From "The Godfather", about the cycles in their "industry":
MICHAEL
How bad do you think it's gonna be?
CLEMENZA
Pretty goddamn bad. Probably all the other Families will line up against us. That's alright -- this thing's gotta happen every five years or so -- ten years -- helps to get rid of the bad blood. Been ten years since the last one.
Why are startups hot now? Not because the economy is good or because the startup ideas people are having are particularly good, but because risk seeking investors are trying to shove capital anywhere they can.
After the crash of 2008 lots of avenues (created by Wall Street post Financial Modernization Act) to invest this capital were closed, and the growth of the startup scene, particularly the NY startup scene, is a direct result of this. Couple this with a real negative interest rates and you have a nice long boom period where startups are the best thing going for investors who are getting free money (via negative interest rates) to gamble with.
Why will this continue? Exactly the same reason why Yahoo is still in business and why Microsoft is still profitable. There is tremendous room for innovation, growth, and all the improvements associated with those things.
Soon joe.sixpack@yahoo.com will wake up and start demanding more and more web innovation, and the void will be filled by startups doing clever, lucrative, disruptive things. I personally can't believe that anyone can tolerate using Yahoo for anything... and I'm stunned that people tolerate 2 hour battery life Android phones, Windows Vista, etc. The problems (areas for improvement) are far deeper than most tech-savvy people (such as on HN) can imagine, and the population (thanks mostly to Facebook) is slowly waking up to what it actually wants to do online.
To borrow the OP's metaphor, we're in the very early dawn of a beautiful, early spring day, etc. This will occur at least until the cost of borrowing increases substantially.
Also, anyone who thinks we have an information economy in 2011 will look back in a few decades and laugh.
This is a good point, the meta comment is that post 2008 a lot of changes were put into place snd so this 'crash' has different things going on than the last 'crash'. Its this action, where the system responds to booms and busts which makes predicting the future from past events difficult at best, and completely non-useful typically.
I have talked with folks who have investment capital that is 'stuck' which is to say they have money they have allocated to the 'high risk' portion of their portfolio and yet fewer options for investing it. And while YC is a startup incubator, I also see it as a VC incubator. I would expect some of the folks who are successfully investing small amounts into a bunch of companies will begin to want to make slightly bigger bets and that will push them out of YC into a more VC like situation.
The original article's message that things go in cycles, and you need to be able to deal with that, is spot on. And in times of high volatility only the folks who have that sort of risk/reward profile that startups offer want to play (the more conservative investors are worried that their 'moderate' risk capital is at risk and so they double down on those bets taking all their high risk capital off the table). More startups chasing fewer dollars, means a more competitive environment. But that being said, startups take time to get from concept to launch, cycles take time to go from down to up. The absolute best time to start a company is just before the end of the winter.
I concur with your counter-argument. I'll add that one of the reasons we've seen such a huge increase in startup activity and entrepreneurship in the last 4-5 years is the fact that getting a startup from an idea to an Internet scale web service costs practically nothing now.
4-5 years ago a startup (like iLike) had to spend millions up front on server and infrastructure costs. Then the ongoing opex costs for serving millions of users were huge.
This has shifted radically. $150k is TOO much money for many ideas and the opex costs have continued to plummet.
In fact, it could be argued that any sort of economic contraction could increase the rate at which these costs decline, further enabling great ideas to get traction via startups.
Unfortunately this is also going to mean that a lot of the impatient money that has been chasing a quick buck in housing and clever financial derivatives is going to pour into tech startups and make it hard to distinguish the good ideas from the bad.
The other comments are really spot on (Yc as a VC incubator and cost being almost neagative except for the opportunity cost that get it back to zero),
But the most often overlooked point is the fact that, thanks to the "almighty facebook", an previously unbelievable share of the world population is now trained and ready to use interface tools that belonged until know the geek realm.
The barrier to user adoption for software as been reduced to zero: anyone is ready to use software as long as it feels a need.
I'm particularly struck by your point about the negative interest rates. The message in recent weeks is a strong commitment not to let interest rates rise, and I believe to keep these interest rates low, the FOMC is intervening in the bond auctions to sop up any slack in demand. I believe they are inflating to finance this, which means that the cycle will continue until a change in policy at the Fed.
