
Winter is coming - jamesjyu
http://www.startuplessonslearned.com/2011/08/winter-is-coming.html
======
timmyd
Its funny that in 2008 - we see posts like "RIP Good Times" -
[http://techcrunch.com/2009/10/06/r-i-p-good-times-one-
year-l...](http://techcrunch.com/2009/10/06/r-i-p-good-times-one-year-later/)
\- and yet nothing - fundamentally - came of it. I'm sure Sequoia's companies
left that meeting - scared, sacked a bunch of employee's, cleaned out the
closest - and the VC's were happy because the capital lasted longer ensuring
no more dilutions for themselves and a "trimmer" business even if it was not
required. VC's love to blow hot air because it's self-serving. "OMG da world
is ending - raise cash now". Of course, many go out and do this [for whatever
reason] and get hit by lower valuations [VC's +1 up]. VC's have already raised
their HUGE current funds - most in the vicinity of 500m+. So how does any of
this affect VC's ? They want more "bang-for-their-buck" and by getting lower
valuations, they get higher returns and larger management cuts on exits. I'm
not suggesting this is a flaw - it's capitalism and the opposite side of what
a start is doing in trying to get larger valuations.

Seemingly, the fundamental problem that exists in the United States is that
the debt level has been never ending. The spending mentality of the U.S.
government since Regean, Bush, Clinton [not so much], Bush and now even Obama
[in my view - cleaning up the mess] was never one of fiscal or monetary
conservatism. I'm an Aussie - our country doesn't have hardly any debt [queue
smart-ass arrogance smirk]. Good fiscal and monetary policy ? Not really - as
much as our politicians love to think so - it's just not over promising and
over spending for political gains. "I'll give you tax-cuts of 5%" - "I'll do
10%" - "I've just discovered I can do 15%!" and so on it seems in the US -
then the whole country argues about whether tax-cuts are better or worse or
giving the wealthier socioeconomic bracket more money is better or worse. I
don't premise to understand the entire US Financial or Political system - I'm
merely an international observer. What you can observe - large socioeconomic
cuts to fundamental social welfare results in those scenes unfortunately
unfolding in London. You rip apart societies most vulnerable social fabric and
it's not going to respond happily.

To suggest we are heading for another "dot-com" boom - at least in my opinion
- is totally unfounded. The internet is in another era juxtaposed against the
2000's with widebroadband adoption and reliance. IPO's are not finished when
they are based on real fundamental revenues and profits underlined with good
talent. Any rational investment is unpinned by this - Facebook would still
raise a huge IPO - because large financial institutions still have huge funds
available to them and see the rationality of the investment. Similar to other
business' that have real revenue and real values.

Solid business basics win as per Warren Buffet "Be fearful when others are
greedy, and greedy when others are fearful". Convince investors to be greedy
in the current climate and nothing matters. You'll win.

~~~
atsaloli
FYI <http://www.debtclock.com.au/> shows Australia with $68 billion in debt
and rising. That's much better than the US, not in the black, either.

Given Australia's much smaller population, this works out to $7,889 per
capita.

Compare to USA $46,780 per capita.

Country's headed in the wrong direction, mate. Same direction as the USA, I'm
afraid.

~~~
timmyd
not really - focusing on this figure is somewhat non-nonsensical and spreads
FUD albeit other than to keep prudent awareness of it. The difference between
Aus and USA - is our net growth far outweighs the debt we owe and therefore we
are relatively liquid if we needed to double-down on this debt. Further, much
of our debt has been localed in foreign currencies - which are now all
depreciated against the AUD - which is seen as a relatively safe currency
given the USA downgrade. I don't propose to know when this will revert.
Further, the regulation of our financial institutions has typically been quite
tight through judicial activism and aggressive regulation. Unfortunately [for
the world] - Wall St wasn't to the same degree. My personal view is that
Governments should not adopt fiscal policy which encourages surplus - a
responsible government is adopted to spend money on essential services - not
carry on for political gain that it is in "surplus'. It should be net-neutral.

Anyway, Feel free to browse this document -
<http://www.treasury.gov.au/documents/1496/PDF/01_Debt.pdf>

"A government’s balance sheet comprises both assets and liabilities. This
article has demonstrated that only considering gross debt can result in an
incomplete picture of public finances. By taking into account assets the
public sector owns, a more accurate view of a government’s ability to respond
to economic conditions can be determined.

