It's really weird how this article tries to frame the situation. It's almost like the startups feel entitled to the funding.
The point of funding should really be to enable faster growth than they might otherwise have been able to achieve, but if a business can't at least survive without huge influxes of investments then is it really a business that they should be investing in in the first place?
Here's the somewhat ironic "catch 22" to the whole thing:
If you're a startup and you don't take VC funding, then you have the luxury of simply enjoying organic growth and funding expansion by re-investing profits into the company. Well, as long as you can do that in the face of competitive pressure. Strictly speaking, unless it's a "network effect" situation like a social network, you probably don't need to grow fast.
Unless you take VC money. Then, the simple act of taking their money now means there is pressure to grow fast, but it comes from the investors and not from the market per-se. And this is because VC funds are time-boxed and, by definition, have to generate whatever return they're going to generate by a fixed point in time. And the older a fund is (eg, the nearer it is to the end of it's life) the greater the pressure.
This is something I think more entrepreneurs should think long and hard about. Don't raise VC money just for the sake of doing it. Even if you can. Do it IF and only if it's the only (or at least surest) way to reach your goals. And always remember that the VC's interests do not necessarily align with the founders (at least not 100% so).
It's a reasonable question, but consider three things:
One, part of the VC model is relatively frequent fundraising. You take some seed money, prove the model a bit, take an A round, prove it some more, etc. It's in nobody's interest to give all the money necessary to get to break-even at once; investors would rather make smaller bets, and founders want to sell as little equity as possible when uncertainty is high.
Two, if your goal is to never actually need another round of funding, then you'll be very conservative in how you spend your money. Bolder competitors will spend money with the expectation of getting more soon, allowing them to outpace you. So there's a strong incentive to spend as fast as possible, trusting that you'll get good enough results to earn the next round of investment.
Three, there are many interesting businesses that are only possible with huge investments. In the Internet world, Twitter and Facebook are good examples. Most ad-supported businesses really only work at scale; ditto network-effect businesses. For physical goods, Tesla's a good example: you have to sell a lot of cars to justify building a factory. Pharma, too; your second pill might cost $1 to produce, but that first pill can cost $2 billion.
I agree there's a lot of entitlement in the industry, but I think some of it's reasonable here, in that when you talk to a VC firm, they'll sing you a great song about how they are there to support you, that they'll back you all the way, etc, etc. People who haven't experience a downturn can be genuinely shocked at how fast supposedly bold, independent investors suddenly all stampede in the same direction.
> if a business can't at least survive without huge influxes of investments then is it really a business that they should be investing in in the first place
Many entrepreneurs have been trained to pursue growth over short-term sustainability. In a market defined by network effects, this makes sense. It also works where one has a shot at winning a significant majority of a research-driven industry's profits (e.g. Apple or SpaceX), thereby starving one's competition of R&D oxygen.
Not all markets look like that. Furthermore, the cost of (and risk of losing) financing have not been properly worked into teams' growth-versus-profitability calculi. The time and resources it takes to adapt will kill some and slow others. After all is said and done, we'll have a healthier Valley culture.
Many of these businesses may make better sense as "non-profits", out to improve the welfare of the general community and funded purely by donations. I'm not sure whether donors would appreciate writing fat checks for programmers/managers/etc., but it's clear that a "hockey stick" growth could lead to a immediate path to monetization (if people know your name, you can capitalize on it when you're doing fundraising drives).
The point of funding isn't just growth, it's to keep a business afloat during the times when there's not much revenue but still lots of work to do to build the core business.
I've been in tech only 6 years and I am already bored of these cycles of VCs becoming frenetically exuberant followed by cautious times. Their advice to startups changes depending on what time it is. It's all so predictable yet people are surprised every time. Any entrepreneur building a business factors these in and approaches fund raising based on that knowledge. I don't even know the point of these articles any more.
Macro-scale deflationary spirals happen in real economies, it's definitely a thing that can happen for investment in an industry. If there's a general belief that VCs can get more for less tomorrow, they'll wait, at which point they can probably get more for less the next day...
Also, don't forget the money's all locked up for multiple years.
This is amusing accurate. Wayyy too many startups, even YC funded ones, have products that are difficult to profit on, or worse, don't really have a market in the first place.
For every "next Uber or Airbnb," there's hundreds of Shutdownifys.
In theory this won't affect the decision making process of top-tier VCs. A good invesment is a good investment regardless of the prevailing funding climate.
In practice, I'm guessing if the LPs get cold feet, then VCs will be forced to triage their funding decisions accordingly. How much this matters given the sheer size of some funds, I'm not sure.
“Right now, we don’t really know what things are worth...When you don’t know what something’s worth, you don’t know whether you are getting a good deal or a bad deal, so the obvious thing to do is, not much.”
When you invest in startups (with the exception of late-stage, pre-IPO investing) you never really know what things are worth. The business model of VCs is to make a bunch of high-risk bets, most of which will fail, in order to get a couple of big winners. What's really happening is that VCs aren't willing to invest at valuations that companies expect based on recent history. This is similar to housing bust, when home owners refused to sell because they continued to believe that their homes were worth what they were before the financial crisis.
