For the past 10 months or so I've been part of a 3 person team that is bootstrapping. I can't count how many times I've been looked at like I have two heads when I tell someone that no we don't have funding, and we aren't looking for it, and we aren't planning on looking for it, and we're not entirely sure we even want it. And when I tell someone that we're more worried about building a sustainable business that can stand on its own I might as well be speaking a foreign language.
You seem to be attaching a moral axis to the decision on whether to raise capital. Consider that people look at you like you have two heads because you're making an irrational decision.
Capital usually comes with two strings -- giving up a part of your company, and giving up control (both of which are correlated, but not the same thing). In the current climate, if you could raise a seed round while giving away a minimal amount of your company and not giving away control, why wouldn't you?
Put a different way, how good would the terms have to get for you to take the money? In the limit case, if someone wrote you a million dollar check, no strings attached, what would you do? How far are the current market conditions from this scenario?
> In the limit case, if someone wrote you a million dollar check, no strings attached, what would you do?
There are never no strings attached. At the very least there are social expectations. Some people feel expectations very acutely and try hard not to set expectations they aren't sure they can fulfill.
> if you could raise a seed round while giving away a minimal amount of your company and not giving away control, why wouldn't you?
You have no idea when or if a liquidity event might happen or how big it might be and you want to make as few promises as possible to keep your options open, including holding no substantial assets at all.
You don't want to add another person to the list of people you have to loop in to conversations.
You don't want to leak information into the tech establishment.
You expect big dilutions later on and you want to keep as much equity as you can initially.
> There are never no strings attached. At the very least there are social expectations. Some people feel expectations very acutely and try hard not to set expectations they aren't sure they can fulfill.
Starting a company is filled with social expectations and refusing to raise money is certainly not going to spare you from them. Founding a company is an exercise in setting expectations you're not sure you can fulfill, you'll certainly be setting those expectations with your early customers, by definition you'll be making some sort of agreement with your first customer that you've never fulfilled for someone in the past. You want to manage the expectations of course, but to say that raising money implies expectations and thus the best course is to not consider raising money is foolish. You'll likely just compromise your ability to meet other expectations.
This assumes that (a) they need the money and/or (b) they could even do something they want to do with the money that they aren't already doing. I could imagine all sorts of cases where neither of these things are true, and everything's going well and according to plan. If everyone's expectations are already being met, what's the point in putting yourself on the hook to someone else for something more, regardless of how much money it is or how low the additional expectations are?
I could see the logic from a VC perspective- VCs aren't going to make any money from companies that don't take funding from them. Companies that don't take funding may as well not exist to them. VC firms themselves are businesses that make money by nurturing other businesses. That just means that all VC firms need startups to nurture, it doesn't mean that all startups must be nurtured by VC firms.
> This assumes that (a) they need the money and/or (b) they could even do something they want to do with the money that they aren't already doing.
edit: I realized my response references a different comment I made. Sorry about that, I've modified it.
If there's nothing you could do with the money then I agree it makes no sense to spend time and energy raising. That doesn't seem to be the OPs position though, instead there seems to be a moral reason for not raising money. I'm not arguing that all startups must be nurtured by VCs, just that saying there's no conditions under which you'll accept money from a VC isn't a rational stance.
I'm not sure where you read all of that into OP's comment. I don't read it as there being a moral reason, I read it as them thinking they have better things to do right now than to seek or even entertain finding offers. Taking other people's money is a total pain in the rear, and worth avoiding if you can build the company you want to build without it.
Since, in my mind anyway, a lot of companies that take VC money appear to be acquihired or bought out and have their services shuttered: As a customer, seeing them not taking VC money is a plus in my book. VC money adds uncertainty to the long-term viability of the company.
I don't want to go into the details of this specific case. I just want to point that what you call rational is in itself a set of values someone has to suscribe to. It is a moral decision. It just happen to be the most common.
This is a good point. Having been in both positions, a startup that has taken on lots of funding, and going the DIY route, the DIY route has been much more effective.
The business model would need to support it though. The business model taking on lots of cash needed a community to be effective and would have been extremely difficult to achieve without those resources. Being able to self fund and find paying customers early is not always an option.
Agreed. Having both bootstrapped and raised VC, it doesn't matter how much you raise or from whom, raising the money changes the company and how you feel about it, period. If you feel like your heart is in owning your whole business and not raising money, don't. It matters.
However, 37signals seemed have done a really unique deal with Bezos so who knows. I wouldn't bank on you getting that same deal though!
It has nothing to do with morality, it has to do with building a sustainable business while retaining full ownership. The notion that you absolutely need to accept funding is getting tired because it's not supported by facts and grounded in reality.
I am currently bootstrapping a business and I have been approached by VCs who asked me to please take their money. I have turned them down because, as I politely told them, I don't need it, AND I am not looking to simply flip the company some day (no sane investor will invest unless the company can be sold in some form and they get their money back). Some people may also wish to avoid having a boss, and if you think your VC is not your boss in some capacity at least, you're in for a rude awakening.
