
Tech faces hour of reckoning as fundraising drops, layoffs rise - apsec112
http://www.usatoday.com/story/tech/2016/01/16/party-over-soaring-tech-valuations-big-funding-rounds/78028176/
======
brianmcconnell
21 year SF resident here. I was here for the dot com bubble, and the smaller
"multimedia" boom in the early/mid 90s.

I think what is unfolding is a shift away from consumer businesses and back to
boring business to business services. The latter tend to have more predictable
cash flow (which ironically is a handicap when VC money is flowing to "viral"
consumer businesses that can paper up their growth).

B2B services whose customers are not linked to the local tech economy should
do just fine. It might be harder to raise money for a while, but that's good
too, it'll weed out the weaker companies. OTOH, consumer companies that
already have ten years of rapid growth priced into their valuation are pretty
screwed. Hard to see where they avoid some really painful and damaging
adjustments.

And a word of advice for workers. If you are at all unhappy with your job, or
suspect that your company is vulnerable to a downturn, now is a good time to
start looking around for something you'll be ok with for a couple years. Once
companies start laying people off in larger numbers, it will get ugly (maybe
not 2000 ugly, but it won't be fun).

~~~
w1ntermute
This is exactly right - the two categories of businesses that will face
hardships are:

\- Consumer tech startups that have only produced revenue-free growth (ex:
Dropbox and Evernote)

\- Startups selling to startups (ex: Mixpanel and Stripe, maybe Zenefits)

On the other hand, a company like Airbnb may benefit from a downturn, as
people look to save money on travel.

~~~
digbyloftus
Is Dropbox really consumer tech? I would have thought businesses would make up
the vast majority of their revenue.

~~~
w1ntermute
Yes, that's exactly their problem - they're consumer tech, yet businesses make
up the vast majority of their (supposedly meager given their insanely high
valuation) revenue.

------
StavrosK
Wow, this article looks like it's pushing some agenda hard. They took _one
quarter_ that was pretty much the same for NA and Asia and much better for
Europe as the comparable quarter in 2014 and use it to report "fundraising
drops"? Looks to me like someone is trying to actually _bring about_
fundraising drops by using spurious data.

"Q4 2015 pretty much the same as Q4 2014, the sky is falling!"

~~~
blazespin
Interest rates have finally gone up. Money has become 2x expensive. Everyone
was predicting the bottom would fall out of tech when this happened.... and it
happened.

TBH, the fed should not have gone from 0.25 to 0.5 That was really really
dumb. They should have gone from 0.25 to 0.3 or something.

My guess if the bleeding keeps up, the Fed will have to do a rate cut. Should
help things.

Since I got downvoted, let me show the math:

For an entity borrowing at fed funds rate, on 100B loan that is 250M to 500M
annual payment after the hike. If it were 2.5% to 2.75% on 10B, that would be
250M to 275M. See the difference? Even a 50bp hike would just be 20% higher
payments.

If you're surviving at the edge of these loans, then doubling your payments
could easily wipe you out.

~~~
marcosdumay
I don't get why people downvote posts like this.

Well, I disagree with your comment on policy, but yes, anybody that was on the
edge is pretty toasted right now. The important question is whether VCs were
there.

~~~
Silhouette
On the other hand, anybody whose financial situation was severely affected by
a widely predicted and minimally sized increase in extremely low interest
rates was pretty toasted anyway.

If you're looking at medium-term financing options -- on the scale of multi-
year business loans, mortgage fixed rate periods, and the like -- in most of
the Western world, you should probably be considering whether you can afford
at least 2.5% interest rate rises over the next few years, not just 0.25%.

~~~
marcosdumay
The point is, it's not a minimally sized change. You double the interest rate,
you half the amount of money big institutions have available to roll around.

I happen to think it was a good decision. But why does everyone insist on
calling this change "small"?

