
Winter Is Probably Coming Soon - devNoise
http://techcrunch.com/2014/09/18/winter-is-probably-coming-soon/
======
dasil003
Of course a VC does not want you wasting his money and will finger wag all day
long to try to make entrepreneurs behave.

However his analysis focusing on isolated economic indicators is missing the
forest for the trees (presumably willfully). Why is money cheap? Because
investors have no place to put their money. The accelerating consolidation of
wealth within the super rich (ie. the 0.01% funding VCs) and the pathetic
amount of tax and philanthropy mean they have _nowhere_ to put their money. It
is going to be impossible to get the returns they demand because of the
decimation of the middle class and on a larger scale the impossibility of
sustaining 20th century level growth over the long term.

Tech is a long way from being an unattractive investment because it still
provides the best avenue to scaling a business quickly. It will survive a
tremendous amount of douchebag entrepreneur cash burning simply because
there's no better game out there, and until society comes to term with what's
actually happening economically rather than wishfully believing the juked
stats the government puts out to get re-elected I don't see any better
investment opportunities coming along.

Let the party continue...

~~~
jeffreyrogers
You can still put money in an index fund (e.g. anything from Vanguard) and get
reasonable returns (better than most investors at least).

~~~
mathattack
You can, but many investors are concerned about the stock market as a whole
being overpriced. "Bonds are overpriced, Commodities are overpriced, Equities
are overpriced, and Real Estate is overpriced. When rates go up they will all
tank."

Of course this is a first world problem.

I used to say "Invest in your own human capital" but I took a look at the cost
of private schools nowadays, and they're overpriced too. :-)

~~~
ryandvm
I'd hate to see what those investors think of paying 10 billion for
SnapChat...

~~~
mathattack
"Oh sh*t we should have gotten in at 3"? :-)

------
ojbyrne
I feel like we've heard this before:

2008: [http://techcrunch.com/2008/10/10/sequoia-
capitals-56-slide-p...](http://techcrunch.com/2008/10/10/sequoia-
capitals-56-slide-powerpoint-presentation-of-doom/)

2011: [http://www.startuplessonslearned.com/2011/08/winter-is-
comin...](http://www.startuplessonslearned.com/2011/08/winter-is-coming.html)

And it makes me think of 2 things:

1\. "the market can remain irrational longer than you can remain solvent."

2\. The way large companies use layoffs not to actually cut the total number
of jobs, but to cut deadwood. This seems like the VC equivalent.

~~~
timr
But the 2008 slide deck was _right_. It was comically easy to hire great
people for a few years after Lehman. Rents were going _down_ in San Francisco.
SOMA wasn't a ghost town, exactly, but it was pretty empty compared to now.
The bust was real.

The rapid recovery in tech has more-or-less paralleled the rapid recovery in
the stock market as a whole. There's no lesson to be learned from cynicism
here, except that the tech industry probably never paid the full price for the
last crash, because the "fix" for that was flooding the market with cheap
capital, which makes risky investments look reasonable.

~~~
justinsb
The question is whether the slide-deck was self-fulfilling because it came
from Sequoia.

~~~
GBond
The answer is no. It was fallout from to the financial crisis.

------
venus
I hope so. Currently, VC money is a horrible market distortion that encourages
what is basically dumping - companies with good products and actual business
models being starved of oxygen by cashed-up competitors who simply give
products away for free. I'm not even sure of the economic term for it but
wouldn't be surprised if it's illegal in a few years, after we've gotten more
sophisticated.

~~~
api
A related argument had been made a lot lately about how "free" can lead to
scummy business models like surveillance and manipulative black hat media
tactics.

You can do free sustainably if your costs are low and if you have something a
tier up you can sell. That's freemium and it can work for some things. But if
your costs are high or if a paid tier does not materialize... Now you have a
big problem. You own a liability, one purchased via massive investment and
employing many people. You must find a way to make it pay, so you start
looking at what you have a little differently. Your users... Now there's a
product.

