
Fred Wilson's response to "Paul Graham's Letter to YC Companies" - hendler
http://www.avc.com/a_vc/2012/06/some-perspective.html
======
mrshoe
Personally I love to see Facebook's stock languish. Not because I dislike
Facebook, but because it's great to see the market react rationally to an
over-hyped tech stock.

FB is arguably the most hyped IPO in history. There was a blockbuster movie
made about it. If ever there was a positive sign that we are not in a bubble,
the poor performance of FB on the open market is it.

It's great to not be in a bubble. That means we won't wake up one day to
discover it has popped. But to see the lack of a bubble on display so publicly
has more important benefits. All the sub-par investors and entrepreneurs who
flood the valley just to cash in on bubbles will be repelled.

~~~
michaelochurch
The bubble isn't in valuations, which are reasonable. Rather, the bubble is in
the high value that some very talented people are giving to subordinate
positions in startups that "seem" cool, not based on business or career
considerations, but irrelevancies like whether there's an XBox on site.
They're doing themselves a disservice by taking positions that tout themselves
as the "startup experience" but involve none of the investor contact,
mentoring, or career development that they'd actually need in order to become
founders for real (I.e. with enough contacts and resources to do it right and
without risking personal financial ruin). They'd be better served if they took
technical positions at more established and traditional companies, whether
these be larger corporations or "lifestyle" businesses.

Of course, there are a lot of great startups out there, where a person can
learn a lot very quickly, but those are not all of them and joining a company
because "it's a startup!" is, without more knowledge, a bad idea.

That's the bubble I see: people taking jobs in dodgy startups for ridiculously
low equity slices based on information that's either biased or only validated
by the ridiculous echo chamber, thinking that their position as Employee #57
is going to make them real founder material in 8 months (because the CEO will
just give them investor contact). It don't work that way.

~~~
temphn
> in order to become founders for real

The first 1000 people at Facebook are millionaires.
[http://www.washingtonpost.com/business/technology/facebook-1...](http://www.washingtonpost.com/business/technology/facebook-1000-new-
millionaires/2012/02/02/gIQAmr9GkQ_story.html)

Any early Facebook employee has both the money and the name brand to be a
credible founder.

By contrast, have you founded a successful startup? Have you raised money from
investors? If not, why would you feel qualified to offer advice on the matter?

~~~
michaelochurch
Read the article. That 1000 figure is pure speculation. It might be that many,
and it might not be.

Just being "early" at Facebook isn't enough to create credibility. A person
also needs a track record of promotions. Millionaire or not, no one's going to
fund someone who joined Facebook in 2007 and _didn't_ get promoted in the
interim.

Startups are a lot worse than people assume when it comes to internal
promotion. The selling point of a position at a startup is the ability to get
in early and have promotions be "inevitable" with growth, but it's equally
common that as the company needs to scale, it has to bring on more established
people, and those people tend to want leadership roles if they are going to
join.

It does sometimes happen that someone joins a startup out of college and is a
VP within five years, but that's not the norm. Just as common is for a person
to end up a "paper millionaire" but languish in vesting twilight, not getting
the raises and promotions that would be available in a more stable company
with a better sense of career development.

~~~
omegastrain
You didn't answer the question: By contrast, have you founded a successful
startup? Have you raised money from investors? If not, why would you feel
qualified to offer advice on the matter?

------
ealexhudson
I don't disagree with Fred Wilson, but I'm closer to pg's perspective on this.
The bubble, to the extent that there was one, burst while we weren't looking.

Facebook's IPO is not really a huge issue in and of itself, and as Wilson
points out the numbers they have are staggering. Other IPOs, like GroupOn's,
have had similar issues and FB will probably look pretty awful by the time
they reach the end of their lock-up period too. But this stuff is largely all
indicative of market sentiment, and that's the issue.

People aren't necessarily disappointed with the performance of any of these
companies, but they are getting very twitchy as investors. When people stop
investing, and sentiment becomes increasingly bearish, it's like the tide
going out and inevitably some boats will end up getting beached.

I know from companies attempting to raise capital in London right now that
things have been difficult for a while now, and look set to get even more
difficult (not that London is necessarily the greatest place for doing this,
or a good barometer) - so those companies that have done decent rounds
recently (HailO, BagThat, etc) will probably need to baton down the hatches
somewhat, and those who were expecting to raise later this year / early next
are probably in for a shock - a nasty one, if they can't operate without a
raise (I know at least a couple of companies in that exact position).

