From my consumer's perspective, the most annoying part is when a company provides a service I like, they look like they could be reasonably profitable for an investment of x but not for 10x, and then they suddenly raise to 10x or more. It's inevitable then that they will eventually ruin the existing service in search (usually futile) for some mythical product/market fit that was somehow projected be appropriately profitable for that 10x investment.
It's particularly irritating with paid services, where all of a sudden paying customers turn from highly valued into a legacy nuisance.
I think the problem is that funds like SoftBank have a very "winner take all" attitude about startups. They threatened my startup by basically saying that if you don't take the XXX millions of dollars, we'll be happy to give it your competitor who will out-fund you. These vcs want to pump a company so full of cash that they essentially take market domination of a vertical.
I worked for a startup with a well liked paid product built through iteration (test prep product). Then it was dropped on the ground and discontinued cause they raised a hundred million and now needed to build the founders vision, a free consumer project designed and built for years without showing it to potential users. Didn’t work out. So I’ve seen that happen.
I've noticed this too... shit I've even been on the dev side of it. I'm glad they pointed this out in the "Silicon Valley" show where Richard is told he could have just not excepted so much money.
I would love someone to write a blog post/article on this effect.
Came here to say roughly the same thing.
I really don't understand some of the numbers, especially for easily replicated business models.
e.g. 120M for MyDreamPlus, a co-working space start-up
Some back of the envelope stuff
approx $200/desk/month
If they could fill a 1000 desks a month it would take 50 years to reach 120M.
I've no idea what they consider what the company might be worth.
>It's inevitable then that they will eventually ruin the existing service in search (usually futile) for some mythical product/market fit that was somehow projected be appropriately profitable for that 10x investment.
Or they will just be bought up and the result for the end user can be seen again and again.
Once a startup raises such insane amounts, they are forced to grow at the same speed. Which in alot of cases is just not feasible. That leaves only a buyout.
Or start-ups that are set up to just kinda help out like Patreon but now that they took massive investment they have to be greedy about what was supposed to be a charitable endeavor
Many of these rounds are replacements for what would otherwise be IPOs or other public financing rounds.
Flywire was founded in 2009 and in 2017 processed over $2B in payments. [1] Gusto was founded in 2011 with a rumored valuation of over a billion and $100M+ in revenues. Convene was founded in 2009 and was doing $18.6M in revenue in 2015 [2]. All of them have acquired other companies.
Before 2000 these would be public companies; hell, before 2000 there were public companies that were barely 2 years old and had virtually no revenue. The investors for these rounds are largely the same firms who would be playing in the public markets.
> what would otherwise be IPOs or other public financing rounds
The NYSE and Nasdaq do a lot of hype about how much money they raise for companies in IPOs and secondary offerings. But if you look at the numbers since World War II (and even before), very little of the money corporate America raises comes from the stock market. US corporations raise money via bonds, term loans, credit lines and so on. The stock markets facilitate stocks moving from one shareholder to another, but have (relatively) little involvement in raising cash.
As you note, companies are staying private much longer nowadays. Facebook didn't go public until it was worth $100 billion.
This is true for any business and any area in the world. Like for example, a thriving diamond polishing industry caused increase in land price tenfold or more in Surat city in India.
One could save money by living in Manhattan and flying to San Francisco for work. If time zones and transit were unrealistically fast and permitted such an exercise.
In biotech (by which I mean therapeutics), out of ~150 "major"* VC investments from 1/2018 to 7/2018, 14% of deals have been over $100M. Many of these have been Series A deals [0].
Many of these rounds are tranched (ie you only get a certain amount upfront, then get the rest if you hit milestones), but I think I saw data suggesting only 30-40% were tranched.