Calling someone's decision to avoid raising money irrational and attaching labels (morality?) is presumptuous. There are certain goals that are incompatible with accepting funding, such as: operating a lifestyle business, not reporting to anyone, freedom etc. I am not sure what's so difficult to understand about that.
> Calling someone's decision to avoid raising money irrational and attaching labels (morality?) is presumptuous.
It happens because either they had to make the decision and they accepted the money, worked for someone who has, or they are the VC who are offering the money and looking for deals. People usually project whatever they did as being a rational, right decion, and those who don't don't agree as being irrational.
Also, this forum is probably one of the most biased forums when it comes to startup "things", so I wouldn't get too upset about stuff you read here.
> There are certain goals that are incompatible with accepting funding, such as: operating a lifestyle business, not reporting to anyone, freedom etc. I am not sure what's so difficult to understand about that.
Nothing wrong with it at all; but keep in mind you are posting on the message boards of an organization (YCombinator) that is deeply invested in the Silicon Valley venture ecosystem. The "growth at all costs" mentality is bound to be quite prevalent among the posters on here as a result. It's just the audience that HN draws.
It's irrational for someone running a startup to be categorically against raising money. It's not for someone running a lifestyle business. A lifestyle business is not a startup.
A startup is a new business. It's not anything special.
It looks like you are falling for propaganda. When someone wants to purchase a car or a home, there's such a momentum behind the idea of financing that a customer who uses their own savings is viewed as odd... perhaps even a money launderer, yet it's perfectly normal.
I mention that because there's a similar momentum behind business financing. If you build software for a living, then you can build a new business with no overheads, no ties, no time limits, no favours, no budgets, no business plan and low risk. It's pure freedom to do what you want.
A successful startup in the eyes of VCs grows fast. It has to, so VCs have some hope of making a non-stupid return. Which is why we get all the drama around unicorns etc etc and more etc.
Does that mean that you, as a founder, have any obligation to play that game?
No. You. Do. Not.
If you choose not to, that's very much your choice. It gives you a number of advantages, including no loss of control over direction or everyday running, a very much lower danger of being fired from your own project, and a wider choice of potential investment sources when you've been running profitably for a while. (Are VCs the only money source in town? Not even close.)
And if you have a solid business model, it significantly raises your prospects of still having a business - and a job - when the unicorn hunter scene crashes and burns around you.
Which it inevitably will - possibly quite soon.
The disadvantage? If the business is seriously viable with many real customers and profits and such, you may to have to settle for being a multimillionaire instead of a billionaire.
African proverb: "If you want to go fast, go alone. If you want to go far, go together."
Startups are designed to go fast and cash out. The founders make a fortune and move on to something else, life doesn't really change for anyone else. A business with real longevity will go more slowly but everyone in the business will share in the ride.
The corner store and Snapchat are both businesses but they aren't the same. Saying this isn't the same as saying that startups are better, just that they are different.
Actually, in this market, it's smarter to take out a home mortgage, and invest the remainder. Mortgage rates are low. If it were the opposite, and mortgage rates were high, you'd have an argument, but that hasn't been the case in decades.
It's true in this market, but not true if, for example, the stock market crashes and/or we have a deflationary depression.
Not saying that's particularly likely, but avoiding debt does remove risk in such scenarios--if you never take on debt you can never go bankrupt, even if your upside is also lower. People make different choices about how to balance risk, reduce stress, etc. It only looks irrational when one person imposes their values on the decisions of another.
The OP hasn't actually said that he turned down funding just that he wasn't looking for it and not sure he (?) wanted it.
This is really similar to someone saying they aren't looking for a job. It's implied I guess that if someone offered them a million dollar job (where they had been making $100k) with complete freedom and great working conditions they'd at least consider it.
Your point is taken though and very possibly might also mean "I take the high road and would turn it down no matter what". (Which doesn't mean they would of course just that they say they would).
Theoretically you could negotiate a deal where you don't have a responsibility of reporting to your first round investors (not far fetched given the current climate).
In practice seed investments consist of multiple $100k-$250k checks, which are generally too small for the investors to put any pressure on your startup. Seed investors write dozens or hundreds of these checks, and they don't have the bandwidth (nor desire) to put any pressure on the founders. The pressure kicks in when you raise series A and get partners on your board who only make a few investments per year.
Is it really true that you could take a $250k seed round, build something profitable-but-not-huge, then just quietly run the resulting business? I thought that carried a pretty strong expectatation that you'd be hiring employees and looking for series A pretty soon.
Definitely interesting if there are other good routes for "slightly-too-big-to-bootstrap" ideas (beyond the obvious "savings" and "transition from consulting")
Wufoo did YC then didn't raise a Series A, before eventually selling to SurveyMonkey. Olark raised from YC, then a Seed and that's it. Statuspage did YC and then Seed and then sold to Atlassian. These are just some examples off the top of my head, I'm sure I could come up with a ton more.
Thanks for these examples. Going for a relatively early sale/acquisition/acquihire returns capital to the seed investors, so not really quite the scenario that I was thinking of, but the Olark example is very interesting.
