
Dizzying Ride May Be Ending for Startups - thatcherclay
http://www.nytimes.com/2015/11/11/business/dealbook/dizzying-ride-may-be-ending-for-start-ups.html
======
hvs
For those of you too young to remember, there were numerous articles written
about the bubble bursting before it finally did in 2000-01. It wasn't a
surprise that it did, just that no one knew precisely _when_ it would.

My point is that arguing that people have said this bubble was about to burst
and that it hasn't yet isn't an argument that it won't.

~~~
creamyhorror
"Unicorns Dropping Like Flies: First Dropbox; Then Square; Now Fidelity Cuts
Snapchat Valuation By 25%" \- Zero Hedge

[https://news.ycombinator.com/item?id=10546947](https://news.ycombinator.com/item?id=10546947)

* Dropbox was warned by its investment bankers that it would be unable to go public at a valuation anywhere near close to what its last private round (which had most recently risen to $10 billion from $4 billion a year ago) valued it at.

* Square, last private valuation of $6bn, $3.9bn at IPO

* Snapchat, written down 25% by Fidelity ($31 -> $23)

* Combined "valuation" of all US unicorns is $486 billion. Their combined profit? $0.

The cresting wave of immense private valuations is crashing onto the rocky
shore of public markets. Funding is going to shrivel.

~~~
austenallred
There's a difference between a correction in the market (or more specifically
a correction with regard to a few companies) and a bursting of a bubble.

Tech investment volume today is much, much smaller than it was in the 2000s,
despite the fact that the number of people on the Internet has grown by two
orders of magnitude. Actually the funding per person online has remained
almost on a flat line from 2002 to today.

There's some frothiness in the late-stage market still, and but those are the
companies that are being corrected. That's largely happening because none of
them are IPOing, and with interest rates being practically 0 investors have to
put their money _somewhere_. So they build some losses into a late-stage
portfolio theory instead of distributing it in the S&P 500.

Some of those companies will end up with lower valuations, but that's always
happened, and that's built into the IPO model. In other words, even if several
late-stage "unicorns" completely failed (and some undoubtedly will), that
doesn't mean that the entirety of tech will be viewed as worthless. The only
way it is worthless is if the companies won't eventually generate profits.
Last time that was largely the case because the unit economics were bad. This
time we see real revenue coming through and the unit economics are there for
most companies.

I remember all of HN being _positive_ that Instagram selling for $1B to
Facebook was the height of the bubble. But now Instagram is returning >$500m
in revenue to Facebook per year. Turns out it was a very, very savvy purchase.

All of the current tech "unicorns" _combined_ are worth 2/3 of Microsoft. You
can make the argument that owning _all_ of Twitter, Amazon, Square, Snapchat,
Dropbox, Uber, Zenefits, etc. would be worse than owning 2/3 of Microsoft, but
I could definitely see the other side of that argument, as well.

~~~
LoSboccacc
Much investment is in private equity anyway, so the market should be fine and
dandy

------
dgreensp
Sam Altman has already explained why late-stage private valuations -- but not
earlier-stage or public valuations -- are bubble-like right now:

>To summarize: there does not appear to be a tech bubble in the public
markets. There does not appear to be a bubble in early or mid stages of the
private markets. There does appear to be a bubble in the late-stage private
companies, but that’s because people are misunderstanding these financial
instruments as equity. If you reclassify those rounds as debt, then it gets
hard to say where exactly the bubble is.

>At some point, I expect LPs to realize that buying debt in late-stage tech
companies is not what they signed up for, and then prices in late-stage
private companies will appear to correct. And I think that the entire public
market is likely to go down—perhaps substantially—when interest rates
materially move up, though that may be a long time away. But I expect public
tech companies are likely to trade with the rest of the market and not
underperform.

[http://blog.samaltman.com/the-tech-bust-
of-2015](http://blog.samaltman.com/the-tech-bust-of-2015)

~~~
paragpatelone
There is a bubble at the seed stage. There are tons of people (accredited
investors) investing that stage and tons of incubators/accelerators to help
introduce those startups to those investors.

Platforms like Angel list are helping fund allot more companies at the seed
stage by having syndicates.

Now even non-accredited investors will be able to invest in startups[1]. So
the seed stage is bubbling up.

[http://www.usnews.com/news/business/articles/2015/10/30/sec-...](http://www.usnews.com/news/business/articles/2015/10/30/sec-
opens-door-to-startup-investing-for-all)

~~~
exelius
It's not really possible for there to be a bubble at the seed stage --
valuations at that stage are "paper" values because there's zero liquidity.
Companies also tend not to stay in the seed stage for long enough to cause an
asset bubble; they are either able to acquire follow-on funding (at which
point they're no longer a "seed" company) or they aren't and they disappear.

The seed stage is increasingly crowded, but IMO that's a good thing.

