
$100M Was Once Big Money for a Startup. Now, It’s Common - prostoalex
https://www.nytimes.com/2018/08/14/technology/venture-capital-mega-round.html
======
usrusr
From my consumer's perspective, the most annoying part is when a company
provides a service I like, they look like they could be reasonably profitable
for an investment of x but not for 10x, and then they suddenly raise to 10x or
more. It's inevitable then that they will eventually ruin the existing service
in search (usually futile) for some mythical product/market fit that was
somehow projected be appropriately profitable for that 10x investment.

It's particularly irritating with paid services, where all of a sudden paying
customers turn from highly valued into a legacy nuisance.

~~~
ditonal
I worked for a startup with a well liked paid product built through iteration
(test prep product). Then it was dropped on the ground and discontinued cause
they raised a hundred million and now needed to build the founders vision, a
free consumer project designed and built for years without showing it to
potential users. Didn’t work out. So I’ve seen that happen.

~~~
mo1ok
Shit, this sounds like a previous startup I left. Product-market fit acquired,
growing steadily, near-profitability. Then Series C, and sudden pivot to more
ambitious product. A few months/years later (I left before this, seeing the
danger) most of the staff gets laid off. :\

------
nostrademons
Many of these rounds are replacements for what would otherwise be IPOs or
other public financing rounds.

Flywire was founded in 2009 and in 2017 processed over $2B in payments. [1]
Gusto was founded in 2011 with a rumored valuation of over a billion and
$100M+ in revenues. Convene was founded in 2009 and was doing $18.6M in
revenue in 2015 [2]. All of them have acquired other companies.

Before 2000 these would be public companies; hell, before 2000 there were
public companies that were barely 2 years old and had virtually no revenue.
The investors for these rounds are largely the same firms who would be playing
in the public markets.

[1] [https://www.flywire.com/pT/articles/how-two-boston-
startups-...](https://www.flywire.com/pT/articles/how-two-boston-startups-are-
shaking-up-the-payments-industry)

[2]
[https://www.forbes.com/companies/convene/](https://www.forbes.com/companies/convene/)

~~~
Ologn
> what would otherwise be IPOs or other public financing rounds

The NYSE and Nasdaq do a lot of hype about how much money they raise for
companies in IPOs and secondary offerings. But if you look at the numbers
since World War II (and even before), very little of the money corporate
America raises comes from the stock market. US corporations raise money via
bonds, term loans, credit lines and so on. The stock markets facilitate stocks
moving from one shareholder to another, but have (relatively) little
involvement in raising cash.

As you note, companies are staying private much longer nowadays. Facebook
didn't go public until it was worth $100 billion.

~~~
another-cuppa
Indeed. It's a complete joke and a big reason why "the rich get richer". I,
for example, believe that artificial meat will be one of the biggest
industries in the world once governments outlaw the cruel and barbaric
practice of producing the "real thing". I also want to support the beginning
of that industry. But is there any way for me to do that? No. The deals are
done in private with a few very rich individuals. If those companies ever go
public it's just a way to cash out because they are already turning a profit.

------
fipple
50% of all this money is being captured by Bay Area landowners.

~~~
user5994461
More than that.

Companies spend the the majority of their costs on office space, then
employees spend the majority of their salaries on a home.

~~~
brownkonas
I disagree. Office space is relatively cheap compared to employee salaries.
For a 25 person startup in SF, office space pencils out to the cost of 1-2
employees depending on the quality of the office. We have capacity to cram in
up to 35.

~~~
cbhl
Market rate rent in SF is something like $3k for a studio, which is like
50-75% of those employees' take-home pay if they're making low six figures.

~~~
ouid
isn't mid 6 figures 550k?

~~~
cbhl
Oops, you're right.

I was thinking 100k-200k for some reason :/

~~~
logfromblammo
On a logarithmic scale, mid-6-figures is 10^5.5 = $316228 . Maybe your brain
prefers to deal with larger numbers in terms of orders of magnitude?

------
aaavl2821
In biotech (by which I mean therapeutics), out of ~150 "major"* VC investments
from 1/2018 to 7/2018, 14% of deals have been over $100M. Many of these have
been Series A deals [0].

Many of these rounds are tranched (ie you only get a certain amount upfront,
then get the rest if you hit milestones), but I think I saw data suggesting
only 30-40% were tranched.