------
eykanal
From what I understand, Facebook's main problem is a lack of a stable income
source. It's becoming more and more apparent that advertising is not going to
be the panacea that it was thought to be, what with numerous studies showing
poor facebook ad performance and companies like GM pulling their facebook ad
campaigns altogether. Sure, they booked $1B last quarter, but annualizing that
number requires some confidence that they can pull that off regularly, and I
don't think people have that confidence. As an investor, I'd be worried.

~~~
arturadib
As much as I think FB's valuation was high, they have the advantage of having
a Product That People Really Want. This means that they have a lot of room to
adjust their business model (so long as they don't screw up the UX/product
while at it).

Contrast this with GroupOn, whose product IS the business model...

~~~
eykanal
Are you familiar with the following phrase?

> If you're not paying for it, then you're not the customer; you're the
> product.

Facebook's product is it's database of user information. If the actual
customers, which currently consist mostly of ad companies, aren't interested,
then they have a serious problem indeed.

~~~
SoftwareMaven
While there is a nugget of truth in that quote, it is also a vast
simplification. There is a (somewhat) symbiotic relationship between FB, you,
and FB's advertisers. If any one of them are abused too badly, the combined
organism will die.

That means FB _has_ to create a product people are interested in using and has
to protect their privacy _just_ enough while giving their advertisers what
they need to successfully market products.

------
georgespencer
Investors will become more conservative and seek better deals for themselves.
I don't think it's anything to do with Facebook. Facebook might just be the
excuse they're looking for.

My unsolicited advice to all startups is to put your energy into the things
which matter. Debating 3-6% more/less dilution with investors is not a good
place to be investing your time and energy.

I suspect the companies who go into this bubble focusing on convertible notes
and caps will be the companies who suffer most.

~~~
Retric
Negotiating with investors is somewhat like negotiating your salary after a
job offer. The per hour ROI can be insane, but you need alternatives before
you have real leverage and you want some deal to go though even if it's not
with them.

------
AznHisoka
Build something people want and will pay for. Stop worrying about Facebook and
IPO's. Waste of time.

~~~
dxbydt
I see this attitude all the time in SV techies - lets just ignore the finance
because its all chatter anyway. Frankly, this line of thinking is counter-
productive and quite dangerous. Macro matters much more than slapping together
some code to build widgets people will want & will pay for. For one thing,
most of those people who want & will pay are getting their dough from boring
non-tech ventures affected entirely by macro. When things head south, people
will batten down the hatches. They will neither want nor pay for, because they
simply can't afford to. All of this wanting and paying for is mostly
discretionary spending driven by a upbeat macro signalled by IPO markets &
especially FB. Once those signals flash red, the wallet stays shut. No more
app store purchases, cloud drive subscriptions, ipads, servers, what-have-you.
Huge giants ( Sun, SGI, Cray...) fell by the wayside because they collectively
put their head down & built what they thought people would want & would pay
for. People did want those things initially, but once the economy went into a
tailspin, the dot in dotcom became the dot in dot-bomb. I still have those Sun
tshirts proudly proclaiming our red hot dotness. I wear them on the weekends
when I take out the trash. The kids snigger and say "dot in dot com...wtf ?"
and I realize...yeah, wtf were we thinking.

~~~
AznHisoka
Well our country and economy is already over inflated with debt, so it
wouldn't be such a bad thing if discretionary spending halted.

really, would that be such a bad thing to the overall economy? People
tightening their spending, instead of recklessly borrowing debt, and buying
nice things that ultimately aren't necessary? I guess if you're a company that
targets discretionary spenders, you're doomed.

~~~
dxbydt
> guess if you're a company that targets discretionary spenders, you're
> doomed.

other than food clothes & shelter, everything in the world is by definition
discretionary spending.

~~~
specialist
My medications are not optional.

------
veyron
This is deceptive. The entire reason the late stage guys invested in higher
valuations is because the early stage guys convinced them it was worth more.

You can't say before the IPO that the company is worth 75 B or 100B and then
after the fact say it's their fault for investing at those valuations. That
destroys the integrity of the silicon valley investment environment.

~~~
fredwilson
i am an early stage "guy" and I can assure you i never "convinced" a later
stage investor of anything. they did all the convincing to themselves. it was
like feeding pigs at a trough.

~~~
veyron
I don't think you directly told anyone that Facebook would be a $100B company.
There are plenty of wall street analysts (like Lou Kerner from Wedbush, who
called for $200B facebook) to do that dirty work.

But if some analysts are pumping Facebook and no one from the silicon valley
is trying to temper expectations, people assume that the valley believes the
same valuation numbers. The result is long-term damage to the credibility of
SV and a contraction of the investment supply. After all, if someone comes up
next year and describes DuckDuckGo as a $100B company, why would anyone
believe the valuation? Everyone would point to Facebook and give it a much
lower valuation even if it probably deserves a much higher one.

