
Pressure on startups is building with IPOs and sales stalled in a funk - kgwgk
https://www.bloomberg.com/news/articles/2017-07-10/silicon-valley-s-overstuffed-startups-risk-messy-blowout
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frgtpsswrdlame
Tech startups get a sort of alternate financial analysis which is all about
growth now, profit later because of network effects. But a lot of companies
under the "tech startup" banner just don't seem like tech companies to me.
Sprig isn't a tech company, its a food company, same for juicero and other
food delivery apps. Uber shares similarities with tech companies and with taxi
companies so why does it always get analyzed as a tech company and never as a
taxi company? As this boom progresses we're at the point where basically any
small company is labeled "startup" and then branded as somehow tech even if
they just have a backend database and a flashy javascript website.

~~~
zitterbewegung
Its due to the fact that VC's see "software eating the world" and they make a
bunch of bets that push that mantra. Also, marketing the business to people
and or investors follows the same pattern. News will eat up "this is uber for
babies" and market it to people.

~~~
BrooklynRage
Uber for babies? The stork will finally be real!

~~~
drpgq
Disrupting the fertility treatment industry? I wonder what Musk would do with
that.

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donkeyd
Since this article is getting upvoted; I'd love to hear what HN'ers in SV
think about this.

I'm located in the Netherlands far away from it all, and to me this article
cofirms exactly what it looks like from the outside. Things I'd be interested
in knowng are:

\- Employees and founders, are you afraid you might end up empty-handed? Do
you manage to save some of those big SV paychecks in case it does go to shit?

\- People on the investment side, do you see any real worries yet, or is
everybody still in full on happy mode?

\- Any remarks in general on what the mood in SV is on this? Do people talk
about it, or are they mostly just going on like they have for the past years?

I'd love to get some insights!

~~~
cobookman
Live in Silicon Valley. Noticing a lot of startups closing shop and friends
finding new jobs.

I'd mention though that the risk was well known. About 1 year ago most people
started to realize that startup options are basically worthless, and similar
to buying a lotto ticket.

~~~
mattmanser
But I've seen this exact post every couple of years on HN since 2006(I
think?).

You might think things are changing but it sounds like you and your friends
are simply growing up and being more realistic.

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leggomylibro
It's interesting. Everyone keeps saying how there's this neverending waterfall
of cheap money with nowhere to go, but in non-software industries it feels
like there's a heavy dearth of capital.

Want to start a new small business as an electrician or plumber? A
manufacturing startup? A boutique hardware studio? Those kinds of businesses
cannot promise returns orders of magnitudes higher than the investment with a
straight face like software companies somehow can, and it seems like they are
ignored because of the comparative risk/reward ratio.

But jeez, this is one fairly specific industry hoovering up all of this cheap
money in our economy. While vast swaths of our economy remain gated behind
enormous barriers of regulatory capture and capital investment.

What's going on?

~~~
FiatLuxDave
I see it too. Here in Cape Canaveral, we don't have a tech industry. Sure, we
build plenty of rockets and electronics, and we have a lot of coders, but you
won't see much javascript and we don't have a single VC firm. From a finance
perspective, we just aren't tech. If you want to start a rocket company or
land a rover on the moon, you'd better know someone on Sand Hill Road.

As far as I can see, the issue is this: the Fed is trying to apply a
macroeconomic loosening of the money supply to fight the deflation from the
financial crisis. For political reasons, the old school Keynesian method of
borrowing for more government spending can't be used. So, they are maintaining
low rates to try to jumpstart the economy. Unfortunately, this money has to
enter the economy through a financial system which is geographically
imbalanced. So, we get inflation in SF, and NY, less inflation in cities with
less finance industry, and deflation in much of the rest of the country. This
seems to be the big economic issue of our time in the developed world.

Why we have two economies, and the financial system isn't arbitraging this
difference away, I'm not sure. I recall reading an economist (Harold Innis
maybe?) who warned about the centralizing effects of a Keynesian inflationary
theory. Anyone know more about this?

~~~
justforFranz
I think you're absolutely right about finance being geographically imbalanced.
Finance can't operate well at scale, it would seem. Finance can't process "the
long tail." And when it attempts to, deployments of capital get riskier, more
speculative, frothy, etc. It's a missed opportunity that hurts potential
customers as well.

I have to disagree with your take on Keynesian macroeconomics, however.
Republican protests against raising the debt limit are for show & they always
capitulate. Plus, concerns about inflation from Republicans are not as
pressing a problem now that they control the purse strings. :)

I think you could have removed anything about Keynes and had a perfect
comment. Your note about Sand Hill Road is spot-on.

~~~
saimiam
> finance doesn't scale

Scales well enough for grameeb bank and the micro lending industry. Scales
reasonably well enough for p2p lending. Scales beautifully for kickstarter
style platforms. If Wall Street and VCs wanted and their HNI clientele were
willing, they'd set aside a portion of investment dollars towards these
borrower-lender marketplaces.

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sharkweek
I'm only citing what I've read, so forgive me if I lack the necessary
understanding here, but my general interpretation has been that:

1) Money is still super cheap in the private equities, meaning companies that
likely could IPO opt instead to stay private and take on more private cash to
avoid public market scrutiny as they grow.

2) Because money is so cheap, it's easy for competition to pop up in any
industry piquing venture interest. This is requiring companies to take losses
to acquire customers. These fickle customers then have plenty of options to
move to a competitor once the company tries to increase prices to hit positive
margin. As an anecdote, I have absolutely no loyalty to most services I use
these days.