If we look at this from a risk-reward perspective and define 10 as the maximum reward for the maximum amount of risk then we have the entrepreneur who is a 10 for obvious reasons, an Angel who invests in the entrepreneur (maybe not the idea really because it might pivot a few times) maybe at an 8, then VCs at 7, bigger institutional investors at 5, and so on and so forth until the average teacher in Michigan who's pension allocates .001% of AUMs to VC at maybe .5 it becomes clear that if that structure becomes unbalanced the overall value creation cycle starts to become disfigured. In other words everyone tends to forget what's really important. For example if an entrepreneur doesn't feel that there is a great deal of risk to their personal livelihood as well as a great deal of reward for taking that risk and an inherent difficulty of having to earn every single cent (i.e. if they assume they can find easy money) then they are probably less likely to dig as deep as they can to come up with ingenious solutions to problems which is really the core of the whole tech startup scene. And then we can back trace that all the way back to the teacher in Michigan who might think that they are better off giving their money directly to someone who is a "VC" in SV. Basically the whole risk-reward equation becomes unbalanced. As a result when S#$$ hits the fan for them, everyone who doesn't really understand that model/equation will slow down. But my theory is that the ones that actually stick to the fundamental rules will keep plugging along with a small grin on their faces because they are glad that they are the ones who actually start to lead again and create value with a lot less BS!
Or they could diversify and invest in more projects with smaller sums, couldn't they? Would probably require more people to manage the increase of investments.
It seems like these VC cycles are akin to a natural selection process for startups. Those with legitimate market fit and pricing schemes will have the highest fitness and thus survive; new startups will (hopefully although historically not so much) attempt to copy a similarly sustainable architecture. So in essence these cycles are beneficial to startup market health
I think it is interesting that this article is critical of valuations changing over such large time spans when the public stock market often marks up and down stocks by a significant amount on a daily basis.
Their service here in Washington, D.C. is awful. I used to love Uber, evangelized it to friends, was even the first to show Sanju Bansal how it worked when we were at a gala. Everyone else was fumbling for their S-Class keys while our twin black Navigator vehicles proceeded to pick us up at the entrance.
That, to me, was the Zenith of Uber. The entire VC set of the city was waiting for cars and drivers gridlocked in the garage and lot, while some kid with an app summoned two fully appointed SUVs as if from nowhere.
I wore Uber shades, tried the various promotions. I was thrilled, absolutely certain that they were one partnership away from Google to automate city transport and leapfrog our ailing transport grid.
Then something changed. The lines between Uber and UberX blurred, and UberX drivers changed from well-dressed folks owner-operating, or working for car fleets, to guys with Jack Daniels hats, ponytails, and (this is literal) body odor.
Uber decreased in quality, both in fleet and drivers. Ubers used to be spit-polished tire-black shined towncars, and the drivers were excellent. Never an open door missed, a bottle of water offered, mints stocked, radio preference, and an AC at a comfortable temperature, which the driver would immediately offers to adjust.
It wasn't just the network that made Uber. It was the service. It literally outclassed the transportation of millionaires, with service options of the Four Seasons at the price of a Motel 6.
The service has now become so bad, that power users are like sailors following the rats off a sinking ship.
Then it's disclosed that one of the main showrunners has been spending all his time on some fucking branding project? And when it's finally released, the material he produced looks like it was created by a sentient bag of cocaine.
"We're particles that unite to form atoms, to something... something... interaction between meatspace and cyberspace.... unity, and particles and shit. Yo, you gonna hit that?"
Are you serious?
In summation: No moat, no network effect. It was nice of you to pave the way for self-driving car fleets, but unless you reorganize management from the bottom of the floor up, your balloon's about to deflate faster than Napster. Peace guys.
*Full disclaimer: I did turn down a second round interview at Uber due to their policies regarding the Americans with Disabilities Act. My consulting rate is $500/hr, and I'd consider fixing this mess with the ADA for half that.
I wish I had the opportunity to speak to your board for five minutes about the damage their ADA policies are causing.
Imagine a girl, unable to move unassisted, alone in the snow, as her driver throws her wheelchair to the curb screaming at how he doesn't accept people "like her."
[+] [-] delecti|10 years ago|reply
The point of funding should really be to enable faster growth than they might otherwise have been able to achieve, but if a business can't at least survive without huge influxes of investments then is it really a business that they should be investing in in the first place?
[+] [-] mindcrime|10 years ago|reply
If you're a startup and you don't take VC funding, then you have the luxury of simply enjoying organic growth and funding expansion by re-investing profits into the company. Well, as long as you can do that in the face of competitive pressure. Strictly speaking, unless it's a "network effect" situation like a social network, you probably don't need to grow fast.
