
Burn Baby Burn - jrwit
http://avc.com/2014/09/burn-baby-burn/
======
netcan
There is something missing in the startup mind-cluster, I think.

A lot of the ideas make sense from a certain perspective, even these
incredible valuations and exits. There really _is_ a chance to create or
invest in the next Facebook. It's not a big chance, but the payoff is so big
that it can fuel funding and building thousands of attempts.

One of the premises of this complexes is the idea that highly impactful
businesses can be started fast and cheap leveraging the internet as a
marketing and distribution channel, open source software, cheap computing
power and other levers of these times. If they focus on building popular
useful things, the scale can get so big that monetization is likely enough to
come. That is, likely enough for the investors formulas.

But, what of businesses that become popular and useful and financially
successful relative to the financial needs of running the business? Reddit.
OKCupid. The proverbial Craigslist.

What if a business can employ 100 people comfortably, serve 100,000s of
customers usefully and reward the founders to the tune of millions, but not
billions. Can these exist? Can they last for decades? Generations?

Is it efficient to roll the dice on a hundred $10m per year businesses for the
chance at one $10bn business. On paper it's a 10X improvement?

I'm not trying to ad my voice to the sour grapes tasting comments about
valuations and such. I'm just wondering if we can let a million flowers bloom
for a longer stretch, not just for their ability to win the big-or- go-home
game.

I think I might be saying this backwards. Let me try it another way. A lot of
the current startup thinking is premised on the idea that small teams can have
a big impact relative to the cash requirements. A second idea is that a
startup making a big impact has a decent chance of turning into a multi
billion dollar company or a $100m+ acquisition for a multi billion dollar
company. Is there no room to build on the first premise without later building
on the second premise? Could Facebook have connected people as well as a 500
person company?

This is a tangent to Fred Wilson's point, but I feel like it might boil down
to a similar enquiry.

~~~
idlewords
Venture capital is supposed to be mechanism for funding at the highest levels
of risk and reward. But somehow we've decided that it's the only model for
Internet companies. So a lot of companies and individuals with perfectly
workable small or medium-size ideas end up inflating them to VC size to get
funding, and then fizzling out. A sad side effect is that it discredits the
ideas.

We have a grandiosity problem in Silicon Valley. The problem isn't really VC,
but the lack of alternatives along the other parts of the risk/reward curve.

~~~
JoeAltmaier
Doesn't fit what I knew: that most startups are Angel funded. Or did the
pendulum swing, and we're back to VC funding?

~~~
idlewords
I don't see a practical difference between the two in our industry. They're
part of the same pipeline.

~~~
jacquesm
There are substantial differences between angel investors and VCs from a
practical point of view, even if both will get you access to capital:

\- Angels rarely do due diligence, VCs almost always do.

\- Angels tend to look much more at who else is investing in the company,
almost never want to be 'alone' or 'first'.

\- Also they are typically much less experienced as investors and having them
on-board can be a pain, especially when you're doing a start-up outside of
their field of expertise

\- VCs investment tends to come with some visibility perks

\- it is usually easier to get investment from a group of angel investors than
it is to get investment from a VC

~~~
tptacek
All of the angel dynamics you're talking about here are premised on a
trajectory that takes angel-funded companies through VC rounds. If there
wasn't a presumption that N out of K portfolio companies would get an A round,
angels wouldn't invest this way.

~~~
JoeAltmaier
My company is angel-funded, no plan on turning to VCs.

~~~
tptacek
Sure. But you don't think that the terms you got for your company benefited
from the broader angel market's expectations about how most companies will
achieve liquidity (almost all of them through VC)?

------
lmg643
Wow - I posted what I thought was a thoughtful comment on Fred's blog,
disagreeing with his throw-away intro on paid content - and it seems to have
disappeared?

My point was, why should we reward Business Insider for ripping off content,
instead of rewarding WSJ?

Why not reward originators of content, instead of recyclers? Clearly, he liked
the interview enough to link to it - why should BI get a benefit instead of
WSJ? He seems to think that it is "inevitable" that digital content will get
ripped off, but perhaps that's only true if they (a) don't innovate on payment
models, (b) don't innovate on fair use rules.

One of the digital currency companies in USV's portfolio could surely work out
a micropayments deal with WSJ to allow people to pay-per-use for content,
instead of subscribe.

So - that was the gist of what I had to say. Insightful, maybe not.

But now I'll add to it - I much prefer the YC approach, where my comments are
free to sit there, and get ranked accordingly.