South Park parodied the grow-first-monetize-later gambit in the "underpants
gnomes" episode:

1) collect underpants

2) ...?

3) profit!

Nobody knew the second step back then. Of course now companies like Facebook
have shown us what step two is. It's:

2) sniff underpants

:)

------
zxcvvcxz
I think it's fair to say that this analysis applies better to web/app
companies. There's just a fundamental problem with raising (and burning)
millions trying to grow a site for inbound marketing, or an app for dating, or
what have you, even though these are great ideas and things that people want:

You likely won't be able to generate real revenue on something whose value is
so immediately replicable or replaceable.

There needs to be a caveat to "build something people want": there has to be
some barrier so that others can't compete so easily. Customer and market
understanding is one, and that's certainly helped. But again, the replication
model, which will drive down profits for everyone, kicks in. Technical
superiority is a possible solution, but most web/app products simply wouldn't
benefit from this because their functionality is trivial.

Of course, there are exceptions. Unicorns. Things like Whatsapp, Twitter, and
Salesforce come to mind. Obviously their initial products were replicable, but
the winner-takes-all network effects (and eventual "platform dynamics") create
that lock-in. For every one of them, 1000s of similar companies fail. The
problem is when VC money is chasing those 1000s of likely-to-fail-I-might-do-
it-too companies. They're more likely to fail than laundromats, but they're
burning millions in an attempt to be those "winners". Easier than investing in
clean energy though.

Fundamentally, as a society we need some technical advancement to create
meaningful economic growth. We can't just keep advertising and selling the
same stuff to each other. When a sector is running dry on innovation
opportunities (i.e. webs/apps) maybe it's time to look elsewhere. Or stick
around and wait for unicorns. Meh.

For now though, how people want to misappropriate (in my opinion) their money
is their choice, as long as most of this doesn't get dumped on John Smith from
The Public like it did in 2000.

~~~
jjoonathan
> Fundamentally, as a society we need some technical advancement to create
> meaningful economic growth

Fundamentally, as a society we need a social+economic advancement that allows
society to continue to function in the absence of growth.

Farms don't need growth to produce food. Power plants don't need growth to
produce energy. Construction companies don't need growth to build houses.
There is no good reason why the wheels should come off our economic system in
the absence of growth.

The fact that the wheels _do_ come off in the absence of growth is a bug.
Plain and simple. We need to fix the bug rather than "working around" it by
trying to produce unending growth.

~~~
cdent
Capitalism is cancer.

~~~
jjoonathan
Capitalism, like cancer, can't be avoided. Economics is more like the laws of
physics than a game of Monopoly: you can't really opt out of it because it
simply describes the way things "want to" work (people competing for scarce
resources).

Unlike cancer, I suspect that if we're sufficiently clever we can figure out a
way to manage the symptoms in perpetuity.

~~~
cdent
So you think some "we" can be clever enough to manage economics but some "we"
(perhaps same, perhaps different) can't be clever enough to manage cancer.
Bummer.

------
ChuckMcM
Winter is always coming. Gurley's analysis is spot on but it really talks
about VC money not "real" money. Something not enough startups internalize has
always been how "expensive" it is to use the dollars you get from investors to
fund operations.

------
barry-cotter
Will any of the bootcamps survive, do you think? It seems unlikely given the
stories I've read here, lsc hiring a former coworker (his technical superior)
out of a sandwich shop, or tptacek having to move from San Francisco to Ann
Arbor because there were no jobs going in San Francisco for someone who co-
founded a large ISP and had lots of security publications.

I'm sure it'll be bad enough in the US but I pity the graduates of General
Assembly London or the Berlin bootcamp.

~~~
enraged_camel
What about the bootcamps? A friend of mine is considering enrolling in one. Is
it a bad idea?

~~~
nostrademons
It's not a bad idea for people who go through them and successfully get jobs
before the crunch comes. As long as they can do the job and don't get laid
off, they're way better off than they would be otherwise. (And even if they do
get laid off, they're probably better off than they would be otherwise - they
have tangible skills that will likely be in demand for a while.)