I think this phenomenon is largely due to 1) more money going into biotech VC
but 2) very little increase in the number of good startups. Many startups are
created in house by 5-10 VCs (though this is changing, especially with
increasing number of well funded Chinese startups), so there's limited
bandwidth. Therapeutics is so different from any other type of startup that
pretty much all the incubators / educational materials don't apply, and the
only ppl who know how to start startups are those who've developed drugs at
big companies or have started successful companies before

* Announced Series A through later deals, and some large seed deals ($5m+)

[0] source is a website where i've been tracking major biotech VC investments.
i'm a hobbyist programmer and its on a free heroku plan, and i'm in the early
stages of turning what was a personal project into a product so expect bugs
and not-ideal performance. but deal coverage is comparable to other biotech
databases.

[https://bio-vc-tracker.herokuapp.com/](https://bio-vc-tracker.herokuapp.com/)

~~~
refurb
Biotech investment has been accelerating significantly over the past year.

A few years ago, you’d see a handful of rounds over $100M. There have been
several in the past couple of months.

And you make a good point about Asian investments in biotech. The Hong Kong
exchange had its first biotech IPO and there have been several big rounds in
Asian as well!

------
bertil
I am surprised that the NYTimes doesn’t see it as a positive sign: the
structures around start-up (accelerators, investors, hosting, third party
tools, etc.) have grown in maturity and relevance quite considerably. I
certainly expect people familiar with YCombinator to agree.

More funding like that means more companies trusted to spend that money into
creating something profitable. If this goes into people who have grown
companies into a unicorn a couple of times; scaling faster local operations
lead by managers with relevant experience; AWS, GCP, Twilio & Square bills,
it’s certainly expensive but overall sensical.

I don’t know of an investor who, since 2000 has said: “This is silly, I can’t
invest anymore.” and left, so I don’t think the game got non-sensical overall.
Real-estate in SF certainly has, but high valuations proved when they made
sense and gave investors confidence. There certainly has been cases where the
value wasn’t justified, but very few at that level of money raised. Certainly
less in proportion than the rounds with crazy valuations in 2000

~~~
timr
_" More funding like that means more companies trusted to spend that money
into creating something profitable. If this goes into people who have grown
companies into a unicorn a couple of times; scaling faster local operations
lead by managers with relevant experience; AWS, GCP, Twilio & Square bills,
it’s certainly expensive but overall sensical."_

Who are these founders who have grown "a couple" of unicorns? There are huge
numbers of them walking around now? More importantly: who are these mythical
founders who have experience growing/managing a company by hundreds of percent
in a single year? They're pretty thin on the ground. This money is going to
inexperienced people. Save for (maybe) a few founders who lived through the
late 90s, _nobody_ has experience with this. It's new territory.

Also, Let's not kid ourselves: this money isn't going to AWS and Twilio. It's
going to salaries, and it's going to marketing. And that's why it's risky.
When you have to hire insanely quickly and buy revenue with marketing spend,
it's essentially impossible to manage the growth. Overfunding is a real thing,
and unless you've seen it firsthand, it's hard to internalize the perverse
incentives it creates.

~~~
bertil
Google has 88k employees today, almost 20 years of existence, and an average
tenure of about two years. I would estimate that people who have worked at
Google and learned valuable lessons, and able to secure director-level roles
in start-ups to be in the thousands; many have gone to Facebook (25k
employees, 14 years, similar retention). There are hundreds of people who
similarly left Facebook for Uber, Lyft, AirBnB, Booking, Coinbase, etc. I
personally know at least a dozen who made that move before their new employer
raised more money, and can name three friends who went from Google to Facebook
and to a third now-10B$ company, moving to pre-IPO company each time. And I
don’t even live in the US.

If you include probably several dozen people from PayPal (not just the six
founders but the people who reported to them); hundreds of YCombinator alumni,
who learned from their own failed company but leveraged the success of the
friends they made in YC, and probably ended up working with; if you include
people who have done their four years at DropBox, Zynga, SurveyMonkey, Twilio,
etc. overall, yes, I expect to find several people with relevant experience at
key positions in hundreds of companies. Some might have gone to investing full
time, but they are if anything more likely to trust and advise appropriately
their former colleagues.

A lot of them are “anonymous” in the sense that TechCrunch wouldn’t name-drop
them, but they would be familiar with, say, SQLite, AirFlow, or know from
experience whether RedShift is the right solution at scale; they would know
how to setup a Salesforce cluster; who to ask about address format in South-
East Asia; they know about bugs in Samsung’s Android video codecs; they would
have coordinated a launch in Arab-speaking countries before, know that React
works well with Big5, or know that VAT is processed differently in Islamic
finance.

I expect those people to be asking for, and justifying convincingly
compensations several times higher than what people could justify in 2000.

You are certainly right about marketing: I should have mentioned far better
targeting and control tools. CPA probably went up overall, but more
importantly: the ability to measure it, to optimise campaign, interrupt
ridiculous PR stunts before they cost too much, leverage them, etc. all that
has become better. Analysts measure LTV with less ridiculous estimations now.
That justifies trusting people with more money because when you hit the
product-market fit, you know that this money will make more.