This article has shown that Australia has undergone several periods of debt
accumulation, followed by periods of fiscal consolidation. Periods of strong
economic growth following episodes of debt accumulation have helped support
relatively quick improvements in the public sector’s net debt position.
Australia has a low level of net debt both historically and when compared with
G-7 economies."

------
grandalf
Check out my counter-argument:

Why are startups hot now? Not because the economy is good or because the
startup ideas people are having are particularly good, but because risk
seeking investors are trying to shove capital anywhere they can.

After the crash of 2008 lots of avenues (created by Wall Street post Financial
Modernization Act) to invest this capital were closed, and the growth of the
startup scene, particularly the NY startup scene, is a direct result of this.
Couple this with a real negative interest rates and you have a nice long boom
period where startups are the best thing going for investors who are getting
free money (via negative interest rates) to gamble with.

Why will this continue? Exactly the same reason why Yahoo is still in business
and why Microsoft is still profitable. There is _tremendous_ room for
innovation, growth, and all the improvements associated with those things.

Soon joe.sixpack@yahoo.com will wake up and start demanding more and more web
innovation, and the void will be filled by startups doing clever, lucrative,
disruptive things. I personally can't believe that anyone can tolerate using
Yahoo for anything... and I'm stunned that people tolerate 2 hour battery life
Android phones, Windows Vista, etc. The problems (areas for improvement) are
far deeper than most tech-savvy people (such as on HN) can imagine, and the
population (thanks mostly to Facebook) is slowly waking up to what it actually
wants to do online.

To borrow the OP's metaphor, we're in the very early dawn of a beautiful,
early spring day, etc. This will occur at least until the cost of borrowing
increases substantially.

Also, anyone who thinks we have an information economy in 2011 will look back
in a few decades and laugh.

~~~
chailatte
If joe sixpack is still watching jersey shore italy, listening to lady gaga,
eating mcdonald, drinking starbucks, playing medal of honor 4, watching
spiderman 5, what makes you think they'll do anything but use facebook,
amazon, google, microsoft?

~~~
sateesh
A few years ago joe sixpack was watching jersey shore italy, listening to lady
gaga, eating mcdonald, drinking starbucks, playing medal of honor 4, watching
spiderman 5, but he did start using facebook, amazon, google, microsoft when
products/services from these companies appeared.

------
edw519
From "The Godfather", about the cycles in their "industry":

MICHAEL

How bad do you think it's gonna be?

CLEMENZA

Pretty goddamn bad. Probably all the other Families will line up against us.
That's alright -- this thing's gotta happen every five years or so -- ten
years -- helps to get rid of the bad blood. Been ten years since the last one.

~~~
analyst74
Winter just makes the surviving ones more profitable, mafias or entrepreneurs!

------
JDulin
The entreprenuers who are determined and flexible enough to keep going through
the crucible of winter may have an even better opportunity to succeed than
they did in summer.

<http://paulgraham.com/badeconomy.html>

------
TomOfTTB
I don't agree with much of this for two reasons...

1\. The bubble for already funded companies burst in the 90s but that didn't
dry up funding. The truth is a wealthy person's best bet in a down economy is
a small startup. Because the potential upside is so much better than any other
investment. A company like Y Combinator can literally fund hundreds of
startups and as long as at least one has a significant payday at the end Y
Combinator still comes out on top.

2\. The problem with borrowing money now, as an American, is the dollar is
falling and most people expect another round of Quantitative Easing which will
almost certainly exacerbate that. It usually doesn't make sense for a startup
to borrow a significant amount of money in a currency whose value is dropping.
Because you only get so many funding rounds and you don't want to waste them
by not getting enough money to buy what you need. Which is what happens when a
currency's value drops after you get the funding.

~~~
Symmetry
No idea why people downvoted you...

 _It usually doesn't make sense for a startup to borrow a significant amount
of money in a currency whose value is dropping._

I disagree with this though. Depreciating currency is awesome if you've got
debt financing, because all of the value of your debt drops, but you only lose
the value of the money you haven't spent yet. OTOH, it might be bad because
uncertainty about depreciation will cause financiers to be reluctant to give
you good terms.