It could be very bad for the boot camps themselves. The reason they have a
business is because the demand for software engineers is red-hot right now;
much of this demand comes from the easy availability of venture/seed money.
Think what happened to telecoms, ISPs, and infrastructure providers at the end
of the dot-com boom. It was not unusual to go from thriving repeat business to
absolutely zero customers in six months.

~~~
timr
Yep. And even more to the point, there were a lot of people who were hired as
"webmasters", and knew little more than some HTML. Those people were cut
almost immediately when the crash came. It's not even a metaphor -- almost the
_exact same scenario_ played itself out in the late 90s. We know how it ends.

It amazes me how resistant we are to learning from experience.

~~~
xcubed
Based on seeing the last crash-

It's not really skill level that determines whether you keep a job. Having a
good network and being able to hustle for opportunities are far bigger
determinants.

The quiet, 50th percentile engineer who hasn't had to look for a job in 10
years, doesn't know a lot of people, low-ish EQ, works for a company that's
not well-known: most at risk of struggling to find a job if laid off or
company goes under.

Someone who knows little more than HTML but is a young, hustler type, big
network, sociable, puts more energy into finding gigs - likely to get at least
some contract work to sustain him through the

~~~
xcubed
*downturn

------
bsder
Translation: "Waaaaaah! I'm a VC; I'm not the only game in town anymore; and I
have to pay money. Waaaaah!"

Yeah, guess what? Nobody likes VC's. They screwed everybody over in the
1999-2000 bust, so those people have stayed away ever since. And, now, the
stupid 20-somethings are starting figure the same thing out, are buckling down
on very small amounts of money and cashing out to Yagglesoftazon ASAP since
there is very little barrier to entry on something which is solely software.

------
pkorzeniewski
I'm always amazed by stories of startups that generate almost no profit and
yet burn millions of VC dollars. Yes, I know that VC count on that 1 out of
100 invested in companies to generate profit larger than all the other
combined, but still it's a bit ridiculous and in my opinion not healthy for
the industry. It's a different story if you've a bootstrapped, profitable
company and want to boost the growth - you can negotiate better terms with the
VC, because a) you've paying customers and have a proven business model and b)
you don't need the VC money to survive, unlike a fresh company without any
profits.

~~~
jiggy2011
Some types of companies are harder to bootstrap in a way that is profitable
from day 1, also the risk for a small bootstrapped company is they just prove
the market for a VC backed juggernaut to come in and eat them alive.

~~~
pkorzeniewski
Yes, some types of companies need time to provide value, but in my opinion the
vast majority of VC funded companies could easily be bootstrapped. I don't
deny that the vision of receiving a fat check and being able to rent a
beautiful office, buy the best equipment and hire a big team is tempting, but
it's something for something - the main goal of VCs is to grow like crazy,
without a sentiment. A bootstrapped company will grow slowly, but steadily,
and I don't believe a VC backed competitor is a real threat in the long term.
Sure, they can offer a similar product for free, but not forever - once the VC
money is gone, they will need to get profitable. Fast. Without the VC money
such company can dissapear the next month. Not to mention the interference of
VCs how to run your company, which is of course expected - after all it's
their money that keeps your company alive.

~~~
jiggy2011
Sure, but by the time they have folded you're already out of business!

------
api
I don't think there is an overall tech bubble like 1999, but there may indeed
be smaller scale bubbles in overheated or overhyped sectors.

There are two areas of worry from what I see. One is free apps and services
with high burn and no good path to revenue. Another is what looks to me like a
mini-bubble in startups that cater to other startups. Scene-centric inbreeding
like that is probably more worrisome than the overvalued pic sharing services.

------
camillomiller
I somehow hope it's gonna happen sooner than later, just because that way it
could hurt a little less. What's not clear here is that the impact on global
economy will be not that big. Anyway, if they're called venture capitalists,
shouldn't they be able to look forward a little better than the market? That
way they know what will happen if they keep going on like this. A quick
deflation of the bubble, with some notable victims, would be better than a
complete burst. Especially for VCs

------
KonoHito
Any evidence the party is coming to an end?