~~~
timr
_" Google has 88k employees today, almost 20 years of existence, and an
average tenure of about two years. I would estimate that people who have
worked at Google and learned valuable lessons, and able to secure director-
level roles in start-ups to be in the thousands; many have gone to Facebook
(25k employees, 14 years, similar retention). There are hundreds of people who
similarly left Facebook for Uber, Lyft, AirBnB, Booking, Coinbase, etc. I
personally know at least a dozen who made that move before their new employer
raised more money, and can name three friends who went from Google to Facebook
and to a third now-10B$ company, moving to pre-IPO company each time."_

So basically, you're counting almost anyone who worked at a big company or a
successful startup in the last 20 years, even though virtually none of these
people have any experience founding or building a company.

~~~
AndrewKemendo
And this is exactly the story that works for VC.

Ex-FAMGA [SWE/PM] builds a new CRM for X, or stack management library. Leaves
FAMGA with a nice $300,000 cushion in the bank and goes to a scout Angel group
for Sequoia and raises $5M to build and launch their product, product gets
some traction, they sell it Google for $40M...and the cycle continues.

~~~
timr
_" And this is exactly the story that works for VC."_

LOL, well...clearly, a lot of things "work for VC" that doesn't actually work.
I don't think a VC would tell you otherwise, either. They're throwing mud at
the wall, and seeing what sticks.

------
meritt
Rand Fishkin (founder of Moz) commented on this phenomenon the other day [1]
by saying: "Make $10mm. Crickets. Raise $10mm. Everyone writes about you." and
"This is how we get a culture that trains founders to raise $$ > make $$."

Might I suggest to some budding founders that you try the revenue-funded
approach. It's not as fast or as glamorous but the payout when you're
successful is so much more significant.

[1]
[https://twitter.com/randfish/status/1028863855353417728](https://twitter.com/randfish/status/1028863855353417728)

~~~
dminor
Sure, but if you've raised $10mm it means that someone has the
expectation/hope that you'll be able to make much more than $10mm in the
future.

------
cft
The inflation due to quantitative easing has already happened at the higher
economic levels. It just has not reached the main street yet.

~~~
rebuilder
I'm wondering as well, how much of this is due to monetary policy pushing
investors into higher-risk investments. That's been the point of QE and
negative interest rates, right, although I don't recall hearing it framed as
an attempt to push investors into taking on more risk?

~~~
jahewson
No that’s not the point of QE. The point of QE is to allow the government to
continue deficit spending without running out of money. The treasury lowers
the interest rate and then creates new money to buy cheap debt from the
government when there would otherwise be no takers.

The interest rate affects everybody, which allowed troubled banks to lend
cheaply to each other in the wake of the financial crisis (good) but also
means that low-risk investments generate very little return (bad). It’s the
later that has pushed investors into riskier assets - whether or not that’s
beneficial depends upon how much systemic risk there now is... which is not
obvious, after all mortgage-backed securities were supposed to be safe but we
all know how that worked out.

The treasury would like to raise interest rates but this means that consumer
debt will cost more each month and is painful for homeowners especially. So
it’s a slow process. We may already have trapped ourselves in unstainably
cheap consumer debt - much like those 2005-vintage mortgage “teaser rates”.

~~~
rebuilder
I admit I'm not very familiar with the discussion around QE in the USA, but in
the EU, a lot of the reporting about interest rates has specifically quoted an
increase in investments as a desired result of low interest rates; pushing
money out of cash and bonds into "useful" investments.

