
Start-ups hit Cash Crunch in Silicon Valley - ahsanhilal
http://online.wsj.com/article_email/SB10001424052970204450804576625043573078086-lMyQjAxMTAxMDEwMjExNDIyWj.html
======
joshuamerrill
I haven't observed web startups running into a "cash crunch."

That said, it does seem to me that the market is exuberant right now. There
are business cycles that imply things will go the other way at some point.

I also want to point out that it's utterly specious to compare the 826
consumer web startups funded in the last two years against the 416 funded in
1998-2000. How much bigger is the total addressable market? ~200 million
people in the late '90s vs. 2.1 billion today? And that doesn't include
mobile.

Similarly with the comparison of VC fundraising. The capital requirements of
an Internet business are completely different today than they were in the
'90s. (Does anyone from Web 1.0 remember budgeting $150,000 for servers?)

~~~
alperakgun
This last wave of startups has brought an incredible number of successful
ones, and innumerable number ones waiting for monetization. As you said, the
audience grew to billions of people. I remember in 2000, we were still trying
to convince people that Internet is here to stay,to shop and to do business.

~~~
joshuamerrill
Similarly in mobile, where worldwide subscribers have grown from ~400 million
in 1999 to over 5 billion today. The smartphone segment of that is still
relatively small, but it's growing 100% year over year.

Meanwhile, today's largest Internet companies have five times as many users as
the _entire_ Internet subscriber base in 1999. My point is, startups that can
profitably solve a problem have HUGE markets to sell to!

------
pg
If this is happening at all, it must be a very recent trend. There was no sign
of valuations decreasing a month ago.

~~~
startupcto
Really? I've talk to several VCs that were very active previously and they all
agreed that valuations are frothy and now is not the time to invest. Naturally
valuations are going to be lower since that's what the buyer's perception of
that market.

~~~
startupcto
@perokreco just like the stock market, the best time for entrance is when the
market's at rock bottom.

~~~
DavidSJ
10 points to anyone who can reliably identify when the market is at rock
bottom.

~~~
fleitz
I'll bite, but you won't like the answer: when it gets to zero.

Unless you know someone willing to pay people to take their stock?

~~~
cperciva
I'm pretty sure I've seen people here saying that they would pay for YC to
take some of their stock.

------
sudonim
My take-away from the article was that at most the stupid money is drying up,
and very likely the article is wrong.

Opportunities still abound to use technology to disrupt existing markets. If
that can be demonstrated to people with capital, they will invest. Even
better, if that can be demonstrated to customers, you don't need people to
invest.

------
jmjerlecki
Lot of action on Twitter about this. Recent tweet from Chris Dixon:
<http://twitter.com/#!/cdixon/status/124297282274340864>

------
Sol2Sol
It would be interesting to know what these start-ups facing a cash crunch are
all working on. Are they all chasing the same pie or are they a diverse bunch
engaged in finding technology solutions for problems in a range of industries?
I asked the question but I think I already know the answer.

------
jpdoctor
Having been through the tech crash v1, I cannot stress enough: You must always
have an alternative to VC financing or you are playing russian roulette with
the availability of new money.

~~~
suking
Profitability - but VCs don't give a shit about that - in fact one told me
that right on the phone... Maybe things will change.

~~~
jpdoctor
That should not be surprising: Profitability makes VCs less necessary, which
gives you leverage to walk away from a term sheet.

Google was a great example of that.

~~~
viscanti
Google didn't gain a competitive advantage because they were profitable early
(they were profitable, but only marginally so). They had an advantage because
of the traction (significant year over year growth) they had as well as their
ability to scale economically.

If Google didn't raise big money, they wouldn't have went on to do as many
early acquisitions. Without those acquisitions, they don't stumble onto
adwords/adsense and they remain a mildly profitable company.

~~~
cppsnob
> If Google didn't raise big money, they wouldn't have went on to do as many
> early acquisitions. Without those acquisitions, they don't stumble onto
> adwords/adsense

Adwords was out for around 6 months before the company's very first
acquisition, DejaNews.

<http://www.google.com/about/corporate/company/history.html>

Google quickly became insanely profitable after launching adwords. They only
ever took $25MM in private funding.

[http://en.wikipedia.org/wiki/History_of_Google#Financing_and...](http://en.wikipedia.org/wiki/History_of_Google#Financing_and_initial_public_offering)

I'm curious as to how you arrived at the assertions you made.

~~~
viscanti
Fair enough, that's a valid question. I arrived at my assertion by looking at
the financials. <http://investor.google.com/financial/2005/tables.html>

Google make the vast majority of their money through ads (no surprise).
Adwords didn't take off until they acquired Applied Semantics (for semantic
processing) and Sprinks (contextual aware ads). It may have existed pre-
acquisitions, but it didn't look anything like the current version, and wasn't
anywhere near as profitable.

------
tworats
Interesting twitter thread on this between @davemclure, @pkedrosky, @msuster,
and others, part of which is here:

<http://twitter.com/#!/pkedrosky/status/124323109032574976>

(how do you capture a series of related tweets, btw?)

Summary seems to be: the cash crunch is not happening (yet). McClure calls it
"poor reporting".

Looks like TechCrunch has captured a bunch of the related tweets:
[http://techcrunch.com/2011/10/12/web-start-ups-hit-cash-
crun...](http://techcrunch.com/2011/10/12/web-start-ups-hit-cash-crunch-or-
dont-depending-on-whom-you-ask/)

------
kokey
I like watching the discussions articles like this generate. It reminds me of
both the dotcom and property bubbles and before it was obvious these were
unraveling how people defended their positions. The biggest thing I get
reminded of is those who bought property on credit at high values with the
intention to flip them quickly at a profit. This reminds me of those who raise
a lot of money for a company in order to flip it to the next guy. These are
the people who will attack any perceived coming decline the hardest. They will
tell you that this time it's different because 1% of China is now online. That
technology is here to stay and will always grow and so will the market, with
mobiles etc. This is true, but so was it true during the dotcom bubble. We got
the timing wrong, and we got the business models wrong for sure.

