
Marc Andreessen Sounds Warning on Startups Burning Cash - stevenj
http://dealbook.nytimes.com/2014/09/25/marc-andreessen-sounds-warning-on-start-ups-burning-cash/
======
cs702
VC-funded startups have _always_ burned cash at prodigious rates. There's
nothing inherently worrisome about that. What worries Andreessen, Gurley,
Wilson, and other investors with decades of experience is that many startups
today are burning cash by spending on things that do not increase business
value -- and in some cases actually destroy it -- without worrying for even a
moment about the possibility of running out of money.

In Andreessen's words: "Lots of people, big shiny office, high expense base =
Fake 'we’ve made it!' feeling. Removes pressure to deliver real results."[1]

In Gurley's words: "I think that Silicon Valley as a whole or that the
venture-capital community or startup community is taking on an excessive
amount of risk right now. Unprecedented since '99\. In some ways less silly
than '99 and in other ways more silly than in '99\. ... For the first time
since '99, in the past 12 months, I've been in board meetings where the
company says, 'Our only option is a 10-year lease,' at record pricing on a per
square foot basis here in San Francisco, which is two or three times what the
rent was three years ago. And so this is why it's all cyclical—because the
landlords get greedy. They wouldn't do a 10-year lease if they thought that
the rates were low. So they're implicitly telling you they want to lock this
in for 10 years, which is its own form of greed because what happened in '99
is half the companies went bankrupt and they couldn't pay the lease over the
10-year period."[2]

In Wilson's words: "I’ve pushed back on long term leases that I thought were
outrageous, I’ve pushed back on spending plans that I thought were too
aggressive and too risky, I’ve made myself a pain in the ass to more than a
few CEOs."[3]

Their worry, in short, is that _many_ VC-funded startups are burning cash
_stupidly_.

\--

[1]
[https://twitter.com/pmarca/status/515219433695223809](https://twitter.com/pmarca/status/515219433695223809)

[2] [http://online.wsj.com/articles/venture-capitalist-sounds-
ala...](http://online.wsj.com/articles/venture-capitalist-sounds-alarm-on-
silicon-valley-risk-1410740054)

[3] [http://avc.com/2014/09/burn-baby-burn/](http://avc.com/2014/09/burn-baby-
burn/)

~~~
j_baker
Honestly? I don't buy it. The VCs are the ones that have been pouring cash
into these companies so they can blow it on obscenely expensive parties and
offices. I think they're just trying to deflect criticism away from themselves
and onto the startups.

I mean, there have also been plenty of startups in the past that have blown
money and built a product that nobody will pay for. And VCs just pour more
cash in.

~~~
cblock811
> The VCs are the ones that have been pouring cash into these companies so
> they can blow it on obscenely expensive parties and offices. I think they're
> just trying to deflect criticism away from themselves and onto the startups.

No VC will ever say they invested in a company "so they can blow it". They
invest so the company can spend on marketing/distribution, product, etc. Not
on just-for-fun items.

I work in a startup and we keep ourselves in check. If we weren't managing our
finances it would be our fault first. Mayyyybe blame the VC's indirectly for
who they invested in.

~~~
Fomite
> No VC will ever say they invested in a company "so they can blow it". They
> invest so the company can spend on marketing/distribution, product, etc. Not
> on just-for-fun items.

They'll call it "Recruitment and Retention"

------
dmritard96
I am not really qualified to determine whether there is a bubble nor do I
believe there is much value in speculating constantly about it. If there is
one, valuations will drop, cash will be harder to get. Its not going to change
the kind of work I like to pursue or the work that makers, builders and
engineers do. It will probably change how much everyone is stuffing in their
pockets, fine.

One glaringly bizarre thing from my perspective is why anyone would listen to
VCs about whether we are or are not in a bubble. I'm sure there are other
perspectives, but it would seem someone heavily invested in seeing valuations
go up wouldn't want to ring alarm bells... I think instead I would rather
gauge things by the numbers which unfortunately, are probably not frequent
enough to reach true statistical significance to not have incredibly large
confidence ranges. That being said, some of the money flying by on crunchbase
every morning is ludicrous.