------
Brushfire
Yeah, this is insanity. It's not common. Its still the 1% of startups, at
best.

------
RestlessMind
At a personal level - being a millionaire was a big deal once. Apparently not,
anymore.

------
infinity0
Pretty ironic that a couple days ago there was some article claiming that
China was about to collapse because it was going through "an orgy of
investment" in an attempt to grow whilst its recent projects did not generate
any actual revenue.

------
golergka
So much money, and yet, the same horrible open office plans and transparent
meeting rooms. Does office space in SF really cost that much?

~~~
madamelic
>So much money, and yet, the same horrible open office plans and transparent
meeting rooms. Does office space in SF really cost that much?

Personally I don't think it is about actually needing the money. It is about
wanting it. Thinking that if you have enough cash to burn, you'll be the next
Google.

In reality, 99.99% (if not 100%) of them are going to burn through their bank
and fly off a cliff in 3 years.

~~~
parthdesai
Yup, i don't remember if i heard this quote by DHH in one of his interviews or
was in his book, but it struck to me and honestly if i ever have my own
company, i'm going to try to follow Basecamp's model.

I'm paraphrasing the quote but it was something like "Not everyone needs to be
next Google, Fb, Amazon. There is ton's of space for medium size $50
million/year businesses."

~~~
nikanj
But no investor wants to put their money in those.

~~~
parthdesai
It's definitely more difficult but you can always try to bootstrap or take
small investments and try to grow organically instead of going for 10x growth.

~~~
brendanmc6
This just seems so much more attractive to me on a personal level. I invested
a stupid amount of my time to build a webapp just on a unproven hunch that a
market exists for it (i.e. if it did, I would have been a customer). Now that
I'm switching to founder mode and exploring paths forward, the thought of
taking a sum just a fraction as big as some of these companies is horrifying
to me.

I don't want to spend my time and energy selling, and then later defending, a
fantasy to investors. Nor the crushing anxiety that must come with that. I
just want to build something that the economy values for it's utility, and pay
my rent in the process.

Though I guess after acheiving that, I'd probably start looking up...

~~~
parthdesai
Definitely, i would rather earn little less and work for myself or someone
sane rather than working for someone who is looking to make 10x return anyhow.

------
pascalxus
These trends and actions aren't arbitrary. It's a reaction to the fact that
the world is becoming increasingly "Winner take All". VCs, having enough
information to recognize this fact, are now shoveling more and more money into
fewer and fewer investments.

On the plus side, I hope that means we'll get more companies that are truely
taking on Moon Shot problems and not just building another useless app we
don't need.

The danger on the other side, is companies that use those large funds for rent
seeking behaviors that hurt consumers in the long run.

------
weka
In some states, yes. Here in the South, KS, TN, FL (maybe), AL and GA. A lot
of these startups... 100M would be a godsend.

------
Xcelerate
Is there a website/newsletter of these companies that receive funding each
month? I would be curious to learn more about them.

~~~
ylere
[http://fortune.com/newsletter/termsheet/](http://fortune.com/newsletter/termsheet/)

------
setgree
A professor friend notes a similar dynamic in grant applications. Certain big
philanthropic groups only have bandwidth to look at grants that are >=$1M --
with predictable effects (grants balloon, the amount of time spent thinking
about how to spend each marginal dollar asymptotes to zero, etc.).

------
gumby
An important point: I looked up the deals mentioned the article and they were
all late stage, where such numbers are unsurprising. One company was a bit
over 2 years old (and then did a Softbank deal); the others were 6-9 years
old.

The article makes it sound like enormous A round deals are being done in
commerce and tech.

------
bwestergard
Does anyone care to guess how many of these will return the principal? How
many will turn a profit? Of those that turn a profit, how many will be
engaging in some form of regulatory arbitrage (i.e. Uber and labor/taxi
regulation)?

~~~
dmritard96
lots of literature is available on this (granted, not always clear what their
source of info is).

In general, many funds at that stage are playing the unicorn game (and many
raising 100M are already a unicorn or at least not too far away). Unicorn
economics is basically, 1/10 will hit >1B in value while X% will be mediocre
outcomes and Y% will fail. The 1 unicorn will return the fund generally
speaking, after accounting for X, Y, opportunity costs (this is high given the
strength of the markets lately) and interest.

