
Valley VCs Sit on Cash, Forcing Startups to Dial Back Ambition - digisth
http://www.bloomberg.com/news/articles/2016-03-09/more-venture-investors-are-sitting-on-the-sidelines
======
delecti
It's really weird how this article tries to frame the situation. It's almost
like the startups feel entitled to the funding.

The point of funding should really be to enable faster growth than they might
otherwise have been able to achieve, but if a business can't at least survive
without huge influxes of investments then is it really a business that they
should be investing in in the first place?

~~~
mindcrime
Here's the somewhat ironic "catch 22" to the whole thing:

If you're a startup and you _don 't_ take VC funding, then you have the luxury
of simply enjoying organic growth and funding expansion by re-investing
profits into the company. Well, as long as you can do that in the face of
competitive pressure. Strictly speaking, unless it's a "network effect"
situation like a social network, you probably don't _need_ to grow fast.

Unless you take VC money. Then, the simple act of taking their money now means
there _is_ pressure to grow fast, but it comes from the investors and not from
the market per-se. And this is because VC funds are time-boxed and, by
definition, have to generate whatever return they're going to generate by a
fixed point in time. And the older a fund is (eg, the nearer it is to the end
of it's life) the greater the pressure.

This is something I think more entrepreneurs should think long and hard about.
Don't raise VC money just for the sake of doing it. Even if you can. Do it IF
and only if it's the only (or at least surest) way to reach your goals. And
always remember that the VC's interests do _not_ necessarily align with the
founders (at least not 100% so).

~~~
freyr
> _unless it 's a "network effect" situation like a social network, you
> probably don't need to grow fast._

Uber seems like a weird example of this. It was said (and remains said) that
they're operating in a winner-take-all space, and they expanded as if they
were a social network.

Despite the aggressive expansion and marketing, a majority of people I know in
the Bay Area now use Lyft exculsively. The last few times I've said "I'll get
an Uber," somebody's actually paused and said "Wait, why don't we take Lyft?"
I'm not even sure why. When asked, they just reply that they don't like Uber
for some non-specific reason.

They're expanding around the world and into new products and concepts, but
haven't even seemed to nail down a loyal customer base on their home turf.
Anecdotally speaking.

~~~
oneloop
Can anyone make a rational argument why uber-type companies are winner takes
all?

~~~
technotony
The network effects come from the driver side of the market. If you have all
the drivers, then you have the quickest pick-up/most availability which means
best passenger experience and then most customers. This in turn means best
utilization for drivers, so you get more drivers etc etc etc.

~~~
prostoalex
Network effect usually implies some kind of lock-in. Unless Uber is willing to
go exclusive and qualify the drivers as employees, getting more drivers out on
the road also means getting more Lyft and Gett drivers on the road, as most
will just have multiple apps running.

~~~
pfarnsworth
It's hard to switch between apps. I've asked all my drivers the same question,
and they all say that it's more trouble than it's worth because at least in
the Bay Area, there work is constant as an Uber driver.

~~~
woah
I feel like almost every über I see has a lyft sticker too. The UX of
switching apps seems like a minor inconvenience given that most of them use
waze to navigate anyway.

------
pritianka
I've been in tech only 6 years and I am already bored of these cycles of VCs
becoming frenetically exuberant followed by cautious times. Their advice to
startups changes depending on what time it is. It's all so predictable yet
people are surprised every time. Any entrepreneur building a business factors
these in and approaches fund raising based on that knowledge. I don't even
know the point of these articles any more.

~~~
ChuckMcM
Well as the saying goes, "It is always new to someone." :-) And that is
largely true. Here in the second decade of the 21st century people are getting
funded who were blissfully unaware children in the dot com crash, or the semi-
conductor recession, or the great social is the new webvan pullback.

A publication can get a lot of clicks and buzz from folks for who it is new,
and so they report it as new.

