
Startups Selling to Other Startups: A House of Cards? - prostoalex
http://techcrunch.com/2016/02/11/startups-selling-to-other-startups-a-house-of-cards/
======
shostack
Are there any good data sources on how much money is actively in play for this
scenario across the industry?

I hear a lot of doom and gloom "the apocalypse is upon us" headlines, but I
have yet to see numbers that show that all of these overly-funded startups
without sustainable businesses going _poof_ will have a massive impact on the
broader picture (or the public markets outside of a few edge cases that are
already seeing corrections).

Sure some people will be out of jobs, and that really sucks, but the market is
still hot and they will be scooped up into companies that are doing just fine.
Are there really enough people employed by unsustainable startups to do
sizable damage to the economy or the housing market should they all disappear
overnight?

Serious question--I've seen lots of hearsay, but little actual data on this
specific aspect of things.

~~~
acchow
Facebook and Google's combined revenue grew by $14 billion in 2015 compared to
the year earlier. We are hardly in "the apocalypse". Internet properties as a
whole are still growing even if many smaller ones are not, and the big
gorillas still want to grow and have the money to make large acquisitions.

~~~
epa
But, a substantial portion of their revenues come from startups paying them
for advertising. If the lake dries up, the river will get lower as well.

~~~
patio11
_But, a substantial portion of their revenues come from startups paying them
for advertising_

Total VC funding in the US is on the order of $50 billion per year. If you
assume 20% of that goes straight to advertising, which is unlikely, that's $10
billion. Facebook and Google sell about $100 billion a year worth of ads.

I would guess that Google and Facebook have less than 1% of their revenue
concentrated in VC-funded startups. They simply don't have enough money to
matter relative to the size of the broader economy. It is not 1999 -- Yahoo is
not making headlines with money it got from startups whose valuation is driven
by Yahoo making headlines.

People in the startup community think the startup community is co-extensive
with the tech industry. AppAmaGooFaceSoft beg to differ.

~~~
abcampbell
You are missing the broader system.

It's about #theCapitalCycle of an entire ecosystem...#theUnicornEconomy

~~~
shostack
Please elucidate us then, with data, as to what that broader system is and how
patio11 (who gave some pretty compelling numbers) was wrong.

~~~
abcampbell
Already did.

[https://medium.com/@alexanderbcampbell/more-than-500bn-of-
we...](https://medium.com/@alexanderbcampbell/more-than-500bn-of-wealth-has-
been-created-on-paper-by-the-unicorn-economy-f5a56514a0c1)

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patmcguire
"By 1998, Yahoo was the beneficiary of a de facto Ponzi scheme. Investors were
excited about the Internet. One reason they were excited was Yahoo's revenue
growth. So they invested in new Internet startups. The startups then used the
money to buy ads on Yahoo to get traffic. Which caused yet more revenue growth
for Yahoo, and further convinced investors the Internet was worth investing
in."

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

------
rdtsc
On hand they say if everyone is digging for gold, start selling shovels.
Everyone is doing start-ups, maybe sell them dashboards, log aggregation
services, api testing tools, virtual whiteboards and such.

On the other hand, if you sell to just a few, now your own volatile future is
coupled with theirs. You might run out of cash, hire bad people, make bad
decisions -- the company fails, and that chance is now multiplied by the
chance that other company make bad decisions, bad investors, burn through all
the cash etc.

So it seems the answer is to just sell to a lot of startups, to spread your
risk. That might end up like the sub-prime mortgage crisis. The risks everyone
thought were decoupled from each other, weren't actually. So when start-ups
start imploding and investors start looking at ... I don't know solar,
hyperloop, or robots, the panic spreads etc.

~~~
chrstphrhrt
I think where the shovel/pickaxe analogy breaks down with startups is that
they often think their tech is part of their secret sauce when really they're
just doing standard things in an interesting vertical, but still insist on
reinventing the implementation to justify using up their funding to match the
target runway/projections.

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philip1209
I don't think that any startup wants to sell to other startups forever.
However, in general startups are early adopters, so it makes sense to start
there in a vertical-by-vertical approach. No startup can sell a future
"billion dollar" vision to investors with a market constrained to just other
startups. A startup is differentiated from other businesses by growth
prospects and potential, and a startup must grow outside of the startup market
to survive. A landing page may not signal long-term vision, but the plan to
disrupt a broader market exists in most of the companies.

Some degree of a "House of Cards" certainly exists. Look at Y Combinator -
part of its value is being able to sell within the network to other YC startup
companies. At demo day, many of the logos on the "current customers" /
"traction" slides are other YC companies. When a company doubles in size every
year, almost everything breaks - from HR to communication to hiring - so, of
course it make sense to start sales with customers whose pains are so dire
that the sales cycle is days instead of months. The customers may be startups,
but revenue is still revenue. A startup is defined by growth, though, and at
some point leads in the startup market get exhausted and a company must search
for prospects beyond other startups to continue growth.

Breaking out of a single vertical, whether it's selling to other startups, a
market outside of San Francisco, or even a product that doesn't cater to just
high-end consumers is the key to making it huge. Uber started in a niche
market - high-end on-demand chauffeur services to people who could afford
their own car, but Uber managed to go beyond that vertical. Shyp just shut
down Miami - that's a far bigger signal than the health of their SF market.
Can Mattermark find a market outside of tech investors? That's the key to
justifying their valuation. Many startups will not develop a repeatable growth
strategy outside of other startups, but alas many startups do not succeed.

No startup can continue the growth prospects that define them as a startup by
just selling in a narrow market, whether it's startups, San Francisco, or on-
demand black cars. There's low-hanging fruit in any approach, and the ability
to continue growth beyond that defines success.

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EvanPlaice
Doesn't SV seem just a bit too... incestuous at this point.

There's a whole wide world of people and businesses that could benefit from
software.