~~~
downandout
_> I am not really qualified to determine whether there is a bubble nor do I
believe there is much value in speculating constantly about it_

Bubbles exist when enough investors decide that a bubble exists. When markets
crash, nothing has actually happened...other than people deciding that equity
values are going to drop. When they stop buying based upon that belief, it
becomes a self-fulfilling prophecy.

That said, of course we're in a bubble. Someone gave "Yo" $1 million ffs. I
won't even go into Clinkle - a failed experiment in Silicon Valley cronyism.
While those investments are poster children for this problem, there are
hundreds of other equally absurd investments and valuations going around.

Fortunately, there is a way to protect yourself that has worked since the
beginning of time. Create a scalable business that produces both revenue and
profits, even during its growth phase. One that actually creates value both
for customers and shareholders. Like magic, you'll still have a fantastic
business while reading about how horrible things are for everyone else.

~~~
curun1r
> Fortunately, there is a way to protect yourself that has worked since the
> beginning of time. Create a scalable business that produces both revenue and
> profits, even during its growth phase. One that actually creates value both
> for customers and shareholders. Like magic, you'll still have a fantastic
> business while reading about how horrible things are for everyone else.

This is less foolproof than you think. Cisco and Sun both had a business like
you describe going into the bubble. They had tons of revenue and profit during
the bubble. But when it popped, all the funny money that had been flowing to
them through startups went away and their businesses took a huge hit. You have
to make sure that not only do you have a stable business, but also that the
majority of your customers are stable too. I would be very worried right now
if I was any company that startups rely on. The obvious one is AWS and the
other cloud providers, but they're not the only ones. If there's disruption to
startups, there will be a ripple effect that will hit a lot of the tech world.

~~~
ameister14
That's something I had overlooked. There is definitely a ripple effect in the
event of a bubble popping, and if we are in one and if it does pop that will
potentially ruin a lot of 'for devs, by devs' companies.

------
emgeee
I'd just like to point out that the "why now?" question is probably related to
a major shift in America's monetary policy. Since the 2008 crash, the Fed has
been using a policy of "Quantitive Easing" (QE) to keep interest rates
artificially low and thus encourage lending and spending. It's been known for
while that the Feds were looking to end this policy sometime this year and
it's looking like the end of October will be that time. Although the Feds seem
to indicate that they won't actually raise interest rates until sometime next
year, halting QE will have the affect of making less money available for
lending. No one is really sure what is going to happen but this is an event
that will affect the economy as a whole. To me, it's sounding like one of the
industries that could be particularly affected by this policy is Tech and the
result will be a market correction in startup valuations.

Links! [http://www.investopedia.com/terms/q/quantitative-
easing.asp](http://www.investopedia.com/terms/q/quantitative-easing.asp)
[http://www.economist.com/blogs/economist-
explains/2014/01/ec...](http://www.economist.com/blogs/economist-
explains/2014/01/economist-explains-7)
[http://www.forbes.com/sites/investor/2014/09/23/the-end-
of-t...](http://www.forbes.com/sites/investor/2014/09/23/the-end-of-the-qe-
era-is-upon-us-whats-next/)
[http://blogs.wsj.com/moneybeat/2014/08/05/goldman-sachs-
here...](http://blogs.wsj.com/moneybeat/2014/08/05/goldman-sachs-heres-what-
will-happen-when-fed-raises-interest-rates/)

~~~
acornax
They've actually been scaling QE back for quite a while now.

