

Raising Money After Bubble 2.0 - stevewillensky
http://dty.me/raising-money-after-the-second-bubble/

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trevelyan
If we look back: 2005 to 2007 was the heyday of user-generated-content
companies (i.e. Mahalo, Squidoo). As the Google bubble ended starting around
2008 the excitement transferred to some of the leading UGC platforms that had
grown into mass market distribution channels in their own right. Facebook
mania in 2008 was followed by a similar wave of enthusiasm for the App Store
around 2009.

All of these mini-funding bubbles focused on specific distribution vectors:
Google, Facebook, the App Store. Central to them was a hypothesis in the
potential for fast and easy _exponential growth_ for companies, because this
was how people justified supra-market valuations.

If the "social bubble" is deflating now, it's not because Facebook stock is
falling so much as because it is increasingly difficult to achieve exponential
distribution in these channels and nothing else has come along yet to replace
them. And this is what Chris Dixon is saying as I understand him -- if people
want to demonstrate that their service is genuinely viral the threshold is
much higher since VCs are skeptics.

But advising someone who wants to go down the VC route to focus on revenues is
still a bad idea, because you can't justify a supra-market valuation without
the prospect of exponential growth. If someone is bootstrapping by all means
collect money, but be aware that 10k a month is still only 1.5 million total
valuation at ten times revenue, which doesn't give a lot of leeway for raising
a ton of money by relying on fundamentals.

~~~
davidtyleryork
So as for the "bubbles" in valuations related to respective distribution
platforms, you're spot on (I think a huge part of social gaming's explosive
growth and valuation growth was a function of the Facebook platform, not of
its own intrinsic value).

I also agree that the "social bubble" is deflating because the gold rush of
everyone-being-connected-as-a-free-marketing-channel is largely winding down.
Chris Dixon's post can reflect that new reality, but I would still be equally
skeptical of a 10m user service with no revenue. (Of course, I'm not a VC.)

Where I disagree is in your last paragraph. Yes, I think a focus on revenues
can be a bad idea for some businesses. But I think exploring or attempting
revenue is a good idea for every business. If the numbers look bad, don't use
them, but you need to try. Even if you are only earning $10,000 per month,
that's starting from $0, so there will be a growth rate attached. This is a
really good number to show VCs right now. Also, you can make projections of
revenue growth with the assumption of your continued user base growth, and
basically double-dip into your user growth numbers that way. I still think
this will be a better way to fundraise in the next 3 years than ignoring
revenue completely.

~~~
trevelyan
I agree the startup ecosystem would be better if there were more of a premium
for revenues over traction, and hope things develop as you say, but don't
think that describes the way things work right now for anything past seed-
stage rounds.

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followmylee
I find it funny that people are already assuming that the "bubble" has popped.

Yeah Zynga and Facebook are doing badly. So what? LinkedIn is killing it.
There are other success stories. Maybe the bubble in these two company's
valuations has popped, but they were overvalued to begin with, not a big loss
for me.

~~~
doktrin
_they were overvalued to begin with, not a big loss for me_

"for me" is important here. While I fully agree that FB, and (especially)
Zynga were both overvalued, the near-constant deterioration of their stock
price is very visible - both to Wall St and investors. Perception is king, and
it's not just "ours" which matters. What the public sees is the tri-fecta
failure of 3 super-hyped tech IPOs (Groupon, Zynga, Facebook).

edited to add : It's also very worth noting that the perception of FB being
massively overvalued may very well have been highly confined to "insiders", or
those close to tech.

When I speak with my non-tech friends, most of whom are highly educated (law,
medicine, etc.), the general reaction to FB's decline is one of surprise. For
instance, I often hear that " _everyone_ thought the price would go up!".

~~~
seminatore
Yeah Facebook was the last tech stock that was able to sucker in the
"muppets". That's why Morgan Stanley & co jacked the price up as much as
possible before running away like bandits

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jessep
Another point that's not explicitly mentioned in the article: raising money
isn't fun and afterward makes the whole venture less fun. If you do a good job
generating and growing revenue, hopefully you don't have to worry about
raising money until a lot later than you would otherwise. I think most people
here probably agree that Github's trajectory should be the goal: crush it on
revenue early, and then raise money for scaling later, if you want to.

~~~
davidtyleryork
That's absolutely the goal of every company, I think, but it's not always
possible, especially if you're building a consumer-facing product. Companies
like Github are more the exception than the rule

My point in this article is that nowadays demonstrating the ability to get
some paying users, even a tiny amount, is going to leave you much better off
than not trying at all. So while a lot of companies will still not be able to
live off of the revenue, they can hopefully raise another round with the proof
that they've found something people will pay for.

~~~
cluda01
Does anyone know how much an operation like github cost to get off the ground
before it was able to support itself (excluding founders time)?

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tatsuke95
All great advice. However, it's a tad amusing that someone still has to put in
the effort to get these points across, points that the rest of the business
world would find obvious. Are these business practices still perpetuated in
the Valley?

Generate revenue? Of course!

Show the revenue growth slide? I'm not sure who that makes look worse: the
fundraisers not showing it, or the investors not expecting it.

~~~
davidtyleryork
Ha yeah I mean my advice isn't exactly revolutionary, but many people don't
realize that they're going to need it in their Series A now, when they wouldnt
have before

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AndrewKemendo
It still boggles my mind that revenue has not been prioritized with many
(most?) of the hottest companies in the last decade. That must be
unprecedented at such a scale.

That said, I don't think any investor ever thought their investments would
have no revenue. I assume they just figured it would come through advertising,
inadvertently making every new product a marketing tool.

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jon_dahl
Other than Facebook and Zynga stock prices, is there other evidence that a
bubble has popped? I haven't seen signs of funding or liquidity drying up.
Valuing Facebook at $50 billion rather than $100 billion could be the sign of
a massive slowdown in Silicon Valley... or it could just be a market
correction to Wall Street hype.