To make it clear, I think that this type of chicanery from wall street is
scorned yet expected in the eyes of most people. We have all accepted the fact
that they will pump stocks, especially at the top
(<http://www.scribd.com/doc/86194691/Long-Good-Buy> was Goldman's paper which
essentially gave a bullish case for equities at the top). But there is still
some credibility lent to silicon valley, which people should not squander in
the interest of one investment.

------
startupfounder
"...the Facebook IPO will hurt the funding market for earlier stage startups.
But no one knows yet how much. Possibly only a little. Possibly a lot, if it
becomes a vicious circle." - PG [1]

"I think it will be particularly impactful on the late stage and secondary
markets where most of the IPO valuation speculation is happening." - AVC [2]

We are now in a contracting market where funding for earlier stage startups,
late stage and secondary markets is drying up.

AVC referenced PG's letter, but didn't address the letter. Now that we are in
a post-frothy market and the froth is drying up, where does this leave early
stage startups that are feeding the late stage startups with talent? It would
be nice for AVC to address PG's letter directly and not just provide financial
analysis to the Facebook valuation.

[1] <http://news.ycombinator.com/item?id=4067297>

[2] <http://www.avc.com/a_vc/2012/06/some-perspective.html>

~~~
rgrieselhuber
> We are now in a contracting market where funding for earlier stage startups,
> late stage and secondary markets is drying up.

Have some data for that assertion? PG's letter never said that. He just
identified sentiment and provided warning advice. I think it's still too early
to see if there is a material impact.

~~~
startupfounder
"Jessica and I had dinner recently with a prominent investor. He seemed sure
the bad performance of the Facebook IPO will hurt the funding market for
earlier stage startups." - PG

What part of this is unclear? PG was sure enough to write a letter to the
startups warning of the oncoming contraction. I am guessing the VC was someone
of the caliber of Ron Conway.

I do not have data as data is a historical record (in this context), not a
prediction of the future. This is why it is a warning of thing will come, but
the question is HOW MUCH will the market contract, not IF if will contract.

"I think it's still too early to see if there is a material impact."

I believe this should read, "I think it's still too early to know the extent
of the impact."

EDIT: I don't have any hard data, I am using PG and AVC to assert that what
they say is true based on the information they know.

~~~
rgrieselhuber
"He seemed sure" is not data.

You said "late stage and secondary markets is drying up." You need actual data
(even if it is a few months old) to back that up.

What actually happened in the case of Facebook is that the price was run up so
high on the secondary markets that the public markets missed out. That's not
the same thing as drying up. It could lead to that in the future but I think
it's still premature to say it is happening now (especially with no data).

------
rjsamson
My personal thoughts are that the greatest near term impact we'll see is in
angel investment $$ in seed rounds. At least here on the East Coast there has
been a boom of relatively unsophisticated Angels driven by hype. It is these
individuals that, in my mind, will react more emotionally to a poorly
performing Facebook IPO.

Not that one shouldn't be concerned about the broader venture market, but I'm
a little less worried about the institutional money than I am about the Angels
disappearing.

------
aurelianito
I needed to google what EBITDA is in order to understand the artice. EBITDA
means "earnings before interest, taxes depreciation and amortization"
([http://en.wikipedia.org/wiki/Earnings_before_interest,_taxes...](http://en.wikipedia.org/wiki/Earnings_before_interest,_taxes,_depreciation_and_amortization)).
Id est, AFAIK, the money they get, without taking into account the money they
spend because their "thigs" age.

I hope it helps fellow hackers who don't know finance (like me) to understand
the article a little better.

Edit: Better explanation of what I mean by spend.

~~~
dcaranda
EBITDA is a form of profit. Whenever someone says they made X in profit - you
should immediately ask what kind - net income, operating profit, etc.
Depending on the business, different definitions of profit can produce wildly
different numbers.

It's a generally accepted proxy for cash earnings since it looks at profit and
takes out:

\- non-operating costs such as interest and tax. These are "non-operating"
because they have nothing to do with delivering your service/product.

\- non-cash costs such depreciation and amortization.

It is worth noting that EBITDA is non-GAAP, which is to say that it's not an
officially recognized accounting term. You won't see it in an audit and if you
do there will be a big disclaimer next to it. The term gained popularity in
the 80s with the rise of private equity. It's used in debt agreements to
approximate how a business will pay back loan principal and interest.

------
mtkd
"In its last quarter Facebook had $1bn of revenue and 40% pre-tax operating
margins"

The key execs and advisors involved in IPO were not conservative with the
valuation. Do not be surprised if those same biases influenced some of the
pre-float numbers.

A cautious CFO may not always tell people what they want to hear short-term -
but they will deliver a much stronger performance over the long.

------
georgemcbay
"But even at half those numbers there are fantastic returns for investors and
entreprenuers to be had."

What about at 0.1% of those numbers?