~~~
emgeee
You are correct, the Fed has said they would be ending this policy sometime
this year and they're on track to do that. How I understand it, the big news
here is that they've changed their language about raising interest rates from
"we'll do it sometime in the future" to "we're going to do it sometime soon".

~~~
JamesBarney
I don't think investors agree with you. If you look at the yield curves for
the 1 year to 5 year treasury bonds[0] over the last year they have stayed
relatively stable. Which means the investors expectations of future interest
rate have been relatively stable. I don't think this supports you're theory
that the Fed will be raising interest rates any time soon.

[0] [http://www.treasury.gov/resource-center/data-chart-
center/in...](http://www.treasury.gov/resource-center/data-chart-
center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2014)

~~~
emgeee
The yield curve has been relatively stable at close to 0. Indeed (as I
understand it) that's the entire point of quantitive easing: it artificially
keeps interest rates on long term securities down to encourage that money to
be lent and spent [http://marketrealist.com/2014/03/fed-taper-quantitative-
easi...](http://marketrealist.com/2014/03/fed-taper-quantitative-easing-
affects-yield-curve/).

~~~
JamesBarney
The short term rate is 0. The yield curve is the curve if you plot interest
rates on the y axis, and length of treasury bond on the x axis. This creates a
curve that tells you what investors think will happen to the interest rate
over the next 3 months to 30 years.

------
austenallred
Part of Marc Andreesen's tweetstorm yesterday said, "Worry." Andreesen hasn't
said "worry" since 2008, so between that and the fact that he is generally
very bullish and optimistic (to the point that when A16Z makes a bet they can
put in an order of magnitude more money than other investors would), I began
to stress out more than a little bit, especially having just closed our round.

This may be anecdotal to my experience, but there was a time last year when
the advice we were getting from mentors changed from, "Figure out how much
cash you need to meet your next milestone and go raise that with a bit of
cushion" to "Money is everywhere right now; get as much as you can and build
the biggest war chest possible." Neither of these approaches are particularly
wrong -- it would be weird to turn down money when it's on the table, but we
opted to raise significantly less than what we _could_ have raised, and keep
our team where we wanted it instead of hiring enough people to become "sexy."

Part of that is because we didn't raise at a super sexy Y-Combinator valuation
and didn't want to give away the farm, and part of that was intentional. In
short, we wouldn't know what to do with those people if we had them.

To be clear, we still have plenty of money to get stuff done. We still can pay
for all the tools we need, pay ourselves enough to not have to stress about
cash, and can hire top talent. We just don't have more money than we know what
to do with.

We have three people working full-time on product right now, and that will
grow to five in the next few months. If we had raised a $3 Million seed round
(if you can still call that a "seed"), we would have felt compelled to go hire
a dozen people. I can think of stuff we'd _like_ to do, but it would probably
be an absolute mess if we were building it all in parallel.

There may be some companies for whom building a huge war chest makes sense,
but the notion of raising money for the sake of raising money (because you
_can_ ) seems odd and dangerous to me.

~~~
ianphughes
You're correct that neither approach is wrong, especially since it might
largely depend upon what type of business you're building. However, I think if
you have no fear in your ability to raise funding, a business may relax in the
real market discovery search. a super sexy valuation is always nice...but I
think profitability is always in vogue. When I read this recent article[0]
about what it MVP really means, it reminded me that some people in our
industry forget that finding a market for your innovation is the lifeblood of
long term success.

[0][https://news.ycombinator.com/item?id=8356906](https://news.ycombinator.com/item?id=8356906)

~~~
austenallred
The advice to build a war chest is often quite pessimistic. For example, if
you think the market is going to bottom out by the next time you're going to
raise money, you might as well raise it now. With all else being the same, it
would have been a whole lot easier to raise money in 2000 than at then end of
2001.

~~~
tim333
>The advice to build a war chest is often quite pessimistic

I think cautious / sensible might be a better description. Few people look
back regretting having too much money in the bank. As long as you can avoid
blowing it on dumb stuff.

------
7Figures2Commas
It's quite amusing that the folks who have been investing in companies at
exorbitant valuations and pushing for higher and higher growth as a
prerequisite for additional funding are now worried that all the large sums
they've aggressively invested are being spent on growth or things that create
the appearance of growth. What did they expect?