~~~
jeffwass
So if the rate was zero, and they increased it by 0.01%, your claim would be
that it was an infinite rate increase, and big institutions would have zero
money to roll around?

~~~
marcosdumay
If the rate was zero the, incredibly small attrition banks suffer while
creating money would completely determine how much money is in circulation. If
not for it, yes, the amount of money would go to infinity, and would get down
infinitely much by any positive rate.

My point is, this attrition turned up to be incredibly small, and still
irrelevant at the US later interest levels.

------
puranjay
This comment from Tucker Max's article on why he stopped angel investing bears
repeating here:

> "But when you have a lot of money chasing all these great ideas, and you
> combine it with the fact that entrepreneurship has gotten sexy in the last
> few years and become the “in” thing for a certain crowd, what you end up
> with is a huge number of people starting companies who have no business at
> all doing that."

[http://observer.com/2015/08/why-i-stopped-angel-investing-
an...](http://observer.com/2015/08/why-i-stopped-angel-investing-and-you-
should-never-start/)

I've said this to tons of people privately and publicly: entrepreneurship has
become the new "I'm working on a novel". Lots of people have good ideas in
their heads. That doesn't mean they should be building businesses on them.

Some people are just not cut out to be entrepreneurs. And once the money dries
up, these will be the first ones to go.

The rest will continue building businesses because they can't really think of
doing anything else.

~~~
orthoganol
I think anyone who follows the advice of Tucker Max, America's biggest no-
apologies frat bro, should not be taken too seriously.

You still got it wrong for who you should be investing in: People who have a
vision driving them to the core, who can't imagine not seeing their change
happen. People who just want to start businesses "because they can't really
think of doing anything else", are people who just want the lifestyle or
equate it with personal freedom or something. They don't have much of an edge.

~~~
puranjay
My comment wasn't about him as a human being. It was about him as an investor
and businessman - two things he's been successful at.

~~~
lmm
Has he? What's the benchmark for someone in his position who goes into
investing, and how does his performance compare to it?

------
VeilEm
Great, can we stop calling it a bubble now? Like if there were an actual
bubble in the bay area, bad trends like this would have popped it? The thing
is things aren't really see-sawing. The pendulum isn't going to swing as hard
as it did in 2000 as it would have done so already.

That the technical companies in the bay area seems to be isolated from the
hardships of the rest of the economy doesn't make it a bubble, it's simply a
place with a different economic focus with different economic realities.

I swear people around here actually sometimes seem to wish bad things would
happen, as some kind of schadenfreude.

We see these high valuation numbers being lobbed around as some kind of insult
to good sense, but we're talking about just a few companies and in the grand
scheme of the size of the economy in San Francisco, Palto Alto, Mountain View
and San Jose these numbers are a tiny fraction of the overall system.

The reality is that software is still eating the world, and more change and
value to be derived therefrom is still to come: automated vehicles, robotics,
smart appliances, VR, and a myriad of far less sexier technological
innovations with sound economic value creation.

~~~
acdha
You had a lot of company saying the same things in 1999.

A central fallacy is assuming that because an idea seems inevitable the
companies in that field now will be the ones doing it. Software is indeed
eating the world but that doesn't mean that, say, those smart vehicles or
robots will be made by a startup rather than GE or GM, or in one of the most
expensive places in the world. Remember Kozmo.com? They're a fading memory but
a lot of my neighbors get their stuff delivered by the same grocery chain
which was there in 1995 who now has a great website, mobile apps, and a fleet
of delivery drivers.

This also has an important corollary for developers: unless you have a
significant chunk of equity, never forget that even if your company is one of
the successes your personal success does not inevitably follow. Most C-level
managers see people like us as an expense to be minimized.

~~~
VeilEm
> unless you have a significant chunk of equity

Actually the better bet is to avoid equity as a replacement for a higher
salary. Less risk, (lost value, taxes on negative value), and unless your
company goes Google huge and you came in early it's not likely to be life
changing.

~~~
acdha
Agreed. I was defining “significant” as founder/early investor level. Many
developers self-identify at those levels but tend to be compensated at close
to a wash when you compare the risk to higher compensation at a big corporate
job.

That's not saying that there aren't many other reasons to prefer working at a
startup but simply that you don't want fantasies about getting rich distorting
the comparison.

------
FussyZeus
The companies that don't make it: CEO's fly away on golden parachutes sewn
with the money they didn't earn, middle management goes on to other companies
with an Impressive Name on Resume (+2 to hire-ability skill) added, and the
engineers lose it all on the company stock they were promised could only go up
and have to find a new source of income for the multi-thousand a month studio
apartment they rented to get out there.

(Yes I realize this is overly simplified and bleak, that's the point.)