Absolutely, it of course depends on the terms. But in my experience investments for that amount never involve a board seat and normally involve a smallish amount of equity so investors have no means to pressure companies into taking an A later if they don't want to. There is some expectation that you'll do something with this money and normally for early stage companies that means hiring people, but I've never heard of an investor strong arming an entrepreneur into hiring people when they didn't want to.
There are far more 10 million dollar companies out there than 10 billion dollar companies. Which hints at the fact taking money to grow increases risks of failure. So, if you don't need funding you are better off not taking it.
Don't worry, you're doing the right thing. Bootstrapping is a 100% thing: you take 100% of the risk; you get 100% of the rewards; and most importantly you can focus 100% of your energy on the product. That focus feeds back nicely into lower risk and higher reward.
Finding capital will divert a lot of your energy into non-productive directions, and probably they are directions that you are not hugely efficient in. And if the time comes that you do need capital, you will get it on much better terms because you have a more mature product.
We bootstrapped, and for a couple of years I had the same uncomfortable feeling as you - all my peers seemed to be focused on raising capital. But now we earn far more than we can spend (we're not profligate people, but we're more than comfortable), and one of the most satisfying things is we can continue to operate on our own values. We don't feel we have to jack up rates or reduce support to improve returns for investors, for instance, which makes our customers love us, which makes it a joy to come in to work, which makes our customers love us even more... life's good, and you really can't ask for more than that.
Finally, you used the magic word "sustainable". You get this in a way that most in our industry don't, so just smile at the unbelievers - you know an important secret they don't.
Don't forget the part where you're told that "it's fine if you want to create a mom-and-pop business"—which is apparently defined as anything that isn't venture-backed.
Mom-and-pop, or lifestyle businesses are categorized as companies who's customer delivery model can't scale well and/or who's market can't sustain a venture return regardless of how it's capitally backed. Capital comes in many forms, and VC is just a small blip in the total amount of money deployed to help businesses grow.
There's a bunch, but one example would be Morningstar, the mutual fund review company. Other than some small friends and family money at the beginning ($80k), Joe Mansueto never raised any money, until seventeen years after the founding and it was making substantial money already.
This was in part by selling annual subscriptions, so he got cash in advance from each customer. Even though he lost money for a while by accounting rules, he was cash flow positive after a year.
Once you accept cash from someone else, you give up some control and you get a giant ticking clock. Even if you're "successful" by most measures, if you're not successful by their measure, you might as well be dead.
Absolutely. That's why we are bootstrapping here, despite being offered funding in the past (unsolicited, I might add). For someone who is trying to build a healthy lifestyle business, accepting money from a VC is equivalent to agreeing to having a boss.
When entrepreneurs who have accepted funding are not able to meet certain targets, they routinely get sidelined and/or replaced. I don't know why so many people here pretend that's not the case.
It smells like this is becoming more and more common. Small startups with outsized redults for founders and employees, instead of big startups with small results for founders and miniscule results for employees.
It seems like the trend has been growing for the past 5 to 6 years. Or I've been wrapped in the microconf crowd bubble and have a bonkers read on reality.
There are three possible reasons for the quizzical look you get.
1) They misunderstood you to mean that you have no money and that you will run aground any minute. Whereas in reality you're fine for now.
2) What you got was a "first reaction" from someone caught up in money worshipping. People sometimes act contrary to their personal beliefs for the purposes of conversation.
3) You're making a horrible miscalculation and you're fated to be punished by unseen forces.
Raising capital is not foolish, doing so without reason is.
Nothing wrong with bootstrapping, but unless you and your partners publicly commit to not doing it and promise to leave without any compensation of any kind if you do raise capital - it is what it is to say you'll never do so, and to be honest, it would foolish to do so.
Who is looking at you this way -- your 2 employees (hoping for a "wealth event"), or outsiders (who want to live vicariously through your wealth event)?
It seems like a lot of the "easy money" in early rounds comes from institutional seed investors like SV Angel, who are happy to hand you a $100k note with a good story and a bit of traction.
The problem I see with this is that their willingness to do that is tied to the performance of their early investments that have turned into unicorns. So for SV Angel for example, that would be Snapchat. As long as the unicorns are riding high at valuations that are obscene multiples of the initial VC investment, the VC can afford to make more small, early stage investments. If the goal is a 10x average return on the fund, then the higher the valuation of its unicorns, the more it can invest small sums in the "long tail" of early investments.
The problem is that as soon as a unicorn sees a devaluation, the calculation of average return decreases, and therefore there is less money available for that long tail.
This is how I see it, anyway, with a fairly unsophisticated understanding of the mechanisms. I'm curious to hear other input on this perspective.
Evernote is a bad datapoint for the Times to use as a starting point for some tech bubble tea leaf reading. The company was mismanaged for nearly 4 years. The founder and CEO walked or was pushed out over a year ago. And rightly so. It was like it was run by someone with A.D.D. For example they opened an online store that sold a bunch of branded Evernote junk, pens etc. including Evernote socks... They kept adding new features when core features were broken for several versions of the app. In some cases resulting in data lost, eroding customer confidence in the product.