Now, it certainly is a bad thing when you're getting equity financing, but
that really isn't "borrowing".

~~~
TomOfTTB
I agree in the sense of having an asset and paying it back but I was thinking
of it in terms of budgeting and getting through the year (or however long)

For example, say you budget for a year of operation and assume you need $1.5
million and get funded at that. Then the value of the currency falls. This
means your revenue falls and the value of your cash on hand falls. Suddenly
you're out of money and its hard to go back for another round so soon after
the first.

That's where I see the problem. If you can survive long enough to pay the debt
back in full a down currency works for you but it could be the death of you.

------
ryanisinallofus
Stocks are pointless, 401ks are dropping, inflation is high...

Sounds like a good time to spend your money on a new company with actual
profit potential.

------
Symmetry
Wait, didn't winter start in '08? I could have sworn Ice Giants came from the
north and dragged down the towers of the Lehman Brothers.

------
wccrawford
I think if people were more cautious, like this guy, the summers wouldn't be
quite so crazy, and the winters wouldn't be quite so bad.

------
DanielRibeiro
_...the truly great entrepreneurs didn't get in this to make money, but to
change the world_

Great food for thought.

~~~
bluekeybox
Beware of schemes that claim that your participation in them will help change
the world but which come with no money attached. One is only capable of doing
great good if one is also capable of doing great evil. More simply: to do a
lot of good (not just a teeny tiny bit), one has to be capable of something
that affects real world, ergo one has to be powerful. Capability is closely
linked with power (and, in a Western society, the closest measure of power is
money). If one cannot easily turn his or her work into money, one should
question how much capability for real change one has.

~~~
geboyr
But it's not impossible to be powerful without turning your immediate work
into money. You might be able to help others make/turn their work into money,
which makes me go off on a tangent in my head about an algorithm that could
calculate how much power one truly had based on n degrees of separation out
from their work.

~~~
bluekeybox
> You might be able to help others make/turn their work into money

Of course it's possible but it introduces a level of indirectness. Once you
have indirectness, it becomes harder to measure your impact. Fields where
one's impact is hard to measure tend to attract BS artists who use the
ambiguity to their advantage, to claim that they are worth more than they
really are.

The algorithm you are thinking of will fail unless it has some way to
empirically measure impact, in which case the algorithm would be trivial.

------
smountcastle
I enjoy reading Eric Ries' posts but I cannot help but be cynical about this,
"Remember: in the long run, the surest way to be successful is to create more
value than you capture. Remember: the truly great entrepreneurs didn't get in
this to make money, but to change the world." I guess his company IMVU created
value (in terms of money) but I don't see how an online social entertainment
destination where members use 3D avatars to meet new people, chat, create and
play games with their friends creates social value or changes the world.

------
6ren
Note: pizzas boom in recessions, substituting for expensive dining.

~~~
fosk
This is true, it's not recession for everyone and there are great
opportunities in winter as well. If you make a compelling product that gets
traction, there's no reason to not get some money. It's more challenging, but
I mean it's ok, it's part of the game.

------
hnsmurf
I'm not so sure. I think the broader economic forces may help tech companies
rather than hurt.

No matter what happens, America (and the world) will still have a lot of very
wealthy people and institutions. Those people need to put their money
somewhere. The stock market is scary, bonds and banks don't pay anything. If
you had $100 million tomorrow to invest what would you do with it? I'd start
looking for startups.

10% unemployment seems bad to us, relative to our more historical 5%, but
Europe has dealt with that for decades. People still buy iPhones and sign up
for Netflix. Even if the market for new services is reduced by a few %, the
quality of new services will more than make up for it.

Rich people will still want to make money and startups will still be an
appealing way to do it.

~~~
chailatte
I would invest in gold. No hassle. No risk since every country is printing
money and putting savers at risk. Doubled in price in dollar in two years thus
far.

~~~
checker
Gold is the safe bet, but some people like to diversify with some riskier
investments.

~~~
kragen
That's a peculiar sense of "safe". The value of gold fluctuates substantially
over time, even over fairly short periods of time. Sometimes (like the last
decade) it goes up; other times (like most of the 1980s and some of the 1990s)
it goes down. It's easy to lose half of what you invested; if you time it
right, you can lose seven-eighths.