Unless you take VC money. Then, the simple act of taking their money now means there is pressure to grow fast, but it comes from the investors and not from the market per-se. And this is because VC funds are time-boxed and, by definition, have to generate whatever return they're going to generate by a fixed point in time. And the older a fund is (eg, the nearer it is to the end of it's life) the greater the pressure.
This is something I think more entrepreneurs should think long and hard about. Don't raise VC money just for the sake of doing it. Even if you can. Do it IF and only if it's the only (or at least surest) way to reach your goals. And always remember that the VC's interests do not necessarily align with the founders (at least not 100% so).
[+] [-] wpietri|10 years ago|reply
One, part of the VC model is relatively frequent fundraising. You take some seed money, prove the model a bit, take an A round, prove it some more, etc. It's in nobody's interest to give all the money necessary to get to break-even at once; investors would rather make smaller bets, and founders want to sell as little equity as possible when uncertainty is high.
Two, if your goal is to never actually need another round of funding, then you'll be very conservative in how you spend your money. Bolder competitors will spend money with the expectation of getting more soon, allowing them to outpace you. So there's a strong incentive to spend as fast as possible, trusting that you'll get good enough results to earn the next round of investment.
Three, there are many interesting businesses that are only possible with huge investments. In the Internet world, Twitter and Facebook are good examples. Most ad-supported businesses really only work at scale; ditto network-effect businesses. For physical goods, Tesla's a good example: you have to sell a lot of cars to justify building a factory. Pharma, too; your second pill might cost $1 to produce, but that first pill can cost $2 billion.
I agree there's a lot of entitlement in the industry, but I think some of it's reasonable here, in that when you talk to a VC firm, they'll sing you a great song about how they are there to support you, that they'll back you all the way, etc, etc. People who haven't experience a downturn can be genuinely shocked at how fast supposedly bold, independent investors suddenly all stampede in the same direction.
[+] [-] JumpCrisscross|10 years ago|reply
Many entrepreneurs have been trained to pursue growth over short-term sustainability. In a market defined by network effects, this makes sense. It also works where one has a shot at winning a significant majority of a research-driven industry's profits (e.g. Apple or SpaceX), thereby starving one's competition of R&D oxygen.
Not all markets look like that. Furthermore, the cost of (and risk of losing) financing have not been properly worked into teams' growth-versus-profitability calculi. The time and resources it takes to adapt will kill some and slow others. After all is said and done, we'll have a healthier Valley culture.
[+] [-] tariqali34|10 years ago|reply
[+] [-] tosseraccount|10 years ago|reply
The point of funding is to generate a return.
Hopefully more than you can get from CDs.
Good investments are often a very long term proposition.
[+] [-] tryitnow|10 years ago|reply
A lot of businesses would never be able to survive their early years without outside funding.
Now, do a lot of flimsy startups feel entitled to funding? Yes. That is a problem.
[+] [-] InclinedPlane|10 years ago|reply
[+] [-] pritianka|10 years ago|reply
[+] [-] tdaltonc|10 years ago|reply
Investors can't just sit on money. They have to get returns, and that means that they have to put capital to work.
[0] http://www.paulgraham.com/submarine.html
[+] [-] patmcguire|10 years ago|reply
Also, don't forget the money's all locked up for multiple years.
[+] [-] olalonde|10 years ago|reply
[+] [-] gooserock|10 years ago|reply
FTFY
[+] [-] justinlardinois|10 years ago|reply
For every "next Uber or Airbnb," there's hundreds of Shutdownifys.
[+] [-] ljk|10 years ago|reply
[+] [-] itgoon|10 years ago|reply
[+] [-] rl3|10 years ago|reply
In practice, I'm guessing if the LPs get cold feet, then VCs will be forced to triage their funding decisions accordingly. How much this matters given the sheer size of some funds, I'm not sure.
[+] [-] ryporter|10 years ago|reply
“Right now, we don’t really know what things are worth...When you don’t know what something’s worth, you don’t know whether you are getting a good deal or a bad deal, so the obvious thing to do is, not much.”
When you invest in startups (with the exception of late-stage, pre-IPO investing) you never really know what things are worth. The business model of VCs is to make a bunch of high-risk bets, most of which will fail, in order to get a couple of big winners. What's really happening is that VCs aren't willing to invest at valuations that companies expect based on recent history. This is similar to housing bust, when home owners refused to sell because they continued to believe that their homes were worth what they were before the financial crisis.
[+] [-] Disruptive_Dave|10 years ago|reply
[+] [-] bitwize|10 years ago|reply
[+] [-] khalloud|10 years ago|reply
[+] [-] unknown|10 years ago|reply
[deleted]
[+] [-] cm3|10 years ago|reply
[+] [-] hoodoof|10 years ago|reply
[+] [-] estro|10 years ago|reply
[+] [-] spullara|10 years ago|reply
[+] [-] financedfuture|10 years ago|reply
Well, isn't that just a nicer way to put this?
[+] [-] s_q_b|10 years ago|reply
[+] [-] financedfuture|10 years ago|reply
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