The tech winter came and took out VC funds, valuations, board seats and executives. It also slowed down the rate of new startups and IPO's. It didn't crush companies like reporters speculated or wished. This time companies that received large amounts of funding unlike the crazy web 1.0 companies of 1999. These companies have finical planners, oversight and accountants. This gave them some buffer.
This very much ties into my answer elsewhere on this thread but I hadn't quite thought of it in your way.
It's like what the Citibank CEO said about the subprime mortgage boom: as long as the music is playing, you've got to get up and dance.
VCs are pressured by unicorn successes to 100x their investors' money, and the scarcity of decent (acceptablely small return without absurd risk or absurdly small return with acceptable risk) investments around the world are very hard to come by these days, so Silicon Valley is pretty much the only option left for people with money who want to see more of it.
It is touted as a hub of "innovation" but I do not see it. There are exceptions that exist, scientific and medical companies perhaps, but the majority of tech-startups are not that at all, they are a fucking FUGAZI. They are speculative companies that are all about hype and getting an "exit" someday. Steve Jobs (as an example) is regarded as a "deity", a god of Silicon Valley. Because of wealth? Because the iPhone / iPod / iWhatever had a simple design? Step outside, the iPhone is used as a vessel for narcissism. Facebook and Instagram, two billion dollar companies in the valley, those two are the TEXTBOOK narcissism vessels of HUMAN HISTORY. These tech-startups are an absolute pathetic coping mechanism for humanity, they are not innovative or special.
Hold on a second. Are you trying to say that a ride-sharing app for cats is of zero or negative value to mankind? That professional bullshit artists and narcissists calling themselves "founders" and "hackers" don't measure up to the old guard who built real innovations such as microprocessors? Blasphemy.
I agree that Silicon Valley is in NEED of a crash.
But NOT because there is no innovation. But because there is a lot of innovation and that real innovation is getting squished by get rich schemes (I have no other descriptions for some startups). This is like with all bubbles: fundamentals will start it but then speculators will take over causing the bubble.
You and I have different ideas of innovation. You are likely thinking in a capitalistic sense of a view (disclaimer before I get thrashed on: I am not thinking capitalistically) perhaps you can name me a few particular up and coming companies YOU think are doing imperative, highly-important and highly-beneficial things for us humans? Companies that, 10 years from now, will be so imperative to our survival and well-being that they will fit directly into the Maslow Heirarchy of Needs?
I scroll through Tech Crunch regularly. My honest observation: 95% of tech-startups are, as I said earlier, F-U-G-A-Z-I-S. Companies that fuel narcissism. Companies that are spin-offs of companies that fuel narcissism. Companies that perform services for other FUGAZI companies. Ad companies. Companies that provide streaming, so millions of Americans can watch Kim Kardashian on their Mac. I don't want to be a philosophical hippy, I am not one of those, but nobody here can deny that all of this is a pathetic coping mechanism.
Why are we coping? We are coping because we are a too primitive and unevolved monkey species to take anything to the next parallel. Even something such as space exploration is science-fiction, meeting a different species of life? Science fiction. Some sort of child pipe-dream we've learned from Hollywood (another FUGAZI)
How about something to help us find a slight meaning to existence. Isn't this the root-goal, at it's core? I look out with clear focus on the surroundings, but I do not understand. Then I go back to FUGAZI-land. It's imperative I figure out myself, but society is an obstacle (despite it's perks)
To sum it up: 95% of Silicon Valley is a primitive coping mechanism.
It's hard to take you seriously when you are being so antagonistic. You can make the argument that Silicon Valley is lacking in innovation, but you don't need to poison that argument right out the door by pushing a worldview that these companies all exist to fuel narcissism, thereby implicitly insulting everyone who likes these products.
I don't use things like SnapChat and Facebook myself, but I also don't act as though these companies aren't innovating, and i don't shame their users. Perfectly reasonable, intelligent, kind and well-adjusted enjoy browsing Facebook every day, and there is nothing wrong with that. And have you seen what's coming out of (for example) Facebook Artificial Intelligence Research labs recently? Is legitimate progress not innovation because it supports capitalist processes that you disagree with?
In short, you're being judgemental and instead of coming across as passionate and self-aware, you're coming across as puerile and angry.
>Companies that, 10 years from now, will be so imperative to our survival and well-being that they will fit directly into the Maslow Hierarchy of Needs?
Can you name any?
no company invented sexual intimacy, or family, or achievement, or hunger.
cars arent on maslows hierarchy, does that mean the invention of the car wasnt innovative?
I dont see flight either, agriculture isnt there, drought resistant crops, eyeglasses, dental care, surgical advancements, pharmaceutical advancements, improvements in the safety and availability of water, accessibility of information, the personal computer, etc.
Before you make some argument about how pharmaceutical advancements would count as 'Health' under the 'Safety' section, then you need to show how facebook and instagram dont fall under friendship, self-esteem, confidence, respect of others, creativity, etc.
how is tinder not related to sexual intimacy? how is linked in not related to security of employment?