~~~
cballard
I've been wondering - in many startup companies, the engineers own all of the
knowledge to run the company (documentation practices are discouraged by
management because that's not "shipping"). Why don't we see more collective
action? If the entire engineering staff walked, the company would be _fucked_
, which gives them quite a bit of leverage. Meanwhile, the engineers can
easily find other jobs since they're relatively in demand.

~~~
scarmig
If only there were some kind of organization of workers that could organize
collective actions. Like, walking out and withholding your labor...

Maybe we could call it a workers unified organization? A unity?

~~~
Apocryphon
A guild.

~~~
walshemj
Which has some unfortunate conations in American industrial history.

~~~
Apocryphon
I was thinking of it in terms of online gaming.

~~~
walshemj
Don't take this the wrong way if your thinking about organising IT workers in
some way you do need to understand American Industrial history at least in
outline.

------
Ologn
20 years ago, if you wanted to ship software, or run a web server on the
Internet, you needed some amount of capital. I worked at one of the cheaper
local Internet Service Providers in 1996, and with a 3-year contract we gave
you 1 gig of traffic a month on your colocated box at 10 MB port speeds for
$540 a month - you provide your own box.

Now for $10 a month, Linode provides me with the VPS box, I get 2 TB transfer,
125MB port speed, and the plan is not yearly or monthly or even daily, but
hourly.

There are two app stores I can put apps out with, with a variety of
monetization schemes. I know for Android that over 1 billion people use their
Android device at least once a month. There is also the web.

There has been an explosion of open source software, and improvements on
existing software - Linux, Apache, and MySQL. Or Nginx and MongoDB. Plus free
Java application servers, or Python, PHP or Javascript web frameworks. There
is Paypal and Stripe.

Companies have gone from renting offices to subleasing to co-working to
virtual offices.

If you can program (or can install software with minimal programming skill and
have some creative ideas and will hustle), there has never been a time when
fundraising has been less important, because you do not need money to get your
product to market. This being the case, worrying about getting a job and
layoffs makes less sense. Because nowadays you don't need an office, a shrink-
wrapped software deal with computer stores, a handful of leased colo'd servers
and IT team to support them. You can start with much less, get to where you're
making a minimal living, and then go from there. After that you can take a
job, or take seed/VC money if you want, but you don't have to. I have seen
this come to pass, and I have heard many luminaries in Silicon Valley say the
same thing. Of course, in good times it is less work and easier to get a job
making low 6 figures programming, than it is to make $30k a year on your own
bootstrapped business, never mind pushing that up to where it grows to $100k.
It is a lot of work, as many have said. It is doable like never before though.

~~~
randycupertino
Yeah but then you can't cash out the VC money and get yourself a condo and a
ferrari!

[http://www.businessinsider.com/secret-may-be-pivoting-to-
a-s...](http://www.businessinsider.com/secret-may-be-pivoting-to-a-startup-
incubator-2015-3)

------
is_it_worth_it_
Less VC money means less demand for engineers. Less demand for engineers means
dropping wages. Higher levels of outsourcing and H1Bs also means dropping
wages. American engineers though "scarce" will see a significant drop in
wages, salaries in this field are going to collapse. They were being propped
up by the government printing money, thus pushing up tech companies stock and
pushing up VC money. With all that money no longer circulating, we will see
wages go down.

~~~
joe_the_user
As you say, this entire situation has been supported by massive infusions of
printed money intended to support the economy dating back from the last
collapse.

And the massive bailout followed by quantitative easing/money-printing was
already touted by Bernanke in his helicopter speech.

Which is to say that one can't imagine any response to the present embryonic
crisis other than even more money being thrown at the problem.

And it seems like this money restore the status quo even as the 2007+ money
didn't restore the previous quo. Rather the primary trends - printed money
concentrating into the hands of the already wealthy, seems likely to simply
accelerate.

How long can the circus keep going? It might collapse at any moment yet I
don't think anyone knows for sure.

~~~
laotzu
Even though the vast majority of monetary transactions are done electrically,
it is still at heart a paper-based system built upon the constraints and
assumptions of the paper/print medium that has dominated for the past ~500
years.