I think this phenomenon is largely due to 1) more money going into biotech VC but 2) very little increase in the number of good startups. Many startups are created in house by 5-10 VCs (though this is changing, especially with increasing number of well funded Chinese startups), so there's limited bandwidth. Therapeutics is so different from any other type of startup that pretty much all the incubators / educational materials don't apply, and the only ppl who know how to start startups are those who've developed drugs at big companies or have started successful companies before
* Announced Series A through later deals, and some large seed deals ($5m+)
[0] source is a website where i've been tracking major biotech VC investments. i'm a hobbyist programmer and its on a free heroku plan, and i'm in the early stages of turning what was a personal project into a product so expect bugs and not-ideal performance. but deal coverage is comparable to other biotech databases.
Biotech investment has been accelerating significantly over the past year.
A few years ago, you’d see a handful of rounds over $100M. There have been several in the past couple of months.
And you make a good point about Asian investments in biotech. The Hong Kong exchange had its first biotech IPO and there have been several big rounds in Asian as well!
I am surprised that the NYTimes doesn’t see it as a positive sign: the structures around start-up (accelerators, investors, hosting, third party tools, etc.) have grown in maturity and relevance quite considerably. I certainly expect people familiar with YCombinator to agree.
More funding like that means more companies trusted to spend that money into creating something profitable. If this goes into people who have grown companies into a unicorn a couple of times; scaling faster local operations lead by managers with relevant experience; AWS, GCP, Twilio & Square bills, it’s certainly expensive but overall sensical.
I don’t know of an investor who, since 2000 has said: “This is silly, I can’t invest anymore.” and left, so I don’t think the game got non-sensical overall. Real-estate in SF certainly has, but high valuations proved when they made sense and gave investors confidence. There certainly has been cases where the value wasn’t justified, but very few at that level of money raised. Certainly less in proportion than the rounds with crazy valuations in 2000
"More funding like that means more companies trusted to spend that money into creating something profitable. If this goes into people who have grown companies into a unicorn a couple of times; scaling faster local operations lead by managers with relevant experience; AWS, GCP, Twilio & Square bills, it’s certainly expensive but overall sensical."
Who are these founders who have grown "a couple" of unicorns? There are huge numbers of them walking around now? More importantly: who are these mythical founders who have experience growing/managing a company by hundreds of percent in a single year? They're pretty thin on the ground. This money is going to inexperienced people. Save for (maybe) a few founders who lived through the late 90s, nobody has experience with this. It's new territory.
Also, Let's not kid ourselves: this money isn't going to AWS and Twilio. It's going to salaries, and it's going to marketing. And that's why it's risky. When you have to hire insanely quickly and buy revenue with marketing spend, it's essentially impossible to manage the growth. Overfunding is a real thing, and unless you've seen it firsthand, it's hard to internalize the perverse incentives it creates.
Rand Fishkin (founder of Moz) commented on this phenomenon the other day [1] by saying: "Make $10mm. Crickets. Raise $10mm. Everyone writes about you." and "This is how we get a culture that trains founders to raise $$ > make $$."
Might I suggest to some budding founders that you try the revenue-funded approach. It's not as fast or as glamorous but the payout when you're successful is so much more significant.
I'm wondering as well, how much of this is due to monetary policy pushing investors into higher-risk investments. That's been the point of QE and negative interest rates, right, although I don't recall hearing it framed as an attempt to push investors into taking on more risk?
Better to call this “asset inflation”, not to be confused with good old fashioned consumer inflation.
Given that we’re talking about high-risk, high-return investments of foreign money I don’t see why asset inflation is a particularly important factor - such investments will always be appealing. This money is being used to create good jobs and expand the real economy.
Inflation of existing assets, not startups, is far more problematic for QE, e.g. housing, stock market, where there’s no value being created.
Pretty ironic that a couple days ago there was some article claiming that China was about to collapse because it was going through "an orgy of investment" in an attempt to grow whilst its recent projects did not generate any actual revenue.
>So much money, and yet, the same horrible open office plans and transparent meeting rooms. Does office space in SF really cost that much?
Personally I don't think it is about actually needing the money. It is about wanting it. Thinking that if you have enough cash to burn, you'll be the next Google.
In reality, 99.99% (if not 100%) of them are going to burn through their bank and fly off a cliff in 3 years.