Apple, FB and Instagram are capitalist-based companies that wish to maximize profit.
People are narcissists and generate demand for narcissistic products, and are willing to pay and/or invest time on them.
From a tech point of view, you can argue that a lot of these companies innovated in being able to scale their solutions to supply the "narcissistic demand" of billions of people in real-time.
From a product point of view, you can argue that a lot of these companies managed to figure out the most comfortable and intuitive ways for people to express their narcissism.
From an all market point of view, you can also argue that lots of non-tech companies also exist based on narcissism, e.g. cosmetics, fashion.
If silicon valley's next bubble does burst, it will probably have nothing to do with narcissism, and more to do will investment speculators not learning their lesson the first time.
In a literal sense the Valley is very real. It exists. We cannot deny this.
On the other hand, the image of a godly unparalleled innovative land full of tech-genius-gods who "create amazing technology" that benefits society is the actual fugaziness of it all (barring a few particular inventors and organizations, but I am not the all-decider who gets to choose which)
If the iPhone is a vessel for self-love (I think psychiatric jargon is overused) wasn't the television a vessel for equally unattractive qualities? But you wouldn't dismiss television engineering - a fantastic body of work, from the rudimentary spinning disks to the latest codecs, just because the content is adapted to the low minds of the masses.
I think the internet gave us an unrealistic reference point, because for a few happy and accidental years it was a network of the intelligent.
Perhaps most technologies are more like television or smartphones.
Except the iPhone is the result of decades of Apple employees researching stuff and doing random skunkworks projects on tablets and PDAs that mostly didn't see the light of day.
If done right, the competitive advantage is in the optimization of the allocation of labor. It's just that there don't seem to be that many labor-intensive businesses where optimization provides the kinds of returns necessary to make it worthwhile.
As for the on-demand valet service, seems that Luxe got there first and built the partnership relationships before the competition. No idea how they're doing, but at a minimum they're not deadpool yet.
The best ones actually are similar to what you are highlighting, but started by someone with a Phd in physics [1] and/or an MD that they walked away from to get in on the lottery.
[1] Note that I do not know what the job market is for people with Phd's in Physics so pick another advanced degree as an example. I do know the market for MD's though.
No; but the most efficient model of a company in an "APIs for everything" world is one that can build their own systems out of bulk APIs provided by various service providers. It gives companies a huge amount of leverage over their suppliers -- open standards and the ability to swap out one supplier for another via an API erodes platform lock-in. The winning players will eat their competition that doesn't have this type of infrastructure.
That's what Andreessen meant when he famously said "Software is eating the world." Given a fast enough computer and enough abstraction, there is literally no task that cannot be automated in software.
Amazon is the poster child for a company built around a set of APIs. So yeah, you may buy warehouse robots from Kiva Systems, but you're not going to have a competitive advantage unless you're vertically integrating / automating all of your business processes like Amazon does. The product offerings that Amazon can deliver (merchant services, AWS, etc.) as a result give them a HUGE advantage over traditional retailers like Wal-Mart: this is an advantage that is structural and not something a large, established entity like Wal-Mart can copy with the same level of success.
Retail was a big one with huge rewards; but the same thing is happening in every industry. The companies that build the APIs that make it easier for their competitors to compete with them are the ones winning because their competition is funding their scale. Open companies are definitely the future (and note that "open" does not mean "free" -- pricing is absolutely key in this type of business model).
Katie Benner has written some good stories, but I'm suspicious of articles like this, because they insist almost irrationally on finding a trend that they can make a pronouncement about.
The truth is, startups are all over the place. Some are wasting cash, and some are trying to build sustainable businesses, and some are trying to get acquihired. And all of those things are going on all the time.
VCs have raised record levels of investment from LPs this year. And that money will get pushed into the system whether Bill Gurley wants the competition or not.
The people who harp on an impending crash -- and they have been harping for quite some time now -- seem desperate for something to say about tech. In secular terms, tech's star is on the rise and everyone knows it, so the real news would be a crash. But the crash, like Godot, refuses to arrive. Actually, many parts of tech are pretty damn healthy, and moving fast, AI and robotics being just two.
And there is a correlation between those who don't have time (or exposure) to talk to the press for fluffy articles about SV... because they are too busy building a real business that makes money. Meeting clients, investors, hiring, etc. PR is only on some startups lists and they are usually consumer plays which are always riskier (such as valet parking apps).
There won't be a crash until the rivers of money being pumped out by the central banks of the world stops. The entire VC industry is just a tiny cork floating on a gale-whipped sea.
I do think that it is getting really hard to break through the noise with a new concept. There are just so many companies chasing the same eyeballs that it is really hard to get the traction needed to build a unicorn no matter how much money you raise. At this point it might be better to go hyper-niche and bootstrap.
Well, from the point of view of the Central Banks, creating any kind of economic activity is a plus, regardless if it'll be viable longterm for it's employees or if its "true innovation" (not noise). So the money faucets are working as intended. Given how anemic our economy is compared to other post-recession economies, I suspect it'll stay that way.