~~~
klochner
Interesting point re: not staying at the seed stage long enough for a bubble.
What we're seeing instead is multiple preferences layered on in subsequent
rounds.

So seed/A investors think they're doing well when the company raises B,C,D,E
rounds at higher valuations, when in fact many will be washed out when the
company eventually IPOs or is acquired at a lower valuation than their last
venture round.

~~~
exelius
That's what I would expect -- the more crowded the market, the less leverage
you have, and the lower your eventual payoff.

There are lots of people willing to provide companies with small amounts of
money in exchange for a gigantic potential payoff. As payoffs decrease,
lenders will exit the market.

------
jgrahamc
It's time for a new term: a "Pegasus" (a different kind of mythical horse than
a unicorn):

[https://twitter.com/jgrahamc/status/658702918200250368](https://twitter.com/jgrahamc/status/658702918200250368)

    
    
        Pegasus (n)
        1. Mythical winged horse;
        2. Silicon Valley 'unicorn' with high gross margin.
           i.e. one that might actually take off.

~~~
iamsohungry
God, "unicorn" is already stupid enough.

~~~
VLM
On the bright side, if you found that annoying, I've heard rhinos as being
unicorns that became hopelessly obese and are dying out, with the fairly
obvious business analogies. They're not dead unicorns because they're not
dead. They're on the way though! And until the seemingly inevitable bankruptcy
or shutdown, they're living rhinos. They'll be dead unicorns unless something
turns around, sure. Or I guess you could call them dead rhinos?

A quick internet search of rhino and bubble and stuff like that has found
nothing, I've only heard this verbally a couple times.

"Do you have a contingency plan for rolling your your (whatever) off
(whatever)? They're a rhino, you know about that, right?"

~~~
giaour
That analogy would make sense, except for the fact that rhinos are real and
very intimidating. Shouldn't a rhino be a unicorn that has survived an IPO or
something?

------
chollida1
Fidelity has just marked its shares down from $30.72 at the end of June to
$22.91 for the end of September.

To be fair, I think these markdowns have more to do with who is investing than
the companies themselves.

VC's do portfolio valuations much less frequently than mutual funds, PE firms
or hedge funds do and they give less negative scrutiny to the valuation than
the aforementioned firms do, the reason for this....

... is VC firm's typically don't allow redemptions on monthly intervals which
means they can keep an unrealistic valuation for longer where as Hedge funds,
PE firms and mutual funds, who typically allow monthly redemption, need to
properly value each holding at the end of each month.

I mean if you are a VC, do you care if you don't write down Snap-chat at the
end of the month, you really have no incentive to do so?

You get paid on a quarterly basis on the size of your portfolio, why mark it
down until you are absolutely certain that it needs to be marked down, this
point is usually not until you actually go to sell, be it IPO or private
equity deal.

However, if you are a hedge fund and someone wants to redeem their assets, you
want to make sure you value Snap-chat for what you can realistically sell if
for as that's essentially what you are doing when you allow someone to redeem
their funds from your firm.

With people pulling money out of hedge funds, and PE firms on a monthly basis,
this makes you have to pay attention to valuations on a much more granular
time frame than historically VC firms would have.

~~~
surfearth
No PE firms allow quarterly redemptions in traditional fund vehicles. PE firms
and VC firms use precisely the same legal structure and are both generally
required to value assets and report to partners on a quarterly basis. Some PE
larger PE firms will have quarterly/semi-annual audits, but most PE and VC
firms audit their financial statements (and thus valuations) annually.

Also note that most funds calculate fees on committed capital during the
investment period (typically five years) and subsequently on invested cost,
not fair value, afterword. Therefore the portfolio valuation has little to do
with management fee calculations.

------
rdlecler1
If Fidelity just did a 25% write down on SnapChat on the most senior portion
of a $600m investment round, and assuming that Fidelity has at least a 1x
liquidity pref/ratchet, then SnapChat is now valued at $462M floor, not $15
billion.

~~~
vincent_s
What about other investors who also have liquidity preferences?

~~~
ericd
The latest investment/liquidity pref is usually satisfied first.

------
alp1970
I always get scared when "delivery" based start-ups get hot. Reminds me of
Kozmo, UrbanFetch, WebVan, Askville...