------
FlyingSideKick
As an entrepreneur I’ve never understood how closing a round of funding is
somehow a badge of success. In fact it is quite the opposite. The ultimate
businesses are those that are highly profitable and can scale using their own
funding. Successful bootstrappers are the best entrepreneurs.

~~~
tomnipotent
> The ultimate businesses are those that are highly profitable and can scale
> using their own funding

I'd like to fly across the sky on a unicorn while drinking whiskey with a
leprechaun, but it's not really in the cards.

How many bootstrapped businesses can you think of in the Fortune 100/500? It's
very rare to get to that size without the capital to make mistakes.
Bootstrapped businesses generally have very little room for risk, and the ones
with business models that can both be executed on and monetized profitably to
> $100MM revenue/yr can probably be counted on two hands (e.g. GitHub, Plenty
Of Fish, Braintree, GoPro).

~~~
madamelic
>the ones with business models that can both be executed on and monetized
profitably to > $100MM revenue/yr can probably be counted on two hands (e.g.
GitHub, Plenty Of Fish, Braintree, GoPro).

If you or even a small handful of people own 100% of a company, you don't need
$100MM ARR to get rich beyond need.

You won't become Bezos but bootstrapped companies don't need to become
unicorns to make everyone there be filthy rich. There are tons of people who
bootstrapped companies and are very well-off from it.

~~~
graycat
On every major body of water in or on the boundary of the US, there are
yachts. The yacht owners are overwhelming full or part owners of a successful
business. Except maybe for near San Francisco or Boston, nearly none of the
owners took venture capital.

Lesson: The people in the US quite comfortable financially rarely took venture
capital.

------
scranglis
$100M is still big money.

~~~
tim333
I guess if you are looking to serve the world population it's only like a
couple of cents per head.

------
izzydata
It seems like you should still be able to accomplish a lot with 100 million.
Maybe the problem is that startups are wasting too much money and not being
productive and / or efficient enough with finances. Now it takes the average
startup more money to accomplish the same amount of progress.

~~~
madamelic
>Maybe the problem is that startups are wasting too much money and not being
productive and / or efficient enough with finances.

Definitely. I was talking to one startup and they were on the 5th round and
they started in ~2016. They bragged that they had raised $100MM, but no
mention of profitability or why they were raising so much.

Tons of people think "we raised $100MM" is impressive, what's more impressive
is not blowing out your cap table and diluting everyone except investors.

~~~
adventured
I've been at the start-up game non-stop since the mid 1990s. You know what's
really amazing today? What would have cost me $30,000 per year in
infrastructure in 1999 or 2003, plus the obnoxious management of it all, is
now $2k or $3k at DigitalOcean (and others) and rather easy to script and
manage. After you adjust for the better hardware vs increased total Internet
users scale and often increased resource demands, I also think that value
proposition heavily tilts toward a greater than 10x gain versus eg 15 years
ago.

Most everyone here will fully understand that effect. I'm skeptical the
NYTimes et al. understands what it has done to the start-up vs capital
equation however.

When Excite got started, you know what they needed? A $10,000, 10gb drive.
Vinod Khosla had to provide it just so they could properly test out their
search engine. Adjusting to today's scale, the equivalent might be three dozen
virtual servers for tens of hours per month at a cost of $100.

I don't _need_ venture capital to scale to a large size. It's beautiful, the
VC aspect has almost entirely become optional outside of a few niche
scenarios. That has provided the large capital raising start-ups with a lot of
sustained bargaining power that they have never had before. If nothing else,
you can simply wait longer to deal with VCs, boosting your position. That's
not going away with the next crash (it will deflate some of course), that cost
edge is here to stay. The leverage point is: can you actually build the thing,
can you execute, do you have the ability / persistence / etc to get it done.

It really wasn't that long ago that infrastructure was the biggest cost in
being able to prove out an Internet business and scale. Just to put on a good
test of a product meant for scale you had to sink large sums of money in
upfront. Today the people - their time - have become the biggest cost (unless
you're in SF etc., then it's that and real-estate). If I want to start
something today, my time is the (personal) red ink risk, rather than very
large amounts of capital plowed into infrastructure.

------
bitL
Bootstrapping is the way to go; borrow/raise money only if you are already in
the exponential growth phase and need cashflow for expansion.

------
arisAlexis
then they say crypto is overvalued