3) This seems to create kind of a vicious cycle of VC-subsidized business
operations, never allowing a large portion of these businesses to hit metrics
that would appease the public, keeping most of them private, in friendly
ecosystems in the short term.

~~~
Cacti
Fundamentally, there is too much money (interest rates are too low, money is
too cheap) chasing too few returns (too many startups are ultimately just bad
business ideas).

Remember when everyone was talking about a bubble in '14? It wasn't a bubble
in the end-point of these startups, it was a bubble in their initial creation
and funding, and this is the consequence of that bubble: decreased returns,
illiquid assets, the end of the 3-year cycle time without the values that were
expected.

The biggest threat is your third point, as it makes the inevitable bust far
more painful if you're able to paper over the long-term issues with short-term
money. And the secondary threat is that there is no bust but this just
continues on as a slow death, which slowly drains VCs of investment funds from
other funds (pensions, etc.), which makes their money more expensive, which
sucks out more money, repeat.

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paulpauper
_But sales of young companies and initial public offerings haven 't been
keeping pace with the surge of money going into tech startups since 2014. The
cash waterfall that is supposed to rush to venture capital firms and their big
moneybags investors is more like a calm stream. This hasn't been a disaster
yet, and it may still turn out fine. But pressure is building._

they have been saying this for years.

 _With Silicon Valley under pressure to make cash back from prior startup
investments, more young tech companies will run out of money and die. Already
this year, more than a billion dollars of investor money has been wiped out in
the closing of tech startups like fitness hardware company Jawbone, food-
delivery startup Sprig and messaging app Yik Yak. Expect to hear the colorful
term "unicorpse" \-- that's a dead startup unicorn -- much more in 2017._

Never even heard of Sprig and Yik Yak. From what I gather, neither were valued
above $1 billion.

Instead of the media constantly trying to front-run the crash, why not just
wait for it. If it's as obvious and inevitable as the media says it is, we
shouldn't have to wait too long.

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stevenj
A part of me thinks that the VC industry will see a flight-to-quality type of
event sometime in the near future. In this scenario, I think it'll be
increasingly hard to raise a series A (and later) round. Instead, firms will
back more big, promising startups (e.g. series C,D,E) that have paying
customers, a defensible position, cash flow, and are still growing or a path
to growth.

On the other hand, I think there are several "unicorns" that are still private
that will do well as public companies -- Dropbox, Lyft, Stripe, and Airbnb.
The success of these in the public markets will help the startup ecosystem and
encourage venture capital funding.

With that said, I find the case of Blue Apron interesting. I have a hunch that
it may have thought its best chance to go public and cash in was now -- that
the environment for "unicorns" like itself (one that faces substantial
competition, a weak product, fickle customer behavior, lack of customer
retention and unstable cash flow) will only get worse.

~~~
eip
> A part of me thinks that the VC industry will see a flight-to-quality type
> of event sometime in the near future.

Logic would make you hope this is true but never forget.. someone funded an
umbrella sharing startup.

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dkarapetyan
They say best time to build a business is during a downturn because you are
truly forced to deliver real value to people.

~~~
mac01021
Being forced to do something is not something I generally consider to be a
favorable circumstance.

~~~
goldfeld
Growing up in adversity trains a system to get stronger and leaner.

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HugoDaniel
The author is afraid about all the money that is being put into startups that
is not coming back again into the markets.

"...most tech startups that survive are sold rather than become public
companies. "

The article then explains that "The value of U.S. technology company
acquisitions fell by 66 percent in the first six months of 2017 compared with
the same stretch a year ago".

All this analysis is interesting but unfortunately there is no mention of the
tech startups that _don 't_ survive. I believe that might be the key factor
for this.

It would also be nice to survey how many silicon valley startups are
considering ICO's instead of IPO's and try to reason if that might bring new
impact into the scene.

~~~
claytonjy
on ICO vs IPO, how does that work? Are there really non-blockchain companies
making cryptocoins for the sole purpose of raising capital to spend on
entirely orthogonal concerns?

~~~
HugoDaniel
I am also not sure, given the current state of the hype i believe that most
companies working on products that depend on network effect might at least be
considering making their own tokens.

Away from the hype there is also the tax problem (the elephant in the room in
most cryptocurrency/ICO articles). The country where the company is based and
how it implements rules to tax and control such money might influence this at
lot. A company is arguably starting with the wrong foot by thinking that it
can get away from taxation with such money.

But besides money isn't a lot of the startup scene also about disruption ?

 _edited: typo and final question_

~~~
claytonjy
So the notion that _any_ non-crypto company is considering an ICO in lieu of
an IPO is pure speculation?

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solotronics
I am fairly convinced at this point that the recent cryptocurrency selloff is
an indicator of the start of a tech stock decline.

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tom50
[http://templatesection.com/](http://templatesection.com/)

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verdverm
Unicorpse, what a great term!

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beepboopbeep
As a wise man once said "Hang on to your butts"

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lithos
Ooo fancy unicorpse.

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1ba9115454
This is a bit alarmist.

Money is not created or lost it just changes hands.

If the VC funds don't get their money back it's because it's been spent on
developers, offices, parties, bowls of fruit.

The main issue is that perhaps the money could have been better spent, perhaps
charitably.

~~~
sputknick
Money actually is created (at least here in America), that's part of the
problem. When you hear the term "cheap money" its referring to money that is
created by the Federal Reserve, which gives the money to US banks, to lend to
US companies and consumer. The more money you create, the more banks have to
lend, the cheaper it is, the lower the interest rate, the lower the bar for
investments, which leads to more investments. The idea is to stimulate the
market.