Bernanke's term lasts until 2014, if he isn't re-appointed. He might change direction, but this would be going against his history and his beliefs.
You've identified that there's a big, cheap money spigot. The policies are in place to ensure that spigot sticks around for awhile. It will flow into every place it looks like it can get a return above inflation, and that includes high risk situations and various forms of carry trade.
Eventually, this will force inflation rates up enough that people can't ignore it, and as always, there will be a price to pay. But I don't think we're close to that yet.
It's like 2001 all over again, only this time it won't be houses but something else (and startups will benefit like they did between 2002-2007).
If joe sixpack is still watching jersey shore italy, listening to lady gaga, eating mcdonald, drinking starbucks, playing medal of honor 4, watching spiderman 5, what makes you think they'll do anything but use facebook, amazon, google, microsoft?
A few years ago joe sixpack was watching jersey shore italy, listening to lady gaga, eating mcdonald, drinking starbucks, playing medal of honor 4, watching spiderman 5, but he did start using facebook, amazon, google, microsoft when products/services from these companies appeared.
The entreprenuers who are determined and flexible enough to keep going through the crucible of winter may have an even better opportunity to succeed than they did in summer.
I don't agree with much of this for two reasons...
1. The bubble for already funded companies burst in the 90s but that didn't dry up funding. The truth is a wealthy person's best bet in a down economy is a small startup. Because the potential upside is so much better than any other investment. A company like Y Combinator can literally fund hundreds of startups and as long as at least one has a significant payday at the end Y Combinator still comes out on top.
2. The problem with borrowing money now, as an American, is the dollar is falling and most people expect another round of Quantitative Easing which will almost certainly exacerbate that. It usually doesn't make sense for a startup to borrow a significant amount of money in a currency whose value is dropping. Because you only get so many funding rounds and you don't want to waste them by not getting enough money to buy what you need. Which is what happens when a currency's value drops after you get the funding.
The dollar doesn't seem to have moved much since 2008. Versus the Euro, it was on a downward trend from ~2004 until mid-2008 or so, but it's been flat since then, albeit with significant volatility: http://www.google.com//finance?chdnp=1&chdd=1&chds=1... Against other currencies, it's down versus the Japanese Yen, but up versus the UK Pound.
In terms of domestic prices, inflation has been running around 1-2%, and futures/bond markets are pricing in an expectation of no inflation, or even possibly deflation, through 2020 or so (with particularly strong consensus in the 5-year window through 2016).
The dollar hit a record low in 2008, not just against foreign currencies but also against measures of value such as gold, soybeans, corn, etc. It got stronger in the intervening years (as you note), except against gold, and is now back down to the 2008 level, more or less.
It usually doesn't make sense for a startup to borrow a significant amount of money in a currency whose value is dropping.
I disagree with this though. Depreciating currency is awesome if you've got debt financing, because all of the value of your debt drops, but you only lose the value of the money you haven't spent yet. OTOH, it might be bad because uncertainty about depreciation will cause financiers to be reluctant to give you good terms.
Now, it certainly is a bad thing when you're getting equity financing, but that really isn't "borrowing".
I agree in the sense of having an asset and paying it back but I was thinking of it in terms of budgeting and getting through the year (or however long)
For example, say you budget for a year of operation and assume you need $1.5 million and get funded at that. Then the value of the currency falls. This means your revenue falls and the value of your cash on hand falls. Suddenly you're out of money and its hard to go back for another round so soon after the first.
That's where I see the problem. If you can survive long enough to pay the debt back in full a down currency works for you but it could be the death of you.
> A company like Y Combinator can literally fund hundreds of startups and as long as at least one has a significant payday at the end Y Combinator still comes out on top.
I understand that Y Combinator only does token investment in terms of money, and gets a good share of the startup in exchange for its brand and the experience and connections of its founders within the VC world. Since the actual money outlay is low, it can afford to fund hundreds of startups.
I doubt that's something that the average "wealthy person" can do.
I used to think I would want to be an angel investor at some point, but being an LP at YC (and maybe at a later stage VC, and get shares in great long term companies directly or via BRK.A, would really meet my goals.
I think it is really hard to become a limited partner in good VCs, unless you are godlike in some domain (which I guess you especially would be when you eventually exit) or were a founder of one of their successful companies.