The peculiar sense in which gold is "safe" is that it tends to go down _just
as much_ as it goes up; that is, it isn't subject to secular inflation or
deflation.

~~~
checker
Thanks for the explanation. I guess I was repeating what I've heard from the
talking heads on TV that really provide popcorn financial advice.

------
sp4rki
I see what you did there.

I totally agree with this sentiment, and totally think that it's only a matter
of time until we need to start dealing with the consequences of not being
prepared for the "Winter". I'm also interested in seeing which players end up
being "part of the NightWatch" and keep going because it's what they love and
pledged their dedication to, and which players are only in it to play the
"Game" and see whom can get the most money, popularity, recognition, etc.
Also, as a fan of the books I loved the analogy between the Ice and Fire saga
and entrepreneurship this days.

------
mise
May I suggest a soundtrack for this article?

The Doors - Summer's Almost Gone "Summer's almost gone. Where will we be, when
the summer's gone?"

The Doors - Wintertime Love "Wintertime winds blow cold this season. Fallen in
love, I'm hoping to be."

------
encoderer
I can't say I agree with this one bit.

One bubble/bust cycle does not a trend make.

~~~
Vivtek
It's good general advice, though - you have to give it that.

------
chanux
Yeah! There's some truth to the idea of winter. But for the people who are
doing it just for the sake of doing it, winter doesn't matter.

Make good things. Money will follow no matter what the season is.

------
gordonbowman
+1 just for the title

------
ratsbane
There are opportunities even when the tide goes out, even the chance to find
things on the beach which the sea has left behind.

------
chailatte
Winter is already here.

\- Stock Market Drops. VCs Hold Partner Meetings. What Happens Next?

"I (Mark Suster) told him (entrepreneur), 'close your round by August 2nd.
After that, all bets are off.'" -
<http://news.ycombinator.com/item?id=2864031>

\- For Some, Rude End to IPO Dreams

"The sound you just heard was the IPO window slamming shut," wrote Geoff Yang,
a partner at venture capital firm Redpoint Ventures in Menlo Park, Calif" -
<http://news.ycombinator.com/item?id=2866438>

\- We're in the second dip of the global economic depression

<http://news.ycombinator.com/item?id=2860910>

~~~
jeffreymcmanus
It doesn't follow that just because the stock market dips that funding for
startups will suddenly evaporate. Most venture funds are investing money that
was raised from limited partners years ago.

And at any rate, most VCs go on vacation during August, so if you don't close
your round by August 2, all bets are off...until September 1. This happens
_every year_.

A good counterpoint to this sky-is-falling is Dave McClure's quote in the Wall
Street Journal, in which he says that the market dip will change his
investment velocity not a whit.

[http://blogs.wsj.com/venturecapital/2011/08/08/early-
stage-i...](http://blogs.wsj.com/venturecapital/2011/08/08/early-stage-
investors-unruffled-by-stock-markets-bad-day/)

~~~
chailatte
"And at any rate, most VCs go on vacation during August, so if you don't close
your round by August 2, all bets are off...until September 1. This happens
every year."

I am not sure why you feel there's a need to make an unrelated assumption
when, if you actually read the well-written techcrunch article, there's a
reason why Mark said that - it's related to funding certainty and economics.

~~~
jeffreymcmanus
"funding certainty" is a contradiction in terms

~~~
chailatte
Stop nitpicking. Did you run out of things to do at your startup?

~~~
jeffreymcmanus
Educating people is what my startup does.

~~~
chailatte
Then you should google "funding certainty" to see that it is widely used. Just
because you don't relish using slightly oxymoronic phrase doesn't mean others
don't

~~~
jeffreymcmanus
now who's nitpicking

------
sabat
The more people say this, the more true it becomes.

------
michaelochurch
It was March, then I took a nap, and now it's November.

This is what you get when Republicans are in charge (and they still are; look
at Congress): short, puny expansions and punishing, horrible recessions.

------
porterhaney
You can't go skiing in the summer.

It's easy to be all roses in the summer time, but only the tough get to make
it through winter.

Should be fun!

------
trevelyan
Winter is icummen in,

Lhude sing Goddamm.

VCs stop and angels drop,

Like aggregate demand....

Sing: Goddamm.

Downcast brow and skittish DOW

Show profit on the lam

Suster shivers, Techcrunch quivers

Damn you, sing: Goddamm.

Goddamm, Goddamm, (and Groupon's canned), Goddamm,

Watch Pincus do facepalm.

Sing goddamm, damm, sing Goddamm.

Sing goddamm, sing goddamm, DAMM.

~~~
vynch
lol downvoting this must feel really good!

~~~
trevelyan
I was pretty pleased about working "the winter's balm" line into that bit
about Zygna. And there were a couple of upvotes early on, but I guess meta
jokes about English literature don't fly on a hacker audience.

~~~
vynch
on a serious note...i dont really think this particulat post is that bad...but
encouraging such posts can turn our beloved community into reddit!