These trends and actions aren't arbitrary. It's a reaction to the fact that the world is becoming increasingly "Winner take All". VCs, having enough information to recognize this fact, are now shoveling more and more money into fewer and fewer investments.
On the plus side, I hope that means we'll get more companies that are truely taking on Moon Shot problems and not just building another useless app we don't need.
The danger on the other side, is companies that use those large funds for rent seeking behaviors that hurt consumers in the long run.
A professor friend notes a similar dynamic in grant applications. Certain big philanthropic groups only have bandwidth to look at grants that are >=$1M -- with predictable effects (grants balloon, the amount of time spent thinking about how to spend each marginal dollar asymptotes to zero, etc.).
An important point: I looked up the deals mentioned the article and they were all late stage, where such numbers are unsurprising. One company was a bit over 2 years old (and then did a Softbank deal); the others were 6-9 years old.
The article makes it sound like enormous A round deals are being done in commerce and tech.
Does anyone care to guess how many of these will return the principal? How many will turn a profit? Of those that turn a profit, how many will be engaging in some form of regulatory arbitrage (i.e. Uber and labor/taxi regulation)?
lots of literature is available on this (granted, not always clear what their source of info is).
In general, many funds at that stage are playing the unicorn game (and many raising 100M are already a unicorn or at least not too far away). Unicorn economics is basically, 1/10 will hit >1B in value while X% will be mediocre outcomes and Y% will fail. The 1 unicorn will return the fund generally speaking, after accounting for X, Y, opportunity costs (this is high given the strength of the markets lately) and interest.
I don't think the ultimate goal for many of these startups is to make a profit. I think most investors are expecting to be acquired by a tech giant at a huge premium.
As an entrepreneur I’ve never understood how closing a round of funding is somehow a badge of success. In fact it is quite the opposite. The ultimate businesses are those that are highly profitable and can scale using their own funding. Successful bootstrappers are the best entrepreneurs.
Actually the best businesses are those that can scale using no funding. Or employees. And a sole founder who does everything by sheer force of will. /s
> The ultimate businesses are those that are highly profitable and can scale using their own funding
I'd like to fly across the sky on a unicorn while drinking whiskey with a leprechaun, but it's not really in the cards.
How many bootstrapped businesses can you think of in the Fortune 100/500? It's very rare to get to that size without the capital to make mistakes. Bootstrapped businesses generally have very little room for risk, and the ones with business models that can both be executed on and monetized profitably to > $100MM revenue/yr can probably be counted on two hands (e.g. GitHub, Plenty Of Fish, Braintree, GoPro).
I'd generally agree, however, seeking to team up with others for a greater good is also a healthy sign for an entrepreneur.
"Hey, you have some capital, and we have this great thing that can serve the world. We're capital constrained, either for quality or for growth, how about we partner to make the world a better place?"
[+] [-] usrusr|7 years ago|reply
It's particularly irritating with paid services, where all of a sudden paying customers turn from highly valued into a legacy nuisance.
[+] [-] swoongoonz|7 years ago|reply
[+] [-] ditonal|7 years ago|reply
[+] [-] my_usernam3|7 years ago|reply
I would love someone to write a blog post/article on this effect.
[+] [-] exolymph|7 years ago|reply
Instapaper, ugh. So frustrating to see a service I loved get absorbed by Pinterest and then spit back out. Meanwhile I've churned over to Pocket.
[+] [-] mywacaday|7 years ago|reply
Some back of the envelope stuff approx $200/desk/month
If they could fill a 1000 desks a month it would take 50 years to reach 120M. I've no idea what they consider what the company might be worth.
Anyone have any insight on what I'm missing?
[+] [-] cf498|7 years ago|reply
Or they will just be bought up and the result for the end user can be seen again and again.
Once a startup raises such insane amounts, they are forced to grow at the same speed. Which in alot of cases is just not feasible. That leaves only a buyout.
Smyte comes to mind here.
https://www.theregister.co.uk/2018/06/22/twitter_swallows_sm...
