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.
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.
I am not really qualified to determine whether there is a bubble nor do I believe there is much value in speculating constantly about it. If there is one, valuations will drop, cash will be harder to get. Its not going to change the kind of work I like to pursue or the work that makers, builders and engineers do. It will probably change how much everyone is stuffing in their pockets, fine.
One glaringly bizarre thing from my perspective is why anyone would listen to VCs about whether we are or are not in a bubble. I'm sure there are other perspectives, but it would seem someone heavily invested in seeing valuations go up wouldn't want to ring alarm bells... I think instead I would rather gauge things by the numbers which unfortunately, are probably not frequent enough to reach true statistical significance to not have incredibly large confidence ranges. That being said, some of the money flying by on crunchbase every morning is ludicrous.
I'd just like to point out that the "why now?" question is probably related to a major shift in America's monetary policy. Since the 2008 crash, the Fed has been using a policy of "Quantitive Easing" (QE) to keep interest rates artificially low and thus encourage lending and spending. It's been known for while that the Feds were looking to end this policy sometime this year and it's looking like the end of October will be that time. Although the Feds seem to indicate that they won't actually raise interest rates until sometime next year, halting QE will have the affect of making less money available for lending. No one is really sure what is going to happen but this is an event that will affect the economy as a whole. To me, it's sounding like one of the industries that could be particularly affected by this policy is Tech and the result will be a market correction in startup valuations.
Hasn't the Fed been warning they'll halt QE "soon" for many years now? I think the actual policy is to keep interest rates low until it's impossible to do so. At present it seems there's no limit in sight to how many $trillions can be borrowed to keep QE going. Why wouldn't the choice always be to keep kicking the can down the road, when the alternative is to pay the piper?
Part of Marc Andreesen's tweetstorm yesterday said, "Worry." Andreesen hasn't said "worry" since 2008, so between that and the fact that he is generally very bullish and optimistic (to the point that when A16Z makes a bet they can put in an order of magnitude more money than other investors would), I began to stress out more than a little bit, especially having just closed our round.
This may be anecdotal to my experience, but there was a time last year when the advice we were getting from mentors changed from, "Figure out how much cash you need to meet your next milestone and go raise that with a bit of cushion" to "Money is everywhere right now; get as much as you can and build the biggest war chest possible." Neither of these approaches are particularly wrong -- it would be weird to turn down money when it's on the table, but we opted to raise significantly less than what we could have raised, and keep our team where we wanted it instead of hiring enough people to become "sexy."
Part of that is because we didn't raise at a super sexy Y-Combinator valuation and didn't want to give away the farm, and part of that was intentional. In short, we wouldn't know what to do with those people if we had them.
To be clear, we still have plenty of money to get stuff done. We still can pay for all the tools we need, pay ourselves enough to not have to stress about cash, and can hire top talent. We just don't have more money than we know what to do with.
We have three people working full-time on product right now, and that will grow to five in the next few months. If we had raised a $3 Million seed round (if you can still call that a "seed"), we would have felt compelled to go hire a dozen people. I can think of stuff we'd like to do, but it would probably be an absolute mess if we were building it all in parallel.
There may be some companies for whom building a huge war chest makes sense, but the notion of raising money for the sake of raising money (because you can) seems odd and dangerous to me.
You're correct that neither approach is wrong, especially since it might largely depend upon what type of business you're building. However, I think if you have no fear in your ability to raise funding, a business may relax in the real market discovery search. a super sexy valuation is always nice...but I think profitability is always in vogue. When I read this recent article[0] about what it MVP really means, it reminded me that some people in our industry forget that finding a market for your innovation is the lifeblood of long term success.
It's quite amusing that the folks who have been investing in companies at exorbitant valuations and pushing for higher and higher growth as a prerequisite for additional funding are now worried that all the large sums they've aggressively invested are being spent on growth or things that create the appearance of growth. What did they expect?