"It is part of the age-old habit of using new means for old purposes instead
of discovering what are the new goals contained in the new means."[1]

I'd imagine the house of cards won't come tumbling down until a viable
electric alternative outcompetes the legacy system.

The old goals of the Federal Reserve system are primarily:

1\. Maximize employment

2\. Stable prices

3\. Low interest rates

These goals are no longer applicable in the new electic age of automation and
ephemeralization.

[1] Marshall McLuhan, The Medium is the Massage

~~~
joe_the_user
Retail transactions may be "at heart paper" with those constraints and they
may be numerically the majority of transactions however broadly financial
transactions involve a greater large amount of _funds_ and so the Fed's policy
of money creation has in no way been limited by retail monetary transactions'
dependence on paper.

Have you heard of the "helicopter money speech"?[1] It seems required reading
for anyone trying to understand modern monetary policy (though it's naturally
only the start).

[1]
[http://www.federalreserve.gov/boarddocs/Speeches/2002/200211...](http://www.federalreserve.gov/boarddocs/Speeches/2002/20021121/default.htm)

~~~
laotzu
Deflation is defined as:

>a decrease in the general price level of goods and services

In the Gutenberg era of paper based processes and hierarchies, as stated in
your cited speech, a reduction in the price of goods and services is seen as a
bad thing. This is no longer the case. The assumption of scarcity of renewable
physiological resources (level 1 of Maslow's hierarchy) is no longer valid:

>In technology's "invisible" world, inventors continually increase the
quantity and quality of performed work per each volume or pound of material,
erg of energy, and unit of worker and "overhead" time invested in each given
increment of attained functional performance. This complex process we call
progressive ephemeralization. In 1970, the sum total of increases in overall
technological know-how and their comprehensive integration took humanity
across the epochal but invisible threshold into a state of technically
realizable and economically feasible universal success for all humanity.

-Buckminster Fuller

In the era of electric automation, deflation flips into ephemeralization
because everything is increasingly/exponentially produced better, faster, and
cheaper. A reduction in the general price level of goods and services is the
_purpose_ of automation.

This is why goal #2 of maintaining stable prices is now obsolete and self-
defeating. It completely ignores automation and renewable resources.

------
jjoe
Most startups have already priced this fundraising-drought in their previous
fundraisers. Instead of raising exactly what they needed, they over-raised by
double or tripple that. It's selfish in some way as it likely contributed to
the negative sentiment and the high valuations.

I think this won't be an acute bubble for incumbents but for early stage
startups that need funds badly to keep the short runway clear.

~~~
forgetsusername
> _Instead of raising exactly what they needed, they over-raised by double or
> tripple that_

Do you have any evidence of this? On the surface, it doesn't even make sense.
There are two sides to every transaction; are you claiming that the
entrepreneurs could see the slide coming, and anticipated it, but the
financiers didn't?

~~~
bitserf
I was working for a startup in 2008, and before everything turned to crap,
Sequoia gave us up front warning to start preparing for the coming apocalypse,
which probably is the reason we survived and made it to an exit of some sort.

Over-raising seems like more proactive version of that (2008 still being
relatively recent in investors' memory), and VCs likely suggested this to
portfolio companies.

------
xiphias
My favaurite part: "We're in a bit of a different bubble this time, the
exuberance now has a foundation" as measured by market size and sales
potential, he says.

Sure, it's always different this time for a CEO who needs to keep hopes up for
investors. Sales is crashing with the deflation that is coming. And also
overvaluations are followed by undervaluations when the interest rates
increase.

~~~
pistle
"It's different this time."

Said every time.

Of course the details of the crashing waves are different, but the tide is the
same every time.

~~~
tomjen3
Yes it is said every time, until the last time when the rules really are
different - one early summer when there really will be no more war in Europe,
one cold november night when the Berlin Wall just opens, one fall when a
scrappy little upstart in a colony forces the worlds biggest empire to leave,
one december when Ireland was free, etc.

Predictions about the future are hard.

------
jondubois
Sounds like things are going to get tough. I have mixed feelings about this.

On one hand, I feel sorry for all those software devs (myself included) who
might be out of a job in the next few months or whose salaries will start
shrinking.