Yeah; this is assuming a large, successful exit, then reinvesting some of your exit into your investors as an LP. Otherwise you'd be a crappy angel investor anyway.
I enjoy reading Eric Ries' posts but I cannot help but be cynical about this, "Remember: in the long run, the surest way to be successful is to create more value than you capture. Remember: the truly great entrepreneurs didn't get in this to make money, but to change the world." I guess his company IMVU created value (in terms of money) but I don't see how an online social entertainment destination where members use 3D avatars to meet new people, chat, create and play games with their friends creates social value or changes the world.
Beware of schemes that claim that your participation in them will help change the world but which come with no money attached. One is only capable of doing great good if one is also capable of doing great evil. More simply: to do a lot of good (not just a teeny tiny bit), one has to be capable of something that affects real world, ergo one has to be powerful. Capability is closely linked with power (and, in a Western society, the closest measure of power is money). If one cannot easily turn his or her work into money, one should question how much capability for real change one has.
But it's not impossible to be powerful without turning your immediate work into money. You might be able to help others make/turn their work into money, which makes me go off on a tangent in my head about an algorithm that could calculate how much power one truly had based on n degrees of separation out from their work.
> You might be able to help others make/turn their work into money
Of course it's possible but it introduces a level of indirectness. Once you have indirectness, it becomes harder to measure your impact. Fields where one's impact is hard to measure tend to attract BS artists who use the ambiguity to their advantage, to claim that they are worth more than they really are.
The algorithm you are thinking of will fail unless it has some way to empirically measure impact, in which case the algorithm would be trivial.
I agree. That's the problem with quotes and mantras: they are a oversimplification of a much more complicated reality. But I find that as long as you don't forget the forest, having some highlighted trees does help you find your way.
Personally, I got into this because it's the only way I know how to live. I'm not happy unless I'm building, it just so happens that makes me an entrepreneur.
Its funny that in 2008 - we see posts like "RIP Good Times" - http://techcrunch.com/2009/10/06/r-i-p-good-times-one-year-l... - and yet nothing - fundamentally - came of it. I'm sure Sequoia's companies left that meeting - scared, sacked a bunch of employee's, cleaned out the closest - and the VC's were happy because the capital lasted longer ensuring no more dilutions for themselves and a "trimmer" business even if it was not required. VC's love to blow hot air because it's self-serving. "OMG da world is ending - raise cash now". Of course, many go out and do this [for whatever reason] and get hit by lower valuations [VC's +1 up]. VC's have already raised their HUGE current funds - most in the vicinity of 500m+. So how does any of this affect VC's ? They want more "bang-for-their-buck" and by getting lower valuations, they get higher returns and larger management cuts on exits. I'm not suggesting this is a flaw - it's capitalism and the opposite side of what a start is doing in trying to get larger valuations.
Seemingly, the fundamental problem that exists in the United States is that the debt level has been never ending. The spending mentality of the U.S. government since Regean, Bush, Clinton [not so much], Bush and now even Obama [in my view - cleaning up the mess] was never one of fiscal or monetary conservatism. I'm an Aussie - our country doesn't have hardly any debt [queue smart-ass arrogance smirk]. Good fiscal and monetary policy ? Not really - as much as our politicians love to think so - it's just not over promising and over spending for political gains. "I'll give you tax-cuts of 5%" - "I'll do 10%" - "I've just discovered I can do 15%!" and so on it seems in the US - then the whole country argues about whether tax-cuts are better or worse or giving the wealthier socioeconomic bracket more money is better or worse. I don't premise to understand the entire US Financial or Political system - I'm merely an international observer. What you can observe - large socioeconomic cuts to fundamental social welfare results in those scenes unfortunately unfolding in London. You rip apart societies most vulnerable social fabric and it's not going to respond happily.
To suggest we are heading for another "dot-com" boom - at least in my opinion - is totally unfounded. The internet is in another era juxtaposed against the 2000's with widebroadband adoption and reliance. IPO's are not finished when they are based on real fundamental revenues and profits underlined with good talent. Any rational investment is unpinned by this - Facebook would still raise a huge IPO - because large financial institutions still have huge funds available to them and see the rationality of the investment. Similar to other business' that have real revenue and real values.