~~~
tomjakubowski
> But now I'll add to it - I much prefer the YC approach, where my comments
> are free to sit there, and get ranked accordingly.

Sure, assuming you haven't been shadowbanned for some arbitrary reason years
ago, in which case your comments are free to sit there invisible to most
without you knowing.

------
jacquesm
There is something supremely funny about VCs complaining that their start-ups
behave like funded start-ups and not like bootstrappers, who focus on revenues
and profits right from day 1.

"At some point you have to build a real business, generate real profits,
sustain the company without the largess of investor’s capital, and start
producing value the old fashioned way. "

Exactly. So how annoying it is when you're bootstrapping a company, you have
your price-points carefully set, you're doing a cracker job at concentrating
on 'how to sustain the company without investors capital' and then _boom_. Out
of the blue some never-heard-of before company that does the same thing you do
starts to hit your customers with a price point that you simply can not beat
because they are able to 'burn baby burn' or maybe even give away that
identical product for free because they're racing for an acquisition before
the money runs out.

That's real trouble. Sometimes it's not just one.

But there is good news: they usually don't survive in the longer term because
they don't have a business model. Once it's free you can't really go back to
'old-fashioned'.

So once they've folded up, you've bought their Aeron chairs at 5 cents on the
dollar and you're re-connecting with your old customers and picking up the
pieces you have a fairly clear field. Contaminated by an over-promising under-
performing competitor that thought that 'growth' is equal to 'health'. (If
that were true then cancer or a locust plague would be good news.) How you're
going to survive the interregnum of unfair VC funded competition is a really
hard question for which I have no other advice than to cut every bit of
spending and go into 'cockroach' or 'spore' mode, hang on to your core team at
any price.

VCs should be far far more critical about the companies that they invest in,
that the path to break even is clear and that they are not going to invest in
a company whose business model is broken but where the cracks are paved over
with marketing and growth by burning investors money.

That just spoils the soup for everybody and sometimes it kills entire
segments.

Especially companies where investment is made in B, C or even later rounds
should be looked at very carefully. A healthy company would survive and grow
even without VC investment, it's supposed to be an accelerator, _not_ life
support.

So burn, but burn with care and a very good plan. Concentrate on your bottom
line taking into account that VC capital will not last forever and make sure
that the transition from 'supported' to 'unsupported' is a smooth one and that
your business model does not somehow depend on the 'supported' bit in a hidden
way.

If you're partying like it's 1999 you're definitely doing it wrong and your
bubble will almost certainly pop, the more VC money there is the more of it
will be dumb.

~~~
ChuckMcM
You read my mind! I've heard parents complain that their toddlers are getting
too fat on sugary snacks, complaining about how much sugar is being put in
snacks these days. Never once recognizing that they, the parents, were picking
out the snacks, not their toddler.

VCs have a similar issue, which is that there are more LPs and other investors
who didn't live through 2000 and are more 'growth' rather than 'business'
focused. They are giving their money to people showing 'growth' then that is
the metric that folks start optimizing. If VCs will only fund companies which
are headed toward 'cash flow positive' then that is the metric that gets
optimized. You can see this dynamic in action at YC demo day as the YC tunes
what it is they want to see in the companies, what ever that is, it shows up
in a lot of slide ware :-).

So I think Fred is grumbling that there is a lot of "less smart" money out
there and he has to either sit out while it flushes down the toilet or compete
with it in the companies where he wants in. And that cuts into margins and it
cuts into discipline because people who think the next round of funding is 'in
the bag' have much less concern with how they spend this round. It doesn't
help that even the "smart" money has no where to go that will provide
significant returns [1]. So that doesn't help either. The good news is that
these things reset themselves, the bad news is that it always seems to catch
some folks completely by surprise.

[1] The period of low interest rates has gone on so long it has now started
flushing out 20 year t-bills and other multi-decade "safe" investments. This
is probably a much bigger story than the WSJ and others have yet picked up.
There is a lot of dynastic wealth getting crimped.