~~~
ChicagoBoy11
Everyone in this thread should check out E-Dreams.

------
damon_c
If I may speculate, it seems like the end result of this situation will be
that in the future, startups will avoid taking money from mutual funds or
anyone else who must attempt to accurately value their holdings publicly,
whenever possible.

~~~
untog
If they have a choice. The situation where startups are spoiled for choice in
investors will not continue forever.

Frankly, the fact that public valuations (of any kind - see Square's IPO
level) are lower than private ones should be ringing alarm bells all over, not
be dismissed.

------
code4tee
The only people that don't see a bubble at the moment are the people inside
the bubbles.

If your business has real revenue and real profit then there isn't much to
worry about. If your business is valued on "hype" and theoretical valuations
then you have reason to worry.

~~~
nilkn
I'm so glad I work at a company right now that has never taken funding and is
legitimately profitable. Hiring and expansion have been hard when you don't
have access to far more cash than you could ever generate yourself, but it's
hard to put a number on knowing that you won't be affected much by an industry
downturn (doubly so since none of our customers are software companies).

~~~
icelancer
Yup. The only debt we have is a rotating LOC for physical inventory (we ship
hard goods) of which we have 2x in cash on hand, but obviously debt service of
inventory is more efficient than cash service of inventory.

I read HN and other sites and I am just in shock of the fact people are
creating... basically nothing sustainable and hoping it will somehow magically
become sustainable? It boggles the mind.

------
koblas
What we're seeing an issue with valuations and investments. TechCrunch just
did a really good piece on how a raise of $150M gave a $6B valuation with a
preference that guaranteed a 20% return on investment to the Series E
investors (at the cost to the early investors).

[http://techcrunch.com/2015/11/10/squares-s-1-of-ratchets-
and...](http://techcrunch.com/2015/11/10/squares-s-1-of-ratchets-and-unicorn-
valuations/)

So what we're seeing is that people are starting to re-think valuations in the
face of these preferences.

------
debacle
While things might wind up bad for the next round of unicorns, things are
likely to be better for startups overall once the trend of "To the moon!" dies
down just slightly. Hopefully we can return to a world where an acquisition
isn't seen as a failure.

------
tmaly
I was doing a paid internship at Intel in 1999 out in Portland, OR. I remember
seeing huge numbers of new hires every week. I met people out in Portland that
were hired to due VB programming with no programming experience. A few months
later, the music stopped and there were too few chairs to go around. I always
think of the Austrian business cycle when I see such huge upswings in things

~~~
bredren
I was also at Intel in Hillsboro on a paid internship at this time. I recall a
ton of projects across so many areas, with loose management. There was a guy
in a QA group I worked in who just day traded.

~~~
tmaly
I was in the Product Development Group working on the Itanium chipset at the
time. I remember an older Engineer in the group that had written his own stock
trading book. He only lost a dollar per share when the market went from 72 to
18

------
axis967
I think there are far too many startups that focus solely on growth/reach.
Build a sustainable business: revenue and more importantly gross margin are
the key metrics that need to be thought about. While vcs want fast growth, it
is often not in the best interest of common stockholders to jet ahead at the
paces many of these companies go.

------
bsg75
It would be a nice change if focus was on companies that produced a product or
service with long term revenue prospects, instead of short term wildly high
margins.

The current state of highly educated people looking for get rich quick schemes
(unicorns) is tiresome.

------
andy_ppp
I actually think the opposite, that we are in a period of history where _all_
the software (and arguably businesses) people use day to day go from being
crap to fantastic.

A gold rush for good startups I think.

The returns from sitting the right group of people in a room and getting them
to make doing something a few orders of magnitude better than it was before is
always going to be fantastic.

~~~
icelancer
I think your theory and the one outlined in the original post are not mutually
exclusive. There will be a culling of the chaff.

------
vox_mollis
Meta: why on earth is this submission being flagged off the frontpage ?

------
superuser2
It's an interesting time to be a year from graduation in CS, that's for sure.

Maybe the folks beating the STEM drum will finally shut up when CS sees
employment comparable to underwater basket weaving.

~~~
rchaud
That assumes that CS grads will look for work exclusively in a technology
role. The skill set of a CS major is applicable to roles well outside
programming. Management consulting and financial services for instance recruit
CS and EE grads by the bucket load.

CS employment in startups may decrease in the event of a startup bust, but
mature companies like Apple, Amazon, Microsoft, Google, IBM etc. aren't likely
to drastically change their hiring patterns unless their own business have
been materially impacted.