Solid business basics win as per Warren Buffet "Be fearful when others are greedy, and greedy when others are fearful". Convince investors to be greedy in the current climate and nothing matters. You'll win.
Nothing terrible happened after 2008 because the Fed and US Govt completely propped up the US economy with $700B TARP + $800B stimulus + two rounds of Quantitative Easing + many more billions of alphabet soup supports and bailouts.
The result was deficit spending making up for a precipitous dropoff in GDP:
The idea was to prevent a shock and/or collapse and buy time to work out the underlying problems, and they succeeded at the former but may have run out of time on the latter.
But much of that ammo is now used up. It's doubtful the GOP in Congress would allow another massive stimulus, leaving only the Fed's ability to keep rates low and possibly try another QE3.
So, my point is, don't take for granted that nothing much happened after 2008. It only played out that way because of massive intervention, but much of the underlying problems still haven't been solved, and a shock or collapse are unfortunately still possible.
This leaves out the state and local part of the picture. The federal stimulus spending minus state and local cutbacks only ended up being around a $100 billion net spending increase. This was minuscule compared to the magnitude of the drop in consumer demand after the burst of the bubble.
(I'm excluding TARP which is more complicated; it isn't quite $700 billion in spending if ends up getting partly repaid, however, aside from the part that doesn't get paid back, there was also an opportunity cost)
In this kind of analysis, you can't ignore the role of government stimulus spending in juicing the economy. Yes, 2009/10 were better, but largely as a result of stupendous stimulus packages. The current problems are a predictable consequence of that stimulus money running out. So, that stimulus spending brought the financial world some breathing room. Now, the question you have to ask is, was that breathing room put to good use? Have the fundamental imbalances which triggered the 2008 liquidity crisis been corrected? I think if you look at the financial/legal problems BAC is facing and the economic instability in the European PIIGS countries, the answer is no. So then you have to ask whether there's going to be another liquidity crisis, and how much capacity and political will there will be for further government stimulus, if there is another crisis. I think another liquidity crisis is all but certain. If that's so, and government stimulus is limited, the downturn will be hard and protracted, and you are going to need a hell of a good business plan just to survive. If the stimulus is vigorous, there will be another acceleration to the economy, and that will be the ideal time to be taking money to grow a nascent business.
So I don't think it's as simple as you make it out to be. Starting a business now is basically a bet that either the problems which caused the 2008 crisis have been corrected (doubtful) or there will be another massive stimulus when another crisis arises (highly uncertain, but certainly possible.)
not really - focusing on this figure is somewhat non-nonsensical and spreads FUD albeit other than to keep prudent awareness of it. The difference between Aus and USA - is our net growth far outweighs the debt we owe and therefore we are relatively liquid if we needed to double-down on this debt. Further, much of our debt has been localed in foreign currencies - which are now all depreciated against the AUD - which is seen as a relatively safe currency given the USA downgrade. I don't propose to know when this will revert. Further, the regulation of our financial institutions has typically been quite tight through judicial activism and aggressive regulation. Unfortunately [for the world] - Wall St wasn't to the same degree. My personal view is that Governments should not adopt fiscal policy which encourages surplus - a responsible government is adopted to spend money on essential services - not carry on for political gain that it is in "surplus'. It should be net-neutral.
"A government’s balance sheet comprises both assets and liabilities. This article has demonstrated that only considering gross debt can result in an incomplete picture of public finances. By taking into account assets the public sector owns, a more accurate view of a government’s ability to respond to economic conditions can be determined.
This article has shown that Australia has undergone several periods of debt accumulation, followed by periods of fiscal consolidation. Periods of strong economic growth following episodes of debt accumulation have helped support relatively quick improvements in the public sector’s net debt position. Australia has a low level of net debt both historically and when compared with G-7 economies."
At least here there is a plan and commitment from both sides of politics to put the budget back into the black in the next 2 years. The US seems a fair way further from that.
Exactly my thoughts... wasn't 2008 doomsday?? If so.. doesn't that mean it's GONNA be summer soon (let alone summer came and freaking passed...)?
I think we should stop the macro outlook and worrying. It's pointless. Focus on what you're doing right now, and producing something of value. In most cases, what you have control over day-to-day, whether it's developing a quality product, speaking with customers, improving business processes, hiring, etc will affect your success much more than whether the country's economy is going down the tubes.. You have no control over it, so stop worrying about it. Worry about getting customers. Worry about developing.
