I find it very hard not to get angry at these posts. I'm thinking also of Fred Wilson's burn-baby-burn piece from a week or two ago.
I am the cofounder of a bootstrapped startup company with 7-figure annual revenue, a better than 100% growth rate for the last several years, a great team, a fantastic market, and a genuinely useful product.
One of the biggest problems facing my company right now is dealing with all of the venture-funded idiots coming after my customers, market and employees without so much as a hint of a viable business model. They outspend us on marketing 1000-to-1 and they offer to serve our clients essentially for free, apparently just to be able to win a logo for the "traction" slide in their deck in the hope that they will have enough proof points to get them their next hit of venture money.
I know that nearly all of them are going to vaporize eventually, but in the meantime they completely poison the well for all of us who are trying to do what Andressen, Wilson and the rest pretend they want startups to be doing - creating sustainable businesses in sustainable markets.
Posting this as an anonymous coward because who knows - I may need to raise venture money myself, though I'm pretty sure we wouldn't qualify with "5x being the new 2x" I don't think anyone is interested in mere 100% growth, even if it comes with the advantages of sustainability built on the back of a real business.
Between this problem and all the other issues that are coming from this age of startups (like trying to build a business on a startup and then it just poof goes away one day), the Startup world is in definite need of maturity and more grown ups.
Thank you. You have explained better than I ever could how their "dumping" of money on unworthy poseurs is not only non-productive but actively harms the whole process of innovation as it crowds out people like you who actually know what they're doing. I guess the upside is that a larger number of leaner companies might spend a lower percentage of their budgets on marketing, so the effect on people like you might be reduced.
>Posting this as an anonymous coward because who knows - I may need to raise venture money myself, though I'm pretty sure we wouldn't qualify with "5x being the new 2x" I don't think anyone is interested in mere 100% growth, even if it comes with the advantages of sustainability built on the back of a real business.
The VCs own compensation structure practically guarantees that they will raise as much money as they can and invest it however they can, no matter how much they have to lower their standards. As in the semi-obvious biological analogy, they don't really care about what kind of offspring they're producing. They just want to reduce the per-company expenditure so they can invest in more companies. That's entirely what this is about. Any good that the "be very careful about hiring" advice does for the companies or founders is purely incidental.
Never trust a money-lender who says they want people to borrow less. They just want more people to borrow the same total amount, to change their own risk profile.
10/Fifth: More people multiplies communication overhead exponentially, slows everything down. Company bogs down, becomes bad place to work.
Warning: pedantic.
Adding people increases communication overhead quadratically, not exponentially. To see why, consider the complete graph on n vertices (people), K_n. The number of edges (lines of communication) in K_n is n(n-1)/2, i.e., proportional to n^2.
This assumes that "communication overhead" is proportional to the number of dyads; I can certainly see why one might suspect that to be the case, but I certainly don't see that it is implausible that that overhead would expand faster than that (I don't see an obvious theoretical foundation for literally "exponential" growth, but I wouldn't reject it out of hand, either. Of course, you'd probably want a clearer operationalizations of "overhead" to answer that question.)
a16z is scared of how high stakes got at the game he has helped to escalate the stakes at. He is getting out priced by new money coming into the Valley, and the only way he can stay in the game is to increase stakes (funding/valuations) even more. Unfortunately, at this level of funding/valuations the start-ups receiving them stop being lean/agile in any sense and become a fat small BigCo-s which just burn the incoming cash with obvious end-of-game.
Build a site that turns http://site/@twitterhandle into a blog compiled of tweets from that Twitter user that start with [0-9]*/ , and maybe he'll fund it, if you don't spend it all on Herman Miller furniture.
Can someone tell me what changed? Hasn't this been the climate for a few years? Are people just now starting to get antsy and feel like things can't stay this way? Not because of any real metrics but a group shift in psychology?
Just a few months ago I listened to a principal at a VC firm in NYC talk about how things aren't going to change anytime soon because a bunch of firms just raised new funds. Now he was primarily talking about seed rounds and as far as I can tell the concern about burn rates is targeted more at companies like Uber & Lyft that have raised nine figures. At the very least there appears to be a different climate around seed stage investments than there is around big growth stage C & D & beyond investments. But let's say the big late stage companies go up in smoke and there is a new reluctance to invest at later stages. Is there then an entire generation of companies that received seed funding when the market was hot that are now on quiet death marches? I suppose that's the disaster scenario.
Just a few months ago I listened to a principal at a VC firm in NYC talk about how things aren't going to change anytime soon because a bunch of firms just raised new funds
Timing is famously part of the issue. Alan Greenspan's famous "Irrational Exuberance" speech occurred in 1996–three to four years before the tech bubble burst. People started predicting a housing bubble in the 2003 – 2004 timeframe (Megan McArdle, for one), and if you believed there was a bubble in 2004 you spent four years with people telling you that you're stupid. With other crises, like Long-Term Capital Management in 1998, I don't think anyone saw the bubble coming.
So, presuming this will all burst at some point... what would you do to protect yourself? What if you want to stay in software, even if it drastically shrinks, or wages contract?
How did we survive? Skills, connections, and some luck. It wasn't that everything vaporized, just a lot of fluff companies built on VC with no profitable business model. Just as when times were good a lot of unqualified people got into the business, when it imploded they got out.