~~~
superuser2
Oh sure, people will still hire programmers, but I expect conditions to worsen
dramatically. The rockstar making a $100k+ salary in a $1000 chair on top-of-
the-line hardware with free meals at the office experience is very much an
artifact of the startup bubble. Mature tech companies offer that to stay
competitive, but I expect we'll see a return to salaries closer to $50k in
grey cubicle Pointy Haired Boss environments when the bubble bursts.

------
brianmcconnell
Whenever I hear the term "unicorn", I think of the Squatty Potty TV ads
(they're funny!)

------
ForHackernews
Oh thank god, finally. Maybe I'll be able to afford an apartment again.

------
alphonse23
My thoughts right now are: how will this reflect on Atlassian IPO?

------
thinkt4nk
> Dizzying Ride May Be Ending for Startups

> may tap the breaks

------
mironathetin
Next bubble burst is close.

~~~
idibidiart
the sky is falling...

~~~
mironathetin
... on our heads :o))

~~~
mironathetin
Can't help a smile: Our pun is downvoted to be the least helpful on this page.

Now look at the top rated contribution. A few more words but essentially the
same meaning.

Its just that the original nytimes article is so ridiculous, that it deserves
nothing but making fun of it.

~~~
idibidiart
Sarcasm and subtle humor has always been problematic on the internets. It's
just that on Hacker News you'd expect that most people are more clued and
would appreciate the playful/funny variety, but noooo they tend to take it
quite literally.

------
kshatrea
Looking at India, this can be conflated with a global level ending of the
dizzying ride. [0] gives a good overview of this. In short, the free lunch is
now over and people are asking for results. I am sure it has a lot to do also
at an economic level with the Fed now talking of tightening- that means
interest rates are headed higher and there is more aversion to risk. I am not
an economist, so others might have different opinions.

[0] [https://goo.gl/9MfjBa](https://goo.gl/9MfjBa)

------
Alex3917
I think a lot of companies who raised seed funding prior to 2010 or 2012 did
so at excessively low valuations, and then tried to make up for it later by
raising at excessively high valuations once they hit. The 'bubble' over the
last couple years that's driven up pre-seed valuations should actually make
the current crop of startups more stable over the long run.

Also, the decaying state of physical infrastructure in the U.S. is only going
to drive more people to spend time on the Internet, where network effects are
only getting exponentially more powerful as new networks are getting built on
top of existing networks. These days a social startup that's "only growing as
fast as Facebook" might not even be able to successfully raise a seed round.
There might be a cyclical downturn, but none of the underlying trends in
society point to tech being a bad investment over the longterm.

~~~
idlewords
The fact that our roads are crappy is going to turn people into shut-ins?

~~~
Alex3917
Basically, yes. I think better examples though would be:

\- A rapid increase in states requiring HS students to complete some of their
classes online in order to save money.

\- Folks being unable to get treatment for all sorts of health conditions and
mental illnesses.

\- The prison system not providing adequate job training or rehabilitation.

\- The costs of college education increasing while the quality of that
education decreases.

Are Internet startups the best way to solve all of these problems? Probably
not. But in each of these cases startups are going to rake in the bulk of the
money, if only because they're going to be the only game in town.

Thanks to complete gridlock at the federal level and general incompetence at
the state level, sandhill road has effectively become the new congress. And
like it or not, this probably isn't going to change anytime soon.

And as for your example with the roads, to quote @noUpside on Twitter the
other day, "SF specializes in creating companies that are essentially 'New
York as a Service' bc its infrastructure sucks."
([https://twitter.com/noUpside/status/659094021151789056](https://twitter.com/noUpside/status/659094021151789056))

~~~
VLM
"SF specializes in creating companies that are essentially 'New York as a
Service' bc its infrastructure sucks."

I've also heard the "mom" variation. I've never heard "mom" equated with "New
York" but it is insightful in its own strange way.

~~~
eropple
So they've figured out how to mometize new revenue streams, eh...

(I'll show myself out.)

------
billybilly1920
it's ending again? Wasn't it supposed to end the year before, and the year
before that, and the year before that? When is google going to just drop
news.google.com and have an algorithm write the same stories over every year?

Next up: The next [pick top product] killer! you won't believe how [pick new
or underdog product] is going to completely replace [pick top product] due to
it's [pick random feature in [pick new or underdog product]]

~~~
zzalpha
Funny, folks used the same line of reasoning prior to the real estate bubble
popping in 2007-2008.

But, that doesn't stop the Pollyanna's...

~~~
nnoitra
If news like this had any predictive value then journalists would be the
richest group in the world.