~~~
7Figures2Commas
> It doesn't help that even the "smart" money has no where to go that will
> provide significant returns [1].

This is an inaccurate understanding of what is taking place.

It's not that there are no asset classes capable of delivering "significant"
returns today; heck, the S&P 500 has nearly doubled in the past four years.
It's that to get returns, investors have been forced to pay significant
premiums and take on greater risk.

That said, the money that is pouring into startups (through venture funds,
super angel funds and individual angels) is _not_ money that was previously
being invested in Treasuries. The startup bubble is being fueled by the public
equities bubble, which is a rising tide that has lifted a lot of boats.

~~~
lmm
It's a cascade, isn't it? Money that used to go into Treasuries has shifted
into money-market funds, money from those has shifted into equities and bonds,
money from those has shifted into riskier equities and bonds and so on.

------
calewis
The words; Horse, Stable and Bolted come to mind. VC's and their stupid
valuations have created this problem.

The idea that a business isn't worth investing in because it's only going to
make millions, not billions, also doesn't help. VC's would be better off
diversifying in lots more companies that have a better chance of making a more
modest profit, than a few that are then pressured to make 10's of billions.

I guess ultimately it comes down to the point in which they exit, the dumb PE
ratios of Facebook, Twitter etc allowed someone to cash out nicely when they
floated, but for the suckers that brought the stock on the public market have
no hope of recovering their cash.

~~~
adventured
You're referring to an extremely small percentage of the venture investment
community that is dealing with concerning itself about making billions. I'd
argue that's 0.1% of the venture investment activity in the US market (but not
0.1% of the dollars). It's basically a few markets on earth.

Go to St. Louis or Dallas and you'll find venture investing going on all over
the place that focuses on companies that will make millions and not billions.
When you start a hotdog stand, and raise $50,000 from your cousin, that's
venture capital too.

The US economy is not lacking in VC activity around million dollar businesses.
There are more venture capitalists running around funding smaller ventures
than at any other time. As I'm sure you know, $50k - $250k is not what it used
to be 30 years ago, and it's now very inexpensive to start internet companies.

In my experience and observation it has never been easier to raise money for a
x million dollar business venture, and I believe this to be true for nearly
any city in the US.

That investment activity however does not make the headlines, and few people
bother to do their research into how many 'boring' deals are being done by
investors worth sub $10m that put $25k or $75k into a startup in Cleveland.

------
droopyEyelids
If a company was going to reduce its spend to a sustainable rate, why would it
want to mortgage itself to an investment firm?

I thought the main point of selling your soul to investors was to increase
your burn rate. If you were bootstrapping your company it seems like you'd
want to maintain control and ownership.

~~~
jasonwen
A good use of investor money is when you have a proven and controllable
conversion from signups -> paying customers.

For example if you need $200 averagely to acquire a customer and the LifeTime
value of the customer is $500 over a 10 months timespan. With a positive
conversion, you can scale very aggressively with almost no risk, whereas if
you re-invest your profit, it will take much longer to reach the same point.
If you are in a competitive space, you especially might benefit from investor
money.

~~~
peterjancelis
Such a company with a proven ROI on its marketing should go for venture debt,
not venture capital. If you can 2.5x your money in 10 months and capital is at
0% interest out there, why would you sell a huge stake of your business to get
to that 0% capital?

------
jroseattle
Honestly, this sounds like Monday morning quarterbacking.

When all these companies lined up and raised umpteen million dollars, I'm all
but certain they were asked about their planned use of funds. Further, I'm
nearly certain they said they were going to spend in order to grow their
business in their chosen market. And many are doing just that. And who the
hell provided them with these funds?

Maybe Fred (and Bill Gurley) should be directing their criticism at those
stewards of investors' monies and consider their own part in this cycle.

------
vasilipupkin
Fred Wilson has lived through a few booms and busts so he is kind of concerned
about the next bust being very likely. I would just say, there is a very high
likelihood of cheap money continuing for a while, given the stance of the
Federal Reserve and the condition of U.S. economy. And, as long as money stays
cheap, I do not see the bubble bursting 2001 style. Money will continue
flowing into private and public equities because it really has nowhere else to
go

~~~
mnglkhn2
When the cheap money stop that's when the adjustment happens. Until then, as
Fred said, they have to keep on dancing. And eyeballing intensely the next
empty chair.