[+] [-] javier2|7 years ago|reply
[+] [-] unknown|7 years ago|reply
[deleted]
[+] [-] majani|7 years ago|reply
[+] [-] nostrademons|7 years ago|reply
Flywire was founded in 2009 and in 2017 processed over $2B in payments. [1] Gusto was founded in 2011 with a rumored valuation of over a billion and $100M+ in revenues. Convene was founded in 2009 and was doing $18.6M in revenue in 2015 [2]. All of them have acquired other companies.
Before 2000 these would be public companies; hell, before 2000 there were public companies that were barely 2 years old and had virtually no revenue. The investors for these rounds are largely the same firms who would be playing in the public markets.
[1] https://www.flywire.com/pT/articles/how-two-boston-startups-...
[2] https://www.forbes.com/companies/convene/
[+] [-] Ologn|7 years ago|reply
The NYSE and Nasdaq do a lot of hype about how much money they raise for companies in IPOs and secondary offerings. But if you look at the numbers since World War II (and even before), very little of the money corporate America raises comes from the stock market. US corporations raise money via bonds, term loans, credit lines and so on. The stock markets facilitate stocks moving from one shareholder to another, but have (relatively) little involvement in raising cash.
As you note, companies are staying private much longer nowadays. Facebook didn't go public until it was worth $100 billion.
[+] [-] fipple|7 years ago|reply
[+] [-] user5994461|7 years ago|reply
Companies spend the the majority of their costs on office space, then employees spend the majority of their salaries on a home.
[+] [-] WJW|7 years ago|reply
[+] [-] rb808|7 years ago|reply
[+] [-] dmitrygr|7 years ago|reply
[+] [-] iamgopal|7 years ago|reply
[+] [-] godzillabrennus|7 years ago|reply
One could save money by living in Manhattan and flying to San Francisco for work. If time zones and transit were unrealistically fast and permitted such an exercise.
[+] [-] aaavl2821|7 years ago|reply
Many of these rounds are tranched (ie you only get a certain amount upfront, then get the rest if you hit milestones), but I think I saw data suggesting only 30-40% were tranched.
I think this phenomenon is largely due to 1) more money going into biotech VC but 2) very little increase in the number of good startups. Many startups are created in house by 5-10 VCs (though this is changing, especially with increasing number of well funded Chinese startups), so there's limited bandwidth. Therapeutics is so different from any other type of startup that pretty much all the incubators / educational materials don't apply, and the only ppl who know how to start startups are those who've developed drugs at big companies or have started successful companies before
* Announced Series A through later deals, and some large seed deals ($5m+)
[0] source is a website where i've been tracking major biotech VC investments. i'm a hobbyist programmer and its on a free heroku plan, and i'm in the early stages of turning what was a personal project into a product so expect bugs and not-ideal performance. but deal coverage is comparable to other biotech databases.
https://bio-vc-tracker.herokuapp.com/
[+] [-] refurb|7 years ago|reply
A few years ago, you’d see a handful of rounds over $100M. There have been several in the past couple of months.
And you make a good point about Asian investments in biotech. The Hong Kong exchange had its first biotech IPO and there have been several big rounds in Asian as well!
[+] [-] bertil|7 years ago|reply
More funding like that means more companies trusted to spend that money into creating something profitable. If this goes into people who have grown companies into a unicorn a couple of times; scaling faster local operations lead by managers with relevant experience; AWS, GCP, Twilio & Square bills, it’s certainly expensive but overall sensical.
I don’t know of an investor who, since 2000 has said: “This is silly, I can’t invest anymore.” and left, so I don’t think the game got non-sensical overall. Real-estate in SF certainly has, but high valuations proved when they made sense and gave investors confidence. There certainly has been cases where the value wasn’t justified, but very few at that level of money raised. Certainly less in proportion than the rounds with crazy valuations in 2000
[+] [-] timr|7 years ago|reply
Who are these founders who have grown "a couple" of unicorns? There are huge numbers of them walking around now? More importantly: who are these mythical founders who have experience growing/managing a company by hundreds of percent in a single year? They're pretty thin on the ground. This money is going to inexperienced people. Save for (maybe) a few founders who lived through the late 90s, nobody has experience with this. It's new territory.