Comments like "When the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rate co's will VAPORIZE" are particularly interesting. The top-tier VC firms always talk about value add and active participation in their portfolio companies, and almost all of them look to have board representation in one form or another. But somehow one of the Valley's most prominent and connected VCs suggests that he doesn't know "who has been swimming without trunks on." Crazy.
you make it sound like all the VCs got together and decided to make this happen. it's instead an artifact of the economic system we have. it's due to humans being involved, but not caused by individual humans.
the car analogy would be the waves of stop-and-go traffic on a congested freeway, which is caused by variances in reaction times of people.
Why now? What about all the years startups have been burning cash? It's nothing new. Parties, entitlements like free meals for employees, fancy offices and furniture, too much travel, ads and PR spending, fancy hardware... when a startup has zero or negligible revenue, this kind of excessive spending is absurd. Not clear why Marc thinks it's time to sound a warning now.
These are growth activities as opposed to the others you list. The truth is many products never have just organic "viral" growth. They need ads, sales, or both to drive it.
Maybe he is seeing new investment opportunities on the near horizon, perhaps including the rise in interest rates, which is expected at the beginning of next year? Tech has been one of the few places for people to put their money for quite a while, but it doesn't mean that will hold true forever. Commodities started heating up around the same time as this round of the tech industry "boom", and has pretty much crashed now.
I do agree valuations are artificially inflated, but before you start drawing parallels to 1999 and every financial bubble of years past remember there are companies with real revenue streams. Sure, there are the snapchat valuations which have no basis, but do uber, airbnb, dropbox, and the like not deserve billion dollar valuations?
Let's entertain the idea that we have another "catastrophic" event where every VC in the world wakes up to the realization that many of these companies are worthless. They can't liquidate their positions. The key idea here is that this is a private market. These startups can't go from $100 million -> $0 in a day. They will tighten their straps, let a few employees go, and extend that runway as long as they need to make revenue. IMHO the easy days will be over and now every founder will learn what its like to really run a startup - No more shots in the dark just because you can
The fact that the tv show Silicon Valley exists, as much as I love it, really shows that were in a big boom right now. It's starting to feel a lot like the dot com era again.
Start-ups actually do this? What's the value in a nice office when you are not established? Does it help to attract talent? Is it one of those everyone else does it things?
The trade is getting crowded - that's the feeling I get from some higher profile VC funds complaining recently. Their buy-in's are getting more expensive as more private money from non-traditional VC funds moves into the sector due to continued low interest rates, a feeling the public markets are getting close to topping and the fact that each round seems to be up, up, up.
This is forcing higher prices for the traditional VC funds which in turn makes them more conservative with how their money is spent. And because the money is so easy to acquire the start-up's are blowing it quickly. They are competing for a limited set of "top" employees which is driving labor costs up to potentially unsustainable levels.
Money won't always be so easy. Use it carefully. However, I see the top VC's getting a bit upset they have more competition to invest in tomorrows potentially massive businesses at discounted rates.
The problem is that nobody will listen. The reason nobody will listen is everyone has an "I better get mine while I can mentality" or a "Well, nobody else is going to listen, so I'll be at a disadvantage if I stop spending so much" mentality.
If you look around and see the people you're competing with spending money like it's going out of style, you're going to do it too.
I disagree with that; people will still try to get theirs, but most people are smart enough to go for the PayPal model: get 100 million dollars right as the bubble pops and spend it wisely.
So the evaluation has been made that there is more to gain by protecting your reputation for the next boom-bust cycle then there is in wringing the last few million out of the current one.
So after such market correction in how investors value startups and software business in general, I suspect that there will be a starkly different valuation model, one that relies on net positive cash today and the prospect of net positive cash in the next quarter.
Spending cash as soon as they come in won't be good enough for the next group of investors, to further weed out the cash burning companies, they will look for a more conservative and cash positive businesses.