~~~
logicallee
so go invest in one? Oh that's right, neither you nor anybody else invests in
other than hot SV startups. You're voting with your dollars here. No seriously
- if you're not writing checks you can't complain about what the recipients of
those checks have to do to get the money. You're acting like they have a
choice.

~~~
xyzzy4
How exactly do you invest in a startup, and how can you see their financials?
It's not like they're listed on NASDAQ. And how would you know your shares are
secure, without bringing in lawyers? Investing in a startup seems complicated
to me.

~~~
JumpCrisscross
For starters, you need to be an accredited investor [1]. If you don't make
more than $200,000 a year or have a net worth exceeding $1 million, those are
the intermediate goals to aim for.

[1]
[http://www.investopedia.com/terms/a/accreditedinvestor.asp](http://www.investopedia.com/terms/a/accreditedinvestor.asp)

~~~
logicallee
this changed recently! :) I believe your information is now out of date.

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orasis
If you're a startup, never waste time talking to or doing deals with other
startups.

~~~
exw
I understand your concern, but depending on what product(s) you are selling,
startups (and by startups I am referring to the PG definition of startups) are
actually great customers for a couple of different reasons:

\- Willing to try new products that help them focus their (limited) resources
on their core product.

\- No legacy integration issues.

\- Generally high quality employees that provide strong product feedback.

\- Willing to move quickly.

The downside is of course that they may not have a lot of money and in total,
usually represent only a very small part of the market, so you have to use the
initial feedback / momentum you got from your work with startups to move into
more traditional customer segments, but they are still a great way to get
started. The risk is of course that you end up building a product that _only_
works for startups, but as long as you understand that risk and validated that
the problem you are solving is not exclusive to the startup community, in my
experience you should not avoid working with (reasonable) startups.

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kriro
Other startups seem like a natural starting point to sell B2B software to. At
least if you take the Crossing the Chasm point of view (which can be argued
against for B2B I suppose). I'd say Innovators or Early Adopters in the B2B
domain are very likely to be other startups a fact that is somewhat ignored in
the post. At least it might be a bit dangerous to assume that you can simply
sell to more established companies instead.

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awakeasleep
Interesting to see the author list AWS and Twilio as money saving services.

Do executatives actually believe AWS and Twilio are saving them money? That
seems like the least sensible reason to use the services.

I thought the AWS/Twilio value was based on the fact that most companies don't
have the know-how or time to recruit or manage or build their own
infrastructure, and it's better to spend more so you can focus on your core
competency.

~~~
lloyd-christmas
Paying $1k for a service is cheaper than paying $70k for a person. That seems
pretty sensible to me. They don't care about how it gets done, just how much
it costs to get it done.

~~~
singingfish
aah that would explain why many code based startups have horrible design-by-
accretion architecture. Just throw more servers at it. I bet the multiplier
effect will start to exhibit in all sorts of interesting ways quite early on.

~~~
lloyd-christmas
Early growth is typically more important than scaleability. What's to scale if
you don't have any customers? It will probably cost more in the long run to
achieve the same goal, but that assumes you make it to the long run from both
starting positions.

Regardless, I don't think the causality exists to the extent you're
describing. It's no different than any open source dependency. Sure, I know
how the functions in underscore work. That doesn't mean I need to take the
time to roll a deep clone. Saving time and money doesn't imply cheap and
broken.

~~~
singingfish
Yeah I'm feeling a bit jaded from seeing stuff that was decade old technical
debt that's never been maintained, yet critical to the code's operation. At
some point early on when you do have customers you want the reengineering crew
in otherwise you will end up with a monster which requires far more bodies and
stress to maintain than otherwise necessary. but I see a lot of places where
they don't seem to care about stress and bodies piling up.