Comments like "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"
are particularly interesting. The top-tier VC firms always talk about value
add and active participation in their portfolio companies, and almost all of
them look to have board representation in one form or another. But somehow one
of the Valley's most prominent and connected VCs suggests that he doesn't know
"who has been swimming without trunks on." Crazy.

~~~
clairity
you make it sound like all the VCs got together and decided to make this
happen. it's instead an artifact of the economic system we have. it's due to
humans being involved, but not caused by individual humans.

the car analogy would be the waves of stop-and-go traffic on a congested
freeway, which is caused by variances in reaction times of people.

~~~
7Figures2Commas
> you make it sound like all the VCs got together and decided to make this
> happen. it's instead an artifact of the economic system we have. it's due to
> humans being involved, but not caused by individual humans.

"Your poor returns are an artifact of the economic system we have. The
collapse in the value of your investments with our firm is due to humans being
involved, but this was not caused by individual humans."

\- Every hedge fund manager, mutual fund manager, venture capitalist

> the car analogy would be the waves of stop-and-go traffic on a congested
> freeway, which is caused by variances in reaction times of people.

I think the pusherman analogy is more apt: he who sells crack gets crackheads.

------
brianstorms
Why now? What about all the years startups have been burning cash? It's
nothing new. Parties, entitlements like free meals for employees, fancy
offices and furniture, too much travel, ads and PR spending, fancy hardware...
when a startup has zero or negligible revenue, this kind of excessive spending
is absurd. Not clear why Marc thinks it's time to sound a warning now.

~~~
jsonne
>ads and PR spending

These are growth activities as opposed to the others you list. The truth is
many products never have just organic "viral" growth. They need ads, sales, or
both to drive it.

~~~
thedaveoflife
Some would argue all the things he mentioned are growth activities. Employees
are a vital resource... taking care of them can be valuable and can attract
new talent as well

------
PublicEnemy111
I do agree valuations are artificially inflated, but before you start drawing
parallels to 1999 and every financial bubble of years past remember there are
companies with real revenue streams. Sure, there are the snapchat valuations
which have no basis, but do uber, airbnb, dropbox, and the like not deserve
billion dollar valuations?

Let's entertain the idea that we have another "catastrophic" event where every
VC in the world wakes up to the realization that many of these companies are
worthless. They can't liquidate their positions. The key idea here is that
this is a private market. These startups can't go from $100 million -> $0 in a
day. They will tighten their straps, let a few employees go, and extend that
runway as long as they need to make revenue. IMHO the easy days will be over
and now every founder will learn what its like to really run a startup - No
more shots in the dark just because you can

~~~
pessimizer
>do uber, airbnb, dropbox, and the like not deserve billion dollar valuations?

Uber and AirBnB are illegal businesses in most places in their current form,
and to the extent that they loosen up those laws they invite competition from
other companies for which there are no switching costs for either their
customers or vendors to move between at will. The only way they can crush in
that case is by undercutting on price and going into negative profits, while
coming up with ways to increase lock-in.

There's nothing preventing an alternative dropbox, or 100 alternative
dropboxes. The only thing they have going for them is an early brand and
technical talent (which may reduce infrastructure costs.)

I don't think that any of them are worth a billion dollars.

~~~
jusben1369
You're overly simplifying things. Uber has my payment information set up in a
sleek app. Uber has the most cars available when I need it. They have pretty
seemless technology that works well. New entrants are unlikely to match that.
So I'd stick with Uber. Which of course are all the reasons Uber has raised
gazillions and is growing like crazy. "There can be only one!"

------
tadmilbourn
I think this is the 4th major blog that I've seen just repost Andreesen's
tweet stream.

But, regardless of frothy times or not, the advice is solid. Keep your burn
low. Run as lean as possible until you've figured out the business model.

~~~
at-fates-hands
Shouldn't this be business 101? Plan for a downturn, use your resources wisely
to avoid future disasters? Even after several market crashes, it's surprising
to see so many businesses acting so recklessly with their capital. You would
think being in the valley they would know better.

~~~
fleitz
It depends on the market conditions. VC funded startups are not a place where
I think that really makes any sense. Most billion dollar startups haven't even
been through an entire business cycle.

The VC market is not looking for consistent year over year 8% growth for the
next 40 years. If they wanted that they would have bought index funds and told
startups to fuck off.

