about a Deus ex Machina that will reach down and save your sorry ass. Stop fantasizing about acquisitions. If you don't you're going to inadvertently turn acquirers into your target market instead of your real customers. And humans aren't good at focusing on two goals at once.
Then do absolutely everything you can to generate sustainable cash. Usually this means (if you're early stage) discovering who your customers are and what business you're in or (if you're later stage) serving the heck out of your customers and making sure that what you provide is worth more than each dollar they spend to acquire it. Then do more of that. If you're successful doing this, rather than raising money, you'll notice that the really big scary problems simply go away.
[+] [-] rpgmaker|10 years ago|reply
.
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Stop worrying about morale: Yes, you heard me right. I can’t tell you how many board meetings I’ve been in where the CEO is anguished over the impacts on morale that cost cutting or layoffs will bring about.
With these prospects, I wonder how will these CEOs keep all those underpaid and highly skilled young laborers working for him/her now?
[+] [-] jmspring|10 years ago|reply
[+] [-] gizi|10 years ago|reply
[+] [-] selvan|10 years ago|reply
[+] [-] lsiebert|10 years ago|reply
[+] [-] zan2434|10 years ago|reply
[+] [-] ar7hur|10 years ago|reply
http://www.slideshare.net/eldon/sequoia-capital-on-startups-...
[+] [-] aledalgrande|10 years ago|reply
That couldn't be farther from the truth, for a real startup with a real business. Maybe growth will not be as fast without VC funds, but I don't think real businesses will notice shrinking investments.
Correct me if I'm wrong.
[+] [-] arihant|10 years ago|reply
This is the most shallow statement I have read this year. The needs of the rich today would be needs of less rich tomorrow. The author clearly missed out on the whole American dream concept. I'm sure some people felt the same way about refrigerator and cars.
You'd almost never create a market segment starting with the bottom end. Almost every product you touch, including the very screen you're staring at, was once made for the 1%.
And almost always the version for the 1% is expensive, won't see a version 2, and is a one time sale. It doesn't matter if your initial rich/busy customers are going out of business. If you found a need you're fulfilling, you will with a fairly high probability will continue to find customers through the generation.
Dot com bust did not kill Network Solutions/Verisign. Very, very important.