This would impact consumer centric startup models where valuation comes from having a large userbase more. Companies that pursue businesses wallets will have a more favorable valuation, possibly a lot larger than what was previously thought.
Looks like a good future but not so much for if you are building the next facebook. Those days of sustaining high user base with little to no paying customers are gone. Market will no longer place favorable valuation on such operations.
Is this relevant? I don't agree with him about Snowden, but I don't see why his view on a political issue should be related to his view on burn rates. People can be wrong about some things and right about others. Everybody is wrong about some things -- but we cannot write off everything that everybody says, because sometimes people are right.
As an interesting factoid that may be it is in no way related to the point Andreessen is making. Startups are warming themselves by burning piles of money and a harsh winter is coming.
[+] [-] cs702|11 years ago|reply
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
[2] http://online.wsj.com/articles/venture-capitalist-sounds-ala...
[3] http://avc.com/2014/09/burn-baby-burn/
[+] [-] j_baker|11 years ago|reply
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.
[+] [-] dkural|11 years ago|reply
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_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.
[+] [-] dmritard96|11 years ago|reply
One glaringly bizarre thing from my perspective is why anyone would listen to VCs about whether we are or are not in a bubble. I'm sure there are other perspectives, but it would seem someone heavily invested in seeing valuations go up wouldn't want to ring alarm bells... I think instead I would rather gauge things by the numbers which unfortunately, are probably not frequent enough to reach true statistical significance to not have incredibly large confidence ranges. That being said, some of the money flying by on crunchbase every morning is ludicrous.
[+] [-] emgeee|11 years ago|reply
Links! http://www.investopedia.com/terms/q/quantitative-easing.asp http://www.economist.com/blogs/economist-explains/2014/01/ec... http://www.forbes.com/sites/investor/2014/09/23/the-end-of-t... http://blogs.wsj.com/moneybeat/2014/08/05/goldman-sachs-here...
[+] [-] acornax|11 years ago|reply
[+] [-] genwin|11 years ago|reply
[+] [-] austenallred|11 years ago|reply
This may be anecdotal to my experience, but there was a time last year when the advice we were getting from mentors changed from, "Figure out how much cash you need to meet your next milestone and go raise that with a bit of cushion" to "Money is everywhere right now; get as much as you can and build the biggest war chest possible." Neither of these approaches are particularly wrong -- it would be weird to turn down money when it's on the table, but we opted to raise significantly less than what we could have raised, and keep our team where we wanted it instead of hiring enough people to become "sexy."
Part of that is because we didn't raise at a super sexy Y-Combinator valuation and didn't want to give away the farm, and part of that was intentional. In short, we wouldn't know what to do with those people if we had them.
To be clear, we still have plenty of money to get stuff done. We still can pay for all the tools we need, pay ourselves enough to not have to stress about cash, and can hire top talent. We just don't have more money than we know what to do with.
We have three people working full-time on product right now, and that will grow to five in the next few months. If we had raised a $3 Million seed round (if you can still call that a "seed"), we would have felt compelled to go hire a dozen people. I can think of stuff we'd like to do, but it would probably be an absolute mess if we were building it all in parallel.
There may be some companies for whom building a huge war chest makes sense, but the notion of raising money for the sake of raising money (because you can) seems odd and dangerous to me.
[+] [-] 31reasons|11 years ago|reply
really ? Its not free money. You have raised rounds so you know it will dilute your equity.
[+] [-] ganeumann|11 years ago|reply
Of course, he was two years late that time. 2008 was a great time to start a company or invest in one.
Because downturns are in large part socially constructed, it is impossible to have an accurate consensus on a downturn until it has already happened.
Market predictions are guesses.