On the other hand, it will be nice to watch some over-funded startups crumble
to pieces and make room for more deserving (bootstrapped) newcomers.

------
at-fates-hands
Nobody should really be surprised by this. People all over tech have been
arguing about the bubble for some time. I see this as an early stage harbinger
of things to come though.

With the Fed raising rates, VC's already starting to hedge their bets, and
friends of mine leaving startups to go back to stable corporate gigs, I see a
shuffling of the deck, but nothing too major.

I feel like this is the normal eight year tech cycle that is just coming back
around again:

\- 1992 recession and crash

\- 2000 recession and crash

\- 2008 recession and crash

~~~
intopieces
All election years, all resulted in change of ruling party. Is it a tech
cycle, or just the people at the economic helm buckling down for changes in
policy?

------
bovermyer
On the face of it, this just appears to be a possible end of the VC bubble. I
highly doubt that this means much for startups that are built solely with
founders' capital.

~~~
te_chris
What about the multitude of startups whose main customers are other funded
startups? And the agencies who are similar. Could get hairy.

~~~
axx
That's kind of what the dotcom bubble was. Startups with only startups as
their customers. All juggling fantasy money around until some investors wanted
their money back.

~~~
signa11
> Startups with only startups as their customers.

it was not just that there were startups which were feeding off of other
startups. even big-name established companies e.g. sun, csco etc. were pretty
deeply involved.

------
guylepage3
I've been hearing more and more of the companies feeling the Series A crunch.
This will lead to many Seeds not making it into their next round. The times
are changing for sure.

~~~
bluejekyll
One great reason for public markets, is it takes away anecdotal evidence and
you can actually have some real data backing up these claims.

While this might be happening, do we have a method to track it with real data?

------
djcapelis
Huh. Is it finally starting?

Overdue, if true. If not, I guess we'll keep waiting for the next hangover to
catch up to us.

------
dangerpowpow
Data shown is based on 3 months.

------
joshmaher
If your a founder facing a fundraising struggle at the seed, bridge, or series
A round I highly recommend you learn more about what your potential investors
are thinking or need to know from entrepreneurs before they invest by reading
more about the 20 different archetypes of investors. After a year of research,
these different archetypes are identifies in my book Startup Wealth -
[http://amzn.to/1Jej8El](http://amzn.to/1Jej8El)

------
brightball
"tech" is a bit broad. Programming startups are the most capable of have a
very low operating budget with high growth, so the burn rates should be easier
to minimize to get the most out of those investments.

The tech startups that involve actual physical products with manufacturing,
distribution, shipping, retail placement, etc are another story.

It seems like we would be well served to have terms to differentiate for sake
of headlines like this.

------
Kluny
Are we taking USA Today seriously now? Why, please?

------
debacle
People shouldn't see this as negative signaling for tech, but rather positive
signaling for other parts of the economy.

------
yggydrasily
Biotech included:

[http://www.businessinsider.com/venrock-partner-bryan-
roberts...](http://www.businessinsider.com/venrock-partner-bryan-roberts-on-
the-2016-biotech-stock-market-2016-1)

------
sholanozie
American investors would be well advised to look north of the border...

~~~
MAGZine
Very true. With the low Canadian dollar, investment dollar will go way, way
farther. Like probably 50% farther, given lower wages compounded by the lower
dollar.

------
nemo44x
""Companies will still raise funding, but at lower valuations," says Arianna
Simpson, a Silicon Valley-based investor."

I wonder if this means companies have gotten wise to the bad deals they were
signing just to get a high valuation and are agreeing to lower valuations but
not giving up preferred stock that is so powerful. I know a few smaller
companies that have done this and prefer to not make headlines with sky high
valuations that everyone knows are meaningless.

This is a good thing.

------
code4tee
When the tide goes out you get to see who's been swimming naked. The tide is
starting to go out..

------
sjg007
In the event of a downturn I think Facebook could absorb a large amount of the
laid off employees.

------
peter303
Pretty accurate. Most of the so-called unicorns are overvalued by a factor of
four or so through accounting tricks.

The article is correct that it is not silly as the late 1990s. Many startups
now actually have working products, revenues, and sometimes profits. Many
1990s companies lacked those.