But the articles are all part of the system which trains and educates
entrepreneurs. It provides examples and stories of people who bring to market
real solutions, those who bring "fad" solutions, and those essentially bring
"me too" type solutions. This system also trains investors, where each cycle
has a few winners which spawns some additional limited partners (or general
partners) in various VC firms who also look at how their money is spent and
where its going.

As much as it would be great, there isn't really a course of study you can
take that will teach you this stuff, you kind of have to live through a cycle
or two, absorbing all the experience you can. If you want to be able to really
internalize and understand the stuff that someone like Danielle Morrill is
talking about you need context, and the context comes from experience both in
the good times and the bad times.

So to answer your question about the point of these articles, it is the same
reason they teach freshman Calculus or Composition. Everyone needs to know
this stuff and every year there are new people trying to learn it. The message
that value is always appreciated over hype is pretty timeless but sometimes it
takes a couple of cycles to really understand and distinguish between the two.

~~~
dwightgunning
This is really a great explanation.

Earlier today I gave a friend a 5min primer on venture funding. After we'd
parted ways and I walked back to my office I had that phrase "you can't teach
some of this stuff" rolling around in my head for a while. You can't teach all
of it but you have to get people started with something.

It's evolution.

------
tdaltonc
In other news, "Suits Make a Comeback!"[0].

Investors can't just sit on money. They have to get returns, and that means
that they have to put capital to work.

[0]
[http://www.paulgraham.com/submarine.html](http://www.paulgraham.com/submarine.html)

~~~
olalonde
I don't get how this article is related to the essay you linked to. Do you
mean that this article is likely a PR piece? Who would be paying for it?

~~~
nostrademons
Silicon Valley Bank.

"SVB counts among its customers 65 percent of U.S. VC firms and half of all
VC-backed companies."

That's the only complimentary sentence about any of the firms mentioned in the
article. It's also a bit out of place - the article reads just fine without
it, and that information isn't needed to make the article's point.

Plus, the tags at the bottom are "Silicon Valley Bank" and "Money".

------
gooserock
> Valley VCs Sit on Cash, Forcing Startups to Dial Back Bullshit

FTFY

~~~
justinlardinois
This is amusing accurate. Wayyy too many startups, even YC funded ones, have
products that are difficult to profit on, or worse, don't really have a market
in the first place.

For every "next Uber or Airbnb," there's hundreds of Shutdownifys.

~~~
BinaryIdiot
Yeah I never understood the idea around "we'll figure out monetization
later!". Yeah maybe you will but you're operating a business. Shouldn't you, I
don't know, have a good idea or 3 to do that out of the gate?

Startup culture is weird sometimes.

~~~
_delirium
A common assumption, which is sometimes even right, is that getting a
significant number of users is harder than monetization. Put differently, your
startup is most likely to fail (in this view) because it doesn't produce
something that anyone wants to use, not even for free. So the main goal up
front should be to figure out how to make something people will use, and then
figure out how to reach them. Succeeding at that, but then failing to monetize
the product, is a real failure mode too, of course. But many VCs are betting
that failing to get users at all is the biggest early risk, and that it's
easier to solve monetization later (if you ever get users) than it is to work
on the monetization plan up front, and then later try to solve the but-we-
have-no-users problem.

Part of this makes more sense if you're looking at it from the perspective of
a VC betting on 100 companies, than from the perspective of a single company.
The funnel they're looking for is: some subset of these companies will get a
ton of users (hundreds of thousands, maybe millions), then a subset of those
will be wildly profitable.

------
rl3
In theory this won't affect the decision making process of top-tier VCs. A
good invesment is a good investment regardless of the prevailing funding
climate.