I want you to be right, but didn't something come of it? Didn't we have a huge recession whose impact is still being felt by all of us? Don't we have a nearly 10% unemployment rate, nearer to 16% if you include people who've just given up?
This is true, it's not recession for everyone and there are great opportunities in winter as well. If you make a compelling product that gets traction, there's no reason to not get some money. It's more challenging, but I mean it's ok, it's part of the game.
I'm not so sure. I think the broader economic forces may help tech companies rather than hurt.
No matter what happens, America (and the world) will still have a lot of very wealthy people and institutions. Those people need to put their money somewhere. The stock market is scary, bonds and banks don't pay anything. If you had $100 million tomorrow to invest what would you do with it? I'd start looking for startups.
10% unemployment seems bad to us, relative to our more historical 5%, but Europe has dealt with that for decades. People still buy iPhones and sign up for Netflix. Even if the market for new services is reduced by a few %, the quality of new services will more than make up for it.
Rich people will still want to make money and startups will still be an appealing way to do it.
I would invest in gold. No hassle. No risk since every country is printing money and putting savers at risk. Doubled in price in dollar in two years thus far.
Every piece of gold every minted is still sitting around somewhere, there is no reason tomorrow it won't be back down to $400/oz. Gold is just a measurement of fear and confidence in governments/currencies. If you really think governments/FIAT currencies are going to fail you might as well by SPAM and canned goods because they're going to be a hell of a lot more valuable during a true depression than some shiny metal.
I'd sooner get bitcoins than gold. =P No risk since there's no government involved.~ Doubled multiple times in the last several months. (Recently halved a time or two though. :( ) No middle-men or scammy "buy all your gold here and then we'll go out of business and you'll never get it back!" businesses if you just want to mine everything.
That's a peculiar sense of "safe". The value of gold fluctuates substantially over time, even over fairly short periods of time. Sometimes (like the last decade) it goes up; other times (like most of the 1980s and some of the 1990s) it goes down. It's easy to lose half of what you invested; if you time it right, you can lose seven-eighths.
The peculiar sense in which gold is "safe" is that it tends to go down just as much as it goes up; that is, it isn't subject to secular inflation or deflation.
I totally agree with this sentiment, and totally think that it's only a matter of time until we need to start dealing with the consequences of not being prepared for the "Winter". I'm also interested in seeing which players end up being "part of the NightWatch" and keep going because it's what they love and pledged their dedication to, and which players are only in it to play the "Game" and see whom can get the most money, popularity, recognition, etc. Also, as a fan of the books I loved the analogy between the Ice and Fire saga and entrepreneurship this days.
"The sound you just heard was the IPO window slamming shut," wrote Geoff Yang, a partner at venture capital firm Redpoint Ventures in Menlo Park, Calif" - http://news.ycombinator.com/item?id=2866438
- We're in the second dip of the global economic depression
It doesn't follow that just because the stock market dips that funding for startups will suddenly evaporate. Most venture funds are investing money that was raised from limited partners years ago.
And at any rate, most VCs go on vacation during August, so if you don't close your round by August 2, all bets are off...until September 1. This happens every year.
A good counterpoint to this sky-is-falling is Dave McClure's quote in the Wall Street Journal, in which he says that the market dip will change his investment velocity not a whit.
"And at any rate, most VCs go on vacation during August, so if you don't close your round by August 2, all bets are off...until September 1. This happens every year."
I am not sure why you feel there's a need to make an unrelated assumption when, if you actually read the well-written techcrunch article, there's a reason why Mark said that - it's related to funding certainty and economics.
Then you should google "funding certainty" to see that it is widely used. Just because you don't relish using slightly oxymoronic phrase doesn't mean others don't
I was pretty pleased about working "the winter's balm" line into that bit about Zygna. And there were a couple of upvotes early on, but I guess meta jokes about English literature don't fly on a hacker audience.
MICHAEL
How bad do you think it's gonna be?
CLEMENZA
Pretty goddamn bad. Probably all the other Families will line up against us. That's alright -- this thing's gotta happen every five years or so -- ten years -- helps to get rid of the bad blood. Been ten years since the last one.