------
FollowSteph3
The fact that the tv show Silicon Valley exists, as much as I love it, really
shows that were in a big boom right now. It's starting to feel a lot like the
dot com era again.

~~~
FollowSteph3
Also for those of you who haven't watched it, they continually make fun of the
valuations, ideas, and funding available. So when I say exists I mean not just
that it exists at all, but what it's really about also ;)

------
snake_plissken
"Companies that spend money on fancy offices..."

Start-ups actually do this? What's the value in a nice office when you are not
established? Does it help to attract talent? Is it one of those everyone else
does it things?

~~~
spamizbad
> Start-ups actually do this? What's the value in a nice office when you are
> not established?

To play devil's advocate: You want to invest in big, fancy offices because...

\- People will be more likely to stay longer each day

\- It helps recruit talent

\- It helps instill the "Company Culture"

\- We have to look successful to be successful

~~~
georgemcbay
Mostly the last one, IME. A misappropriation of the common "fake it til you
make it" advice.

The REALLY sad part is how many companies build out these offices that are
expensive as hell, super nice inside and out and then (ignoring 40 years of
studies) they structure them in large open floor plans designed to maximize
noise and distraction and minimize the ability of developers to reach a useful
state of flow.

~~~
techdragon
Yeah ... There's merit in having an open plan, but an open plan with no places
to hide from the chaos is definitely going to be less efficient.

------
nemo44x
The trade is getting crowded - that's the feeling I get from some higher
profile VC funds complaining recently. Their buy-in's are getting more
expensive as more private money from non-traditional VC funds moves into the
sector due to continued low interest rates, a feeling the public markets are
getting close to topping and the fact that each round seems to be up, up, up.

This is forcing higher prices for the traditional VC funds which in turn makes
them more conservative with how their money is spent. And because the money is
so easy to acquire the start-up's are blowing it quickly. They are competing
for a limited set of "top" employees which is driving labor costs up to
potentially unsustainable levels.

Money won't always be so easy. Use it carefully. However, I see the top VC's
getting a bit upset they have more competition to invest in tomorrows
potentially massive businesses at discounted rates.

------
simonswords82
Southparks - Go Fund Yourself episode about startups is timely:
[http://www.hulu.com/watch/691075](http://www.hulu.com/watch/691075)

------
JustSomeNobody
The problem is that nobody will listen. The reason nobody will listen is
everyone has an "I better get mine while I can mentality" or a "Well, nobody
else is going to listen, so I'll be at a disadvantage if I stop spending so
much" mentality.

If you look around and see the people you're competing with spending money
like it's going out of style, you're going to do it too.

~~~
ameister14
I disagree with that; people will still try to get theirs, but most people are
smart enough to go for the PayPal model: get 100 million dollars right as the
bubble pops and spend it wisely.

------
forgotAgain
So the evaluation has been made that there is more to gain by protecting your
reputation for the next boom-bust cycle then there is in wringing the last few
million out of the current one.

------
dang
[https://news.ycombinator.com/item?id=8369734](https://news.ycombinator.com/item?id=8369734)

------
il
The solution is simple: always treat each round of funding like it's the last
money you'll ever get.

------
stealthlogic
Can Confirm, I work at a start-up and see it on a regular basis.

------
notastartup
So after such market correction in how investors value startups and software
business in general, I suspect that there will be a starkly different
valuation model, one that relies on net positive cash today and the prospect
of net positive cash in the next quarter.

Spending cash as soon as they come in won't be good enough for the next group
of investors, to further weed out the cash burning companies, they will look
for a more conservative and cash positive businesses.

This would impact consumer centric startup models where valuation comes from
having a large userbase more. Companies that pursue businesses wallets will
have a more favorable valuation, possibly a lot larger than what was
previously thought.

Looks like a good future but not so much for if you are building the next
facebook. Those days of sustaining high user base with little to no paying
customers are gone. Market will no longer place favorable valuation on such
operations.

This is just what I'm predicting of course.