Crash is going to happen. Most of these startups are not run by people with business sense who know how to make a company profitable. They are raised by people who know how to tell stories to raise easy money. The money is not there anymore, soon enough they'll run out and won't get a lifeline.
The good ones know how to tell a story... a lot of them can't even do that. They just have wealthy friends/family or made some money from another deal where they got lucky and think they can do a startup.
I work at a consulting company and it's amazing. Some of the customers come in and have five employees, no product, no story, but a rich dad.
I have literally seen a millionaire dad sit across their kid in a meeting trying to explain what minimum viable product is and ended up giving in and paying to have their over-blown product made anyway. It's worth noting that we also explain and strongly encourage the client to stick to MVP, we never recommend overly broad feature sets.
It's so odd. Most of the attraction I see in starting a business is the problem of bootstrapping it—there are many business ideas that are attractive, and the game is in separating the viable ones from the busts. I'm not sure why you would start one if you really just want to be a PM and not think about the cash flow.
I thought that too, but that last YC batch was filled with some solid (read boring) start-ups. They all had potential... not sure they all had the potential to be billion-dollar companies, but I doubt YC is going to lose any money on that batch. It was a lot more down to earth than the typical silicon valley type nonsense I've personally become used to.
There are actually many things in the world to be worried about when it comes to the economy. A few badly run companies won't help with that but ultimately won't be the cause.
Brexit may or may not have an effect. What is most likely is that other EU countries see the same movement towards exit based on the influence of far right parties.
If the US elects a president that openly calls for that, like a certain party candidate did for Brexit, we can be certain about the uncertainty.
That's just inside my sphere of concern. There are many other things going on in the world that could lead to a shock in the economy.
My point was that a crash would be a big enough event that the latest batch of YC startups wouldn't stop it, and one data point doesn't invalidate the broader criticism of SV over the last five years or so.
Of course, there may be global factors that could impact a crash in SV. But if the SV tech economy crashes (which is what we're talking about here), I think most blame will fall on local rather than global factors.
According to the article, "investors are shoveling money into venture capital funds, which raised so much cash in the first half of this year that it rivaled the amount raised in all of 2015."
How about that number excluding Uber and Airbnb? Anyhow I am talking more about the smaller lower profile startups, not the unicorn media darlings that can always find dumb money somewhere.
You seem to be implying that a "crash," which I'm taking to be defined as something that drops the stock market and overall economy, is caused by these startups. The widespread Mainstreet investors are not invested in startups like they were in the IPO-fueled dot-com bubble. It is largely accredited LPs going through VCs privately.
Yes, there may be other economic factors that could cause a crash, but at this point, I think we would need to see an unprecedented black swan event to royally shake investor confidence. The election outcome could be an interesting one as markets tend to go a little crazy during election years.
Plus, I'm curious how many people VC-funded pre-revenue startups in the Bay employ. If they were to all crater overnight, what impact would that have on the housing market given the other massive tech companies with strong revenue models and billions in the bank to weather anything? My assumption is they hire and locally employ orders of magnitude more people.
The 'crash' won't be so much a function of how well earl stage companies are doing.
It's a function of the IPO markets and overall investor confidence.
If there are a few big IPOs, it will create excitement and money will keep coming.
"The money is not there anymore" - it definitely is.
Even without some IPOs to keep the animal spirits going - the big difference between this and the last few VC 'corrections' is that now we are in a permanent era of low interest rates - and - money from around the world is finding it's way into the Valley creating a surplus of cash.
This is a secular change, and it's the 'new normal' at least for now.
As long as there are pitches, there will be money.
I suggest a correction is coming of some kind, but it won't be a huge drawback, like the kinds we've seen before.
I've basically stopped using the word startup because at this point it seems to apply primarily to companies that only care about vanity metrics and nothing else. The word has been hijacked by investors and founders who want companies to appear profitable so they can cash out.
I love the Steve Blank definition that "A startup is a business in search of a scalable business model" because it really cuts out all of the companies have their business model and metrics in place. It would certainly eliminate a company like evernote, and most if not all unicorns for that matter.
At least based on HN coverage there seems to be a recently a wave of stories about scammers and wanterpreneurs, some questions about "signs of failed startups", warnings about red flags and so on.
Is increasing scammer activity a sign of the tail-end of a market hype?
This is just silicon valley growing up and joining the actual business world. It used to be a blank check, now people are asking questions about finances, valuation. VCs, startups were some super risky exotic venture. Now that it's become more commonplace, more common business controls are being put into place. Startup == small agile business.
This is a good sign, in my opinion. It means the word startup is no longer some rocket to the stars but means a small business with bootstrapped capital that may or may not make it. Like every other small business tbh. VC has become a legitimate vehicle for investment and returns and not some exotic moonshot project. Therefore, financials are now questioned.
What defines a startup? Everything that did not IPO yet is referred to as a startup. Sure everything starts at some point, but should Dropbox, Uber and Airbnb still be called start ups? Aren't these large companies?
Better yet, is any new business a startup? Having been around business for a long long time I tend to see it as fitting a particular mold in terms of tech type product offering, young staff, desire to get venture funding, talking the talk and walking the walk. I think I know it when I see it but I can't even think of all of the qualifiers.