Actually for me it is getting a bit ridiculous when an app like Yo can get
like a million dollars when it goes viral without anyone actually figuring out
what's so great about it.

It does seem like growth is triumphing over other metrics, like revenue, or
common sense. Of course if we go by that measure, companies like facebook will
never survive at all, not sure how this is gonna play out.

------
no_future
Can somebody explain to me why every startup company(or at least every one
that articles are written about) feels the need to raise as much VC as
possible ASAP? There are so many options for developing scalable systems
relatively easily and the cost of running an entirely web/software based
company(read: 90% of the hot startups) today is comically low, especially with
pay what you use PaaS/IaaS systems like those offered by Google and Amazon. If
your product crashes and burns, you will be out a couple thousand dollars MAX
+ whatever time and effort you put in. If your product is successful, by the
time running it on one of these platforms gets too expensive to pay for out of
pocket(meaning you have a lot of users running up bandwidth/infrastructure
costs), I'd guess that VC firms would be coming to you rather than you to
them, and you would basically have more authority to dictate investment terms,
and wouldn't have to slog around pitching to firm after firm - most of who
will probably reject early stage investment in anything that isn't some
rehashed social media dreck made by the white boys from Stanford. I've never
pitched to a VC firm, but I don't believe that any pitch is better than "Hey
my thing has 10,000 fucking users and we get a metric shitton of new signups
every day". I don't think they would care if you were a hobo clown from Latvia
who dropped out of elementary school if your product had users and pull,
they'd throw money at you since they all want to jump in on the next big
thing.

This confuses me as it would seem to be a counter trend to what I'd expect
based on what stuff was like a few years ago, when infrastructure costs were
much higher, there were much less options, and development was more difficult.
Google and Facebook - both of which are practically the model now for
successful web companies - were fairly bootstrapped(run out of garages and
dorm rooms by a few friends who had scraped together money from friends and
family) before getting VC funding, which they got after their products had
received somewhat widespread hype/adoption. I don't even think it would have
been difficult to raise money or make VC connections before the product even
launched for these people, they were practically the definition of the white
boys from Stanford - but they didn't. The founders of both of those companies
still retain massive shares and control in them compared to what you would
expect from almost any other type of company of their calibre. Neither of them
had to resort to advertising before their companies got big. The excuse that
seems to be given is that by getting VC you don't have to worry about profits
and paying costs for a while and you can just focus purely on the product, but
as I said before, the costs are minimal - if you had even a small amount of
savings or hit a family member up for a loan, you could run for quite a while
on Google App Engine and such and not really have to worry about cost. If your
founders are even remotely technical, I don't see how you would need more
staff members in your early stages, successful web/software companies love to
brag about how early on their team consisted of 3 people who worked a million
hours a week on the product subsisting on nothing but cocaine and melon rinds
because they were so dedicated to the company. As a person who I guess would
be considered technical(though if you ask me I'm just a monkey who doesn't
have a clue what they are doing and just bangs rocks together and hacks at
stuff till something working comes out), I simply don't see the appeal of
begging a bunch of of suits - most of whom probably don't know a shit about
computers - for venture funding, and having to sell large stakes of your
company to get it when you don't absolutely need it at the time.

The only reason I would postulate for this trend is an increasing amount of
non-technical founders who need to pay for developers to make and maintain
their product, but don't want to give these developers significant equity in
the company. Almost all of the cofounders of Google and Facebook were highly
technical and very driven and intelligent from what I can see, so I could
easily believe that they were able to chug along on their own for a while
without hiring more technical staff. I've put a couple of fairly popular and
highly trafficked web projects(nothing huge, current one pushes about 2TB of
bandwidth a day from 30k visitors, and costs about $100 a month to run on a
dedicated server) together with some friends and am currently learning iOS
dev, and I don't believe its a stretch at all to think that me and a buddy
could build something like Snapchat or Instagram in a couple of weeks and
throw it up on App Engine.

I know