~~~
vasilipupkin
perhaps, what I'm saying is cheap money is unlikely to stop for years to come

~~~
adventured
That's only true if the Fed's hand isn't forced and the QE equation can remain
the same in regards to both the results they get per dollar of QE and the
inflation they cause per dollar of QE.

However that's not how it works. The Fed is in a downward spiral scenario, in
which their policies have ever less of a positive impact and ever greater of a
negative impact, and that's what arbitrarily low interest rates also function
based on: the longer you hold them low below absolute optimal, the greater the
damage as a result at an accelerating rate.

The cheap money party is very likely to destroy itself in a way that is both
hard for the Fed to predict and control. Just like it did the prior two times
the Fed made the mistake of unleashing a wave of cheap money. You can read
their minutes and speeches, they were so oblivious they (supposedly) had no
idea the real estate bubble was underway or about to implode (true for both
Greenspan and Bernanke).

What ends the cheap money is the asset bubbles get so large their downside
poses a threat to the integrity of the entire economy. They have to raise
interest rates to stop the extreme asset bubbles that cheap money causes.
We're at that line right now, which is why they keep pushing headlines about
raising interest rates, it's meant to artificially hold down asset prices
without the Fed having to actually raise rates.

The stock market is already approaching the highest valuation it has ever had
in a 'bull market' outside of the dotcom era and maybe 1929x. Real estate has
almost entirely recovered, and in many markets is now higher than the peak of
the bubble of 2005/06.

You throw another 30% gain on the stock market, and 20% on the real estate
market, with continued mediocre earnings growth and 1% to 2% GDP growth, with
little to no wage growth or full-time employment growth, while Europe is in a
continuing depression, Japan is in a recession, and China is melting toward
zero real growth, and you're priming for a crash across numerous asset classes
that will send the US into a true depression.

15 years of horrifically bad monetary policy has yet to be paid for. They keep
trying to prevent recessions from happening. The price for that bad behavior
will keep climbing day by day.

If they don't raise rates, they crash the economy as asset bubbles become
increasingly unsustainable. And even though the Fed will attempt to keep the
cost of money low in that scenario, nobody will be able to get access to that
cheap money (ala 2009/2010 but far worse).

~~~
vasilipupkin
How long has money been cheap in Japan? 30 years? we have some of the same
factors at work in the U.S. not the same situation obviously, but
fundamentally, we have a relatively slow growing economy which does not
generate a lot of inflationary pressures and my guess, the Fed will keep rates
relatively low for a long time.

------
mnglkhn2
It says something when the money people (VCs) complain high real estate rents:
changes might be afoot. It is possible that the property owners feel/know that
the current situation is untenable and that new properties will be allowed to
be built, hence their desire to lock in leases for 10yrs.

------
tlogan
I'm not sure if I understand the point of this blog post. VCs give money to
startups so these startups can grow faster than they would without external
investment. So they will spend that money. It is not like startup come to VC
and said: I need $10M and I will put that money in the bank.

Maybe the blog should be how it is important that startups are more focused
when they spent? Or maybe how VCs are investing into companies with not so
great ideas?

I'm just confused here.

------
idlewords
Sometimes this happens when you give people free money to play with. What did
you think was going to happen?

------
mathattack
"At some point you have to build a real business, generate real profits"

The companies that seem to be able to switch off the growth and become cash
flow positive will be fine no matter what.

------
jeffreyrogers
So why are these companies in your portfolio in the first place?

------
dsugarman
sanity impending

------
_craft
Where's the data?

~~~
jacquesm
What you are asking for is asking for a VC to talk down their own book. That's
a ridiculous request. Fred and his colleague are already taking a pretty
daring step in writing this, you can bet that any future potential acquisition
party will make damn sure they're not buying into one of the companies that
Fred is apparently unhappy about today, and that a whole horde of junior
associates at various establishments is currently looking through their
portfolio to try to figure out which companies were the ones he was talking
about.

VCs will _never_ talk about specific portfolio companies in a negative way (in
public) unless they have a direct financial motive for doing so (in which case
storm is brewing or in progress, and likely the press has already had a field
day with something).