In practice, I'm guessing if the LPs get cold feet, then VCs will be forced to
triage their funding decisions accordingly. How much this matters given the
sheer size of some funds, I'm not sure.

~~~
pritianka
Agreed -> a good investment is a good investment regardless. The best startups
often have raised in the worst of times.

------
ryporter
The Mike Volpi quote is curious:

“Right now, we don’t really know what things are worth...When you don’t know
what something’s worth, you don’t know whether you are getting a good deal or
a bad deal, so the obvious thing to do is, not much.”

When you invest in startups (with the exception of late-stage, pre-IPO
investing) you never really know what things are worth. The business model of
VCs is to make a bunch of high-risk bets, most of which will fail, in order to
get a couple of big winners. What's really happening is that VCs aren't
willing to invest at valuations that companies expect based on recent history.
This is similar to housing bust, when home owners refused to sell because they
continued to believe that their homes were worth what they were before the
financial crisis.

~~~
Disruptive_Dave
Came here to say this. It's a copout. They didn't know what things are worth a
year ago either, particularly early stage cos.

------
bitwize
Wait, what? VCs' valuation of _their_ money exceeds their faith in your
"unicorn" startup idea? Ohhhhhh nooooooooooo

------
khalloud
If we look at this from a risk-reward perspective and define 10 as the maximum
reward for the maximum amount of risk then we have the entrepreneur who is a
10 for obvious reasons, an Angel who invests in the entrepreneur (maybe not
the idea really because it might pivot a few times) maybe at an 8, then VCs at
7, bigger institutional investors at 5, and so on and so forth until the
average teacher in Michigan who's pension allocates .001% of AUMs to VC at
maybe .5 it becomes clear that if that structure becomes unbalanced the
overall value creation cycle starts to become disfigured. In other words
everyone tends to forget what's really important. For example if an
entrepreneur doesn't feel that there is a great deal of risk to their personal
livelihood as well as a great deal of reward for taking that risk and an
inherent difficulty of having to earn every single cent (i.e. if they assume
they can find easy money) then they are probably less likely to dig as deep as
they can to come up with ingenious solutions to problems which is really the
core of the whole tech startup scene. And then we can back trace that all the
way back to the teacher in Michigan who might think that they are better off
giving their money directly to someone who is a "VC" in SV. Basically the
whole risk-reward equation becomes unbalanced. As a result when S#$$ hits the
fan for them, everyone who doesn't really understand that model/equation will
slow down. But my theory is that the ones that actually stick to the
fundamental rules will keep plugging along with a small grin on their faces
because they are glad that they are the ones who actually start to lead again
and create value with a lot less BS!

------
cm3
Or they could diversify and invest in more projects with smaller sums,
couldn't they? Would probably require more people to manage the increase of
investments.

~~~
cenal
Valuations are out of whack. They are smarter to sit back and let the
unsustainable ventures die out and then invest in the viable ones after things
level out.

I mean, even a touch screen toaster that costs $1,500 got invested in. Who is
going to pay $1500 for a touch screen toaster?
[http://www.juneoven.com](http://www.juneoven.com)

~~~
sjg007
It will sell. It's just the beginning of the IoT revolution.

~~~
audleman
I took a look and it is very nice, but $1500 for a toaster oven? Holy shit no.

~~~
Symbiote
I've never seen a countertop oven, except as a "feature" of an expensive
microwave. As I understand it, results for baking especially would be poor, as
the oven has less air mass and less heat capacity.

(At least, that's the reason my mum gave for not using the feature on her
fancy microwave. She used to be a professional cook.)

~~~
saalweachter
Wait, really? Never one of these? [http://www.amazon.com/Better-Chef-Toaster-
Broiler--Stainless...](http://www.amazon.com/Better-Chef-Toaster-Broiler--
Stainless/dp/B00PBC14KM/)

Besides the price, the low thermal mass is a selling point -- throw a couple
chocolate chip cookies in there and you don't heat up the entire house in the
middle of summer just for a fresh baked treat.

~~~
Symbiote
I forgot to say I've lived mostly in the UK. A quick search shows a couple of
models are available, but that's a tiny selection compared to most appliances,
and they're being sold at a very low budget shop.

Britain doesn't really have snack food like America. I've never thought to
warm up a cookie, and without air conditioning I doubt I'd want a warm snack
in the summer. Ice cream!