[+] [-] ianphughes|11 years ago|reply
[0]https://news.ycombinator.com/item?id=8356906
[+] [-] general_failure|11 years ago|reply
[+] [-] 7Figures2Commas|11 years ago|reply
Comments like "When the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rate co's will VAPORIZE" are particularly interesting. The top-tier VC firms always talk about value add and active participation in their portfolio companies, and almost all of them look to have board representation in one form or another. But somehow one of the Valley's most prominent and connected VCs suggests that he doesn't know "who has been swimming without trunks on." Crazy.
[+] [-] clairity|11 years ago|reply
the car analogy would be the waves of stop-and-go traffic on a congested freeway, which is caused by variances in reaction times of people.
[+] [-] brianstorms|11 years ago|reply
[+] [-] jsonne|11 years ago|reply
These are growth activities as opposed to the others you list. The truth is many products never have just organic "viral" growth. They need ads, sales, or both to drive it.
[+] [-] randomdata|11 years ago|reply
[+] [-] latchkey|11 years ago|reply
[+] [-] PublicEnemy111|11 years ago|reply
Let's entertain the idea that we have another "catastrophic" event where every VC in the world wakes up to the realization that many of these companies are worthless. They can't liquidate their positions. The key idea here is that this is a private market. These startups can't go from $100 million -> $0 in a day. They will tighten their straps, let a few employees go, and extend that runway as long as they need to make revenue. IMHO the easy days will be over and now every founder will learn what its like to really run a startup - No more shots in the dark just because you can
[+] [-] tadmilbourn|11 years ago|reply
But, regardless of frothy times or not, the advice is solid. Keep your burn low. Run as lean as possible until you've figured out the business model.
[+] [-] FollowSteph3|11 years ago|reply
[+] [-] snake_plissken|11 years ago|reply
Start-ups actually do this? What's the value in a nice office when you are not established? Does it help to attract talent? Is it one of those everyone else does it things?
[+] [-] spamizbad|11 years ago|reply
To play devil's advocate: You want to invest in big, fancy offices because...
- People will be more likely to stay longer each day
- It helps recruit talent
- It helps instill the "Company Culture"
- We have to look successful to be successful
[+] [-] nemo44x|11 years ago|reply
This is forcing higher prices for the traditional VC funds which in turn makes them more conservative with how their money is spent. And because the money is so easy to acquire the start-up's are blowing it quickly. They are competing for a limited set of "top" employees which is driving labor costs up to potentially unsustainable levels.
Money won't always be so easy. Use it carefully. However, I see the top VC's getting a bit upset they have more competition to invest in tomorrows potentially massive businesses at discounted rates.
[+] [-] simonswords82|11 years ago|reply
[+] [-] JustSomeNobody|11 years ago|reply
If you look around and see the people you're competing with spending money like it's going out of style, you're going to do it too.
[+] [-] ameister14|11 years ago|reply
[+] [-] forgotAgain|11 years ago|reply
[+] [-] dang|11 years ago|reply
[+] [-] il|11 years ago|reply
[+] [-] stealthlogic|11 years ago|reply
[+] [-] notastartup|11 years ago|reply
Spending cash as soon as they come in won't be good enough for the next group of investors, to further weed out the cash burning companies, they will look for a more conservative and cash positive businesses.
This would impact consumer centric startup models where valuation comes from having a large userbase more. Companies that pursue businesses wallets will have a more favorable valuation, possibly a lot larger than what was previously thought.
Looks like a good future but not so much for if you are building the next facebook. Those days of sustaining high user base with little to no paying customers are gone. Market will no longer place favorable valuation on such operations.
This is just what I'm predicting of course.
[+] [-] cyphunk|11 years ago|reply
[deleted]
[+] [-] nilkn|11 years ago|reply
[+] [-] kenrikm|11 years ago|reply
[+] [-] bdcravens|11 years ago|reply
[+] [-] thinkingkong|11 years ago|reply
[+] [-] JustSomeNobody|11 years ago|reply
Keep it on topic.
Edit: Why on Earth do I get down voted because I think it should be kept on topic??? Really???
[+] [-] todd3834|11 years ago|reply
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