About right. Myself and many others made it through the dotcom boom simply by working at companies that seemed to have rational business models and were diverse in their interests. They never pegged their entire existence on one product or industry.
At a macro-level: The Federal Reserve started tapering the amount of money being printed. They have also signaled that interest rates are rising. Both of those things affect the money flow to the VCs, as well as the exit options in the public markets.
In truth: People should be happy that the party has gone on for as long as it has.
Yes, I believe that's exactly what's happening. Investors as a whole are able to shape their own reality: If enough of them talk about valuations taking a southward turn or a "bubble popping," then it can quickly become a self-fulfilling prophecy. The opposite case is also true, of course.
Every investment vehicle is overvalued which led to a glut in, amongst other things, venture capital. With more capital available than needed for viable business models, a lot of founders created innovative new ways to spend venture capital and soak up the available cash.
What's funny is that a founder of an unprofitable VC backed startup generally still makes substantially more money than most people. What does it matter if they're spending a ton? The people who ran Groupon into the ground walked away and got other jobs, it wasn't their money...
Reminder, Andreessen is the same person that says Snowden is a traitor. He blames Snowden for hurting the tech industry, with no thought of the stake government institutions may hold in this issue.
Technology is still freaking people out. I suppose it's understandable. For centuries, humanity progressed with just incremental little improvements in productivity from year to year... then automation technology and computers show up and everything explodes. Workers are able to produce 10x or 20x or 200x as much in the same time period. Wages were the first to go, immediately divorcing themselves from any relationship to the amount of value the worker produces for the company.
This sounds to me like an outgrowth of that. "Can this little bit of software really be worth THAT much?" When it sparks exponential growth and enables a company to be active in a global marketplace with a handful of employees, yes, it absolutely can be. But with a voluntarily blinded eye turned to the actual value of software, everything looks the same. An app to waste a few hours in entertainment, or a system to automate part of customer service? Which one can make a ton of money?
He may be quite right though. I've lost track of how often I read stories about a startup and then am absolutely gob-smacked at the number of employees they bring on. They start a project that could be easily and competently handled by maybe 15 people, and they hire 1500. What most of those people are doing is anyones guess, probably marketing and design work that should have been done by contracted remote-work freelancers I suppose. They continue ignoring everything and pretending like this is 1975, like offices are something more than a gigantic drain on efficiency with no payoff. And they plunk themselves down in Silicon Valley, paying $28000/mo to rent an efficiency apartment above a garage. The actual WORK, the production of value, seems completely ignored next to the rush of "playing the game."
If there is an invisible hand guiding the market, we will see "companies" as such evaporate eventually. They no longer offer any value. They used to offer almost all the value, by solving the problem of distribution, both of work to workers and product to customers. Thanks to the Internet and software, distribution is a solved problem. It's nearly worthless because anyone can do it. All that efficiency that companies could afford while standing between a worker and an end customer, skimming 90% off of every transaction between them, is going to become their death.
Hooking workers up with people who need the product of their work will be handled by software, putting together teams automatically, managing reputation and portfolios to provide good fits to whoever needs a team of a certain type. Without companies there to take almost all of the value being exchanged, workers will find it only necessary to work occasionally. The massive productivity improvements that have occurred since 1980, like a secretary going from being able to answer 20 letters a day to handling 300 emails before lunch, which were collected exclusively by the company owners and upper management will make it so terribly easy for people to make a decent living without working much. And when people do work, they'll do it from home because there's simply no reason to gather them together in the same building which costs more and lowers their productivity. For work that requires heavy tools and things of that nature, I expect people will open community workshops where people can lease workspace and equipment.
The industries where the service actually HAS to be carried out in person have proven fairly resistant to takeover by small numbers of large corporate concerns. There are always independent plumbers, hairdressers, and restaurants everywhere. Thanks to the Internet, essentially everything escapes from this need for fragile centralization.
1/Cash burn rates at startups: Recently @bgurley and @fredwilson have sounded a vivid alarm -- http://online.wsj.com/articles/venture-capitalist-sounds-ala...
2/I said at the time that I agree with much of what Bill says (https://twitter.com/pmarca/status/511617992757506048 …), and I want to expand on the topic further:
3/New founders in last 10 years have ONLY been in environment where money is always easy to raise at higher valuations. THAT WILL NOT LAST.
4/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.
5/High cash burn rates are dangerous in several ways beyond the obvious increased risk of running out of cash. Important to understand why:
6/First: High burn rate kills your ability to adapt as you learn & as market changes. Co becomes unwieldy, too big to easily change course.
7/Second: Hiring people is easy; layoffs are devastating. Hiring for startups is effectively one way street. Again, can't change once stuck.
8/Third: Your managers get trained and incented ONLY to hire, as answer to every question. Company bloats & becomes badly run at same time.
9/Fourth: Lots of people, big shiny office, high expense base = Fake "we've made it!" feeling. Removes pressure to deliver real results.
10/Fifth: More people multiplies communication overhead exponentially, slows everything down. Company bogs down, becomes bad place to work.
11/Sixth: Raising new money becomes harder & harder. You have bigger bulldog to feed, need more and more $ at higher and higher valuations.
12/Therefore you take on escalating risk of a catastrophic down round. High-cash-burn startups almost never survive down rounds. VAPORIZE.
13/Further, to get into this position, you probably had to raise too much $ at too high valuation before; escalates down round risk further.
The blog post author then goes on some further back and forth about specifics.