Also, Let's not kid ourselves: this money isn't going to AWS and Twilio. It's going to salaries, and it's going to marketing. And that's why it's risky. When you have to hire insanely quickly and buy revenue with marketing spend, it's essentially impossible to manage the growth. Overfunding is a real thing, and unless you've seen it firsthand, it's hard to internalize the perverse incentives it creates.
[+] [-] meritt|7 years ago|reply
Might I suggest to some budding founders that you try the revenue-funded approach. It's not as fast or as glamorous but the payout when you're successful is so much more significant.
[1] https://twitter.com/randfish/status/1028863855353417728
[+] [-] cft|7 years ago|reply
[+] [-] rebuilder|7 years ago|reply
[+] [-] jahewson|7 years ago|reply
Given that we’re talking about high-risk, high-return investments of foreign money I don’t see why asset inflation is a particularly important factor - such investments will always be appealing. This money is being used to create good jobs and expand the real economy.
Inflation of existing assets, not startups, is far more problematic for QE, e.g. housing, stock market, where there’s no value being created.
[+] [-] 0xB31B1B|7 years ago|reply
It has definitely hit main street
[+] [-] hinkley|7 years ago|reply
[+] [-] Brushfire|7 years ago|reply
[+] [-] RestlessMind|7 years ago|reply
[+] [-] infinity0|7 years ago|reply
[+] [-] golergka|7 years ago|reply
[+] [-] madamelic|7 years ago|reply
Personally I don't think it is about actually needing the money. It is about wanting it. Thinking that if you have enough cash to burn, you'll be the next Google.
In reality, 99.99% (if not 100%) of them are going to burn through their bank and fly off a cliff in 3 years.
[+] [-] pascalxus|7 years ago|reply
On the plus side, I hope that means we'll get more companies that are truely taking on Moon Shot problems and not just building another useless app we don't need.
The danger on the other side, is companies that use those large funds for rent seeking behaviors that hurt consumers in the long run.
[+] [-] weka|7 years ago|reply
[+] [-] Xcelerate|7 years ago|reply
[+] [-] ylere|7 years ago|reply
[+] [-] setgree|7 years ago|reply
[+] [-] gumby|7 years ago|reply
The article makes it sound like enormous A round deals are being done in commerce and tech.
[+] [-] bwestergard|7 years ago|reply
[+] [-] dmritard96|7 years ago|reply
In general, many funds at that stage are playing the unicorn game (and many raising 100M are already a unicorn or at least not too far away). Unicorn economics is basically, 1/10 will hit >1B in value while X% will be mediocre outcomes and Y% will fail. The 1 unicorn will return the fund generally speaking, after accounting for X, Y, opportunity costs (this is high given the strength of the markets lately) and interest.
[+] [-] mywittyname|7 years ago|reply
[+] [-] FlyingSideKick|7 years ago|reply
[+] [-] jahewson|7 years ago|reply
[+] [-] tomnipotent|7 years ago|reply
I'd like to fly across the sky on a unicorn while drinking whiskey with a leprechaun, but it's not really in the cards.
How many bootstrapped businesses can you think of in the Fortune 100/500? It's very rare to get to that size without the capital to make mistakes. Bootstrapped businesses generally have very little room for risk, and the ones with business models that can both be executed on and monetized profitably to > $100MM revenue/yr can probably be counted on two hands (e.g. GitHub, Plenty Of Fish, Braintree, GoPro).
[+] [-] ISL|7 years ago|reply
"Hey, you have some capital, and we have this great thing that can serve the world. We're capital constrained, either for quality or for growth, how about we partner to make the world a better place?"
[+] [-] unknown|7 years ago|reply
[deleted]
[+] [-] scranglis|7 years ago|reply
[+] [-] tim333|7 years ago|reply