Though thinking about it, the most common thing to serve during the day as a
snack is cake. There's a decent variety here (remove "vegan" and anything that
says "salted"):
[http://www.jamieoliver.com/recipes/category/dishtype/cakes-t...](http://www.jamieoliver.com/recipes/category/dishtype/cakes-
tea-time-treats/)

(Or, perhaps with smaller houses on average people don't want to use up the
space for one, and wealthier people with space don't want to heat up processed
foods.)

Most British people own a toaster. Do Americans?
[https://en.m.wikipedia.org/wiki/Toaster](https://en.m.wikipedia.org/wiki/Toaster)

------
hoodoof
Investors market. Tighter conditions, preferences, ratchets.

~~~
lvs
Words. Punctuation, plural nouns, haiku.

~~~
andy_ppp
This. Absolutely made my day! Thanks.

~~~
dwaltrip
Agreed. I can't explain why I found it so hilarious. But I cracked up pretty
hard at it.

------
estro
It seems like these VC cycles are akin to a natural selection process for
startups. Those with legitimate market fit and pricing schemes will have the
highest fitness and thus survive; new startups will (hopefully although
historically not so much) attempt to copy a similarly sustainable
architecture. So in essence these cycles are beneficial to startup market
health

------
spullara
I think it is interesting that this article is critical of valuations changing
over such large time spans when the public stock market often marks up and
down stocks by a significant amount on a daily basis.

------
financedfuture
>For most firms this is a pause, a reset —not a meltdown

Well, isn't that just a nicer way to put this?

------
s_q_b
Their service here in Washington, D.C. is awful. I used to love Uber,
evangelized it to friends, was even the first to show Sanju Bansal how it
worked when we were at a gala. Everyone else was fumbling for their S-Class
keys while our twin black Navigator vehicles proceeded to pick us up at the
entrance. That, to me, was the Zenith of Uber. The entire VC set of the city
was waiting for cars and drivers gridlocked in the garage and lot, while some
kid with an app summoned two fully appointed SUVs as if from nowhere. I wore
Uber shades, tried the various promotions. I was thrilled, absolutely certain
that they were one partnership away from Google to automate city transport and
leapfrog our ailing transport grid. Then something changed. The lines between
Uber and UberX blurred, and UberX drivers changed from well-dressed folks
owner-operating, or working for car fleets, to guys with Jack Daniels hats,
ponytails, and (this is literal) body odor. Uber decreased in quality, both in
fleet and drivers. Ubers used to be spit-polished tire-black shined towncars,
and the drivers were excellent. Never an open door missed, a bottle of water
offered, mints stocked, radio preference, and an AC at a comfortable
temperature, which the driver would immediately offers to adjust. It wasn't
just the network that made Uber. It was the service. It literally outclassed
the transportation of millionaires, with service options of the Four Seasons
at the price of a Motel 6. The service has now become so bad, that power users
are like sailors following the rats off a sinking ship. Then it's disclosed
that one of the main showrunners has been spending all his time on some
fucking branding project? And when it's finally released, the material he
produced looks like it was created by a sentient bag of cocaine. "We're
particles that unite to form atoms, to something... something... interaction
between meatspace and cyberspace.... unity, and particles and shit. Yo, you
gonna hit that?" Are you serious? In summation: No moat, no network effect. It
was nice of you to pave the way for self-driving car fleets, but unless you
reorganize management from the bottom of the floor up, your balloon's about to
deflate faster than Napster. Peace guys. *Full disclaimer: I did turn down a
second round interview at Uber due to their policies regarding the Americans
with Disabilities Act. My consulting rate is $500/hr, and I'd consider fixing
this mess with the ADA for half that. I wish I had the opportunity to speak to
your board for five minutes about the damage their ADA policies are causing.
Imagine a girl, unable to move unassisted, alone in the snow, as her driver
throws her wheelchair to the curb screaming at how he doesn't accept people
"like her."

~~~
cylinder
Quality of Uber in markets outside of NYC (where you need TLC car and thus
mostly just get professional livery drivers) is really appallingly bad.