Yep, the word "startup" has the same definition to me. It's more of a description of the culture than how new or scrappy the business is. I worked at a "startup" that had been around for 10 years, had no plans of exiting, and was sustainable, but had a very young staff, a keg in the kitchen, and pressured it's young developers to work late for shitty pizza.
I think some small businesses are jumping on the startup train so that they can attract kids right of college.
I work in the SF Financial District and one rarely sees T-shirt paired with a blazer. Lots of T-shirts (company-branded or otherwise) and jeans, occasional blazers with open collar dress shirt, more frequent outdoor jackets (e.g. North Face) with dress or T-shirt, or no jacket at all.
Dress slacks are rare among anyone not in the SVP Or C-suite.
(All this is me going from memory so undoubtedly if unintentionally inaccurate to some degree.)
I wondered the same thing, even tried Googling his height. I think it's partly exaggerated by a somewhat-wide lens, and the two flankers leaning back in their chairs while he leans forward (nearer objects being represented as larger).
What would be the best way to tell if there is a market crash about to happen? Is there a way to monitor for a decrease in Help Wanted ads or an uptick in vacant commercial properties in SV? There has to be some numbers before the crash that could tell you when the crash was about to happen. There has to be the proverbial canary in a coal mine out there.
* I knew the 2008 housing crash was coming when someone told my Dad that mortgage companies were not even checking credit history of buyers anymore. I knew that day, housing market was toast, but I did not know how to make money off of it.
There's a bunch of short funds you can buy into. A buddy has an unlisted one set up and they are waiting out the next 12-24 months waiting for an Asian market crash. It's quite interesting to hear how they set up the strategy of what companies/industries they have focused on.
A quick Googlefu brought up this article. No idea if these funds are good but this kind of things is a Good investment point if you want to bet on a crash:
Short FB and GOOG, since both are entirely dependent on ad revenue, and marketing budgets are the first to be cut in a recession.
The problem with shorting equities like that is that your downside is unlimited. "The market can stay irrational longer than you can hold your short position," or whatever the saying is.
That doesn't sound right to me. As far as I can tell, for most positions, if you just care about money and are not counting on the IPO lottery, you're better off working at Google or Facebook (assuming you can get the job). In other words, overfunded startups aren't paying THAT much.
And even then, most people would not call you "rich" by Silicon Valley standards. I would say "rich" at a minimum requires you to be able to buy a house in Silicon Valley or SF.
Depending on where you are, any job at $BIG_CORP is generally more stable than any startup I've worked for... at least outside SV. I've spent most of my life in the Phoenix area, and the job market for developers (outside late 2001 through mid 2002) has been very good, especially compared to cost of living. It's all been line of business work for the most part, and none of it too exciting. But it pays consistently. And does leave enough time to work on secondary projects.
I've never really seen the draw into the startup lottery, it just seems like a bad bet as an employee most of the time.
My experience is that startups uniformly pay less (significantly in some cases) than established companies. They also (warning: anecdata) fudge the pay schemes, doing thinks like counting a hiring bonus which can be clawed back as part of salary, or running a "stock options/equity" scam, etc.
My main concern is that there are few investment avenues these days that provide a decent return without being extraordinarily risky. Stocks are stagnating. Bond yields are so dismal you have to invest in places like Turkey to see any sort of return - if it even happens.
That pretty much makes Silicon Valley the default place to get any bang for your buck. Investors in VC funds want to see returns. VCs want to keep investing in winners, getting more investment in their funds, and making good money along the way. People want to turn their sweat into gold so there is no shortage of aspirational entrepreneurs.
So it seems to me that if there is anything that could turn a cautious slowdown into a full-blown crash, it's a scarcity of decent investment options.
(EDIT: Didn't notice that the emphasis in parent is a quote from grandparent. So consider the numbers below to further support parent rather than contradict it)
Your numbers doesn't show that at all.
9.7% up in a year is roughly 0.775% average per month compounded. Assuming even growth through the year, which is obviously a simplification, to reach 9.7% at the end of the year you'd want to have appreciated 6.3% by now, so 6.7% doesn't sound all that bad.
85.4% over 5 years is roughly 13%/year compounded. Since 1950, the annualised average return of the S&P500 have fluctuated between -3.6% and 19.3% [1], so both the 1Y and 5Y are well within the norm. If 9.7% were to hold through a full decade, it'd still be far above the median per-decade averages.
If one of your investors or potential acquirers is a big company and you already have contacts with them, get that company to do a Euro corporate bond issuance, and use the proceeds to buy your company
A) this is already happening
B) it isn't the strangest thing that has happened
Silicon Valley downturn talk is ignoring broader macroeconomic fundamentals, at this point in time.
Economically unsound? SURE! Are you in a privileged enough position to make a lot of money? DEFINITELY!
This is why I don't think a 2001-style crash is coming. A slowdown maybe, but not too hard a landing.