Facebook (while it obviously has a ways to go on direct customer
monetization), is an extreme outlier whose numbers across virtually any metric
are far more extreme than most startups will ever come close to. IMO it is
their outlier status combined with the lackluster performance relative to that
status that is the killer.

Trying to anchor other startups to Facebook's numbers at something like "half"
or even a "quarter" is kind of handwavey because a startup would have to be
improbably, insanely successful just to get a small fraction of the userbase
Facebook enjoys.

------
DennisP
I don't see why FB's IPO should be considered a failure, from the perspective
of earlier investors. They sold stock at an IPO price even higher than the
market could support. What's not to like?

Of course institutional IPO investors don't like it, because they want to buy
stock at a discount and sell it with a big bump the next day. But the early
investors are the losers in that scenario.

I guess you could argue that the IPO investors just won't play ball if they
can't get their free money, but I think more likely they'll just be more
careful about pricing next time.

~~~
EternalLight
I agree completely with your view, can someone explain to me why this is a bad
thing?

------
smnl
From the article: "That means that Facebook's enterprise value is greater than
10x current revenue run rate and greater than 25x EBITDA. These are big
multiples folks. I am happy to take those numbers for any company out there."

The bigger those multiples are, the more "overpriced" a company is, so it
should actually be less attractive of an investment.

~~~
jtbigwoo
_The bigger those multiples are, the more "overpriced" a company is, so it
should actually be less attractive of an investment._

Right. The OP is considering the situation as a seller, not a buyer. He would
be overjoyed if everything he sells is overpriced similarly.

------
dcaranda
Despite market fluctuations, pundits and haters - there is an objective truth
that Facebook's financial performance is exceptional.

Facebook full year 2011 EBITDA was roughly 55%, demolishing google's 37% and
apple's 42%. Wilson approximates a 40% margin in Q1, but ad businesses tend to
be Q4 heavy due to holiday shopping. Facebook has demonstrated exceptional
leverage in its model.

Facebook has growing pains for sure, but that is likely a result of being the
first to scale in its market.

Who knows what the market will do, the general sentiment here and in other
places seems to be largely emotional and indicate that it will go down
further. But even if you strip away Facebook's brand name and sexy market, the
numbers are impressive and the business performs very very well.

~~~
bad_user
The problem isn't that Facebook doesn't have earnings, but rather their
incredible P/E ratio.

Also, the profit margin doesn't say much about a company that doesn't do much
other than its core product, while Google and Apple have their hands in other
products as well. If anything the chances for long-term survival look better
for companies that diversify successfully and Facebook hasn't demonstrated an
ability for that.

------
tocomment
What is "enterprise value" and how does he come up with 43B?

~~~
chrisaycock
_Enterprise value_ is

    
    
      market cap + debt - cash
    

It reflects how much it would cost to buy a company out.

------
mipapage
It seems to me this whole thing is more about sentiment than numbers. How it
is perceived and the effects of that perception, rather than "does it add
up"...

------
dm8
What if the stock now bounces back? Nobody can deny that the company is
generating some solid revenues with lots of potential. Investors might think
this is really low valuation and we might see surge in buying.

(Disclaimer: I do not own FB stock and this is just my speculation)

~~~
debacle
I will deny that the company is generating solid revenues with lots of
potential.

I don't see a lot of potential in Facebook. They're just another rung on the
ladder of social network churn, and luck may have played strongly into that.

Facebook is generating revenue, but nothing I would consider 'solid' for a
company with a ~85 billion market cap.

The company is incredibly overvalued, and time will show that to be the case.

------
salimmadjd
I'm glad to see FB come down, just so I can invest on FB at reasonable price.
As for FW he is right. FB used the hype to raise money at great valuation. If
anything, there is now a lot of liquidity among potential investors.

------
lifeisstillgood
The Articles argument seems to be that FB got 10x revenues and if new startups
got just half that it would be great

sadly that's a common fallacy on any business plan - the Market is x million
and we could get 10% of that then ...

So what's a better argument?

------
badusername
Did he just say, in very nice terms, that Facebook stock is still overvalued?

------
rmATinnovafy
Could somebody tell me what is Facebook's intrinsic value?

~~~
iand
Several hundred million people are willing to invest a portion of their finite
time every day visiting and interacting with content only available via
Facebook. Winning people's attention is a zero sum game (if you gain it your
competitors lose it) and attention is a scarce resource. The strong network
effects of having all your friends in one place makes facebook's position very
defensible. All that adds up to high intrinsic value.

------
sylvinus
I'm wondering about the "even at half those numbers" bit, if Fred actually
thinks it will go that low.

------
mathattack
Great perspective on price. It is still a success, but perhaps also still
overpriced.

------
FredBrach
I don't really see the relation with the pg's letter unless facebook' ipo and
valuation. It's interresting anyway.