In reality, like after the dotcom bubble, there are startups that formed over
the recent years that will survive all this and be as well known as the giants
we have today that formed during the dotcom era. It's just that we'll have a
decline of appetite to throw money at me-too ideas with unrealistic business
plans apart from flipping the company to the next sucker.

------
ahsanhilal
What is so interesting to me is how everyone was worried about a start-up
bubble earlier this year to now where start-up financing is drying up. The
whole notion of media speculation by noting short-term trends makes for some
great gossip columns, but in reality do not provide real news to the reader.
Because in the end this is not news just speculation more fitting for the Sun
rather than WSJ.

~~~
tatsuke95
I'm not suggesting it will play out this way, but financing drying up can be a
step in the bubble bursting.

------
chris_dcosta
I can understand why startups need funding to get them off the ground, but I
think this indicates that the focus might change away from "investing in tech
that might turn into something" towards "only investing if there is a credible
business model".

There's a fundamental difference between funding great people with innovative
ideas, and investing in proven business models.

I'm not saying both can't happen to coincide in the same start-up, but there
is some great start-ups with really promising technology, who haven't yet
reached the stage where the business model should matter, and this would be
like cutting them off at the knees.

I guess this is a consequence of bad economic times, moreso than the
enthusiasm fading away. At least I hope it is.

------
larrys
Indinero should consider pivoting.

Compete.com only shows them at 800 or so uniques _per month_. But more
importantly it will be extremely challenging for indinero to pick up enough
small business accounts to make this idea work. While it's possible that this
company could be an acquisition for Intuit that's not going to happen with
anything like the user base they have. And getting time strapped small
business owners to see value in this service in my opinion (with many years
selling to small business and owning several) doesn't seem likely at all.

~~~
mlinsey
I don't have access to Indinero's data, but for my own startup, Compete's data
is no more accurate than a random number generator. Both the absolute numbers
and the shape of the graph have essentially zero resemblance to the real data.

~~~
larrys
If the sample is small then the data will be way off. That's the point. There
is low traffic so there is nominal data.

That being said comparing compete data to _hundreds_ of parked domains that
get enough traffic to have a decent data sample yes I would agree the data is
off. But not anywhere near enough to make any difference in the point I was
making.

~~~
mlinsey
Those numbers being off just by a factor of "only" 10-50X (which I think is
reasonable given Compete's record) would make a big difference for a B2B site.
Even more important from the perspective of a startup would be the presence of
an upward trend - and with Compete, I've seen their estimate for our traffic
fall by over 50% in months where we grew by around 40%.

I'm pretty sure for a "decent sample" - at least, accurate enough for the data
to be useful for anything - you need to be at least a top 100 site, and even
then I've heard stuff from a couple webmasters of those sites that Compete
data is off by an order of magnitude or so.

------
deepGem
If a startup idea is really solid and has a potential for revenues, lets say
in the short term ( < 1 year), do these market conditions affect funding such
a startup idea. I mean, why would a VC or an angel not be convinced to invest
in such an idea regardless of market conditions. Just trying to understand.

------
startupcto
It's disturbing to read XXXXX "has been burning through its $1.1 million
quickly" and all they could think of is raising more money. Why about revenue?
Did the idea of making money just drop off the face of the Silicon Valley?

That's just to show that inexperience entrepreneurs like Jessica ( not saying
she's not a smart person ) has hype caught up with reality. It's not
surprising that these entrepreneurs will fight a long and tough battle ahead.

~~~
moses1400
Go read Jessica's blog post from August - she advocated raising as much money
as you could, etc. I asked the same question as you did on her blog but never
got a response. What's wrong with you know making money to grow instead of
trying to just grab vc cash.

~~~
startupcto
The only time it make senses to grab as much money as you can is when you're
building to flip. I've always viewed raising as little as you can if you are
serious about building a sustainable business.

~~~
joshu
No. It makes sense to raise as little money as possible as you can when you
are building to flip. Think about it. I'll explain the math if you can't
figure it out.

Not all new companies are startups. Startups are companies that are in search
of a business model. They are building something that is at least somewhat
capital intensive before they can get revenue.

There is a lot to be said about bootstrapping, and if you can do it then that
is awesome. But there are lots of ideas that require some cash to get off the
ground.

~~~
startupcto
You are right about the math and I respect that you did that with delicious
but not many entrepreneurs are like you.

No matter how it much it "make sense" to not raise more, most entrepreneurs
will do the opposite and not take the risk of running out of cash before the
exit. It's like the blue and red pill.

I'm not sure how you define startups but that's subjective and I think all new
companies are startups. I would say most new companies have a clear revenue
model in the beginning and it's all about making it happen or pivot till you
got it right. There are some that don't have one at the early stage and it's
also rare to see one that had gotten successful versus most that just got
bought without even breaking even or mmde a single dime.

~~~
joshu
I wouldn't take what I did at Delicious as an example of anything. I was
green.

------
nknight
Whether the trend is real or not, I note two highly encouraging, closely
related things:

1) A hell of a lot less money overall is being poured into "Dot Com II". Even
if Dot Bomb II happens, it won't be as bad.

2) A lot more companies are being funded, logically with a lot less money
each.

There might have been some "excesses" recently, but for once, people _did_
learn.

Moreover, using valuations as a proxy for this analysis is kind of misleading.
If you put a million dollars in a company and the company goes bust, you're
out the million, whether it "bought" you 5% of worthless shares or 50%. It
only matters if the company actually does well.