Since 2008 global central banks have made it abundantly clear that deflation in any major asset class will not be permitted. If it begins to occur, governments and central banks will intervene with infinite QE and other actions that will restore "confidence" in the market and prop up the asset. In some cases that amounts to actually entering stock, bond, and RE markets and buying stuff with printed money, or giving printed money directly to banks with incentives to do the same.
Major players in this unwritten pact include the USA, China, and the EU. It's so large you might almost think of it as WWIII, but being fought with monetary policy (mostly) instead of guns. It's not really a classical bubble but (IMHO) more properly thought of as an economic war. The loser of this global conflict will be the first nation or economic union unable to pump any further. At this point the loser will experience hyper-deflationary collapse and will be bought by the winners. Either that or the war will go hot with the loser being forced to substitute military action for economic might.
Startup stock is obviously not on the list of TBTF assets, but it certainly rides on others like stocks, bonds, and real estate. To the extent that startup markets are international, dips will be seen by foreign actors as buying opportunities. Chinese money is already flooding into SV and tech in general. EU money is there as well, albeit more quietly, since right now real yields in the EU are in some cases actually negative and people are looking for ways to diversify more globally. Ploughing some money into high-risk assets like startup stock can be part of a larger diversification push, and the startup world is so tiny compared to the truly massive markets of bonds, stocks, and real estate, that all it takes is a little bit of this behavior to keep the music playing.
Edit: add in the fact that startup crowdfunding is going live and you now have a second firehose opening up. I do think things have gotten frothy but I don't think it's over.
yeah accurate, but if you take out the 'conflict' and 'WWIII' parts you'll see that it is a coordinated effort between all the major players to spur all the economies.
The central banks are all trying to get people to diversify into higher risk assets further up the yield curve, by pushing everything into negative yielding territory.
They are trying to spur the economy by getting everyone else to circulate money to groups that are marginalized out of low growth investment grade sectors.
No accident and no economic war whatsoever.
Pump further? As long as the marginally higher risk businesses don't default all at once, the central banks and everyone else will get all of their principle back.
Of the investment grade bonds being issued, it is largely no questions asked general purpose money for the corporation issuing it. They can use those billions to buy up startups all they want making all the laborers very wealthy. If they want.
I was seeing it as a conflict primarily because the world does not provide us with an infinite supply of resources or human capital. This pumping can therefore only work to the extent that it can generate some medium-long term real ROI. Otherwise you get an eventual deflationary collapse when waves of debt defaults occur because nothing anywhere is generating a return sufficient to maintain payments on your also-inflating asset prices. (See also: house prices vs. median income in major cities.)
The conflict, therefore, is being fought by major powers via their ability to generate real ROI. It's a game of chicken. The loser is the one who deflates first and gets purchased by the winners.
Cooperative behavior is not mutually exclusive with this hypothesis. It's in the best interest of individuals within all of these major super-states to hedge by investing in the others. Whether or not this overcomes the game of chicken aspect and leads to a win/win/win outcome depends on whether we can all -- collectively -- scale and grow or whether limits to growth are reached.
Clearly, supply and demand are out of whack - there is too much capital ready to produce stuff, and not enough consumer cash to buy all that which can be produced.
And yet central banks keep pumping money into the supply side. It boggles the mind. Why? Why not pump the money into the demand side?
It's ideology. That would be "giving handouts" to "lazy people," etc.
Oddly enough the strongest support base for this ideology is among those who would benefit from pumping the demand side the most. Many of the wealthier people I've talked to or who I've heard speak on the subject seem to get that we are in a demand-constrained economy.
IMHO it emerges from the fact that human beings are genetically programmed for scarcity. When we feel threatened we tend to respond by pushing for others to have less. "I'm poor, so you should be poorer." Our emotional and social brains simply do not compute abundance and definitely do not compute large-scale economics.
> And yet central banks keep pumping money into the supply side. It boggles the mind. Why? Why not pump the money into the demand side?
Central bank monetary policy is a fairly limited, blunt tool. It can make borrowing cheaper, which in principle has effects on both the producer and consumer sides, but it can't really focus all that well.
Focussing stimulus is more government fiscal policy than central bank monetary policy, but those are controlled by different actors.
>Major players in this unwritten pact include the USA, China, and the EU. It's so large you might almost think of it as WWIII, but being fought with monetary policy (mostly) instead of guns
Indeed, there's a book called Currency Wars. Recommended.
They are wildly guessing based on the past in my view. MarketWatch.com has an author that's been predicting the market crash for the past 3-4 years. Eventually he will be right.
If Katie Banner really thinks we're heading towards a crash in a defined time frame, I recommend that she start shorting, as that'll pay off way more handsomely than writing for the NYT.
> Other entrepreneurs have a newfound air of practicality, no longer shooting for their companies to be the next tech behemoth like Facebook.
I haven't been hearing much about raising lately — Is it still the case that you are expected to lay out a path to $1Bn in your pitch deck, no matter what your company does?
Several VC funds were launched over the past few years. Assuming they're ~7 year funds, we're going to see an increase in LP and board pressure over the next few years, as these funds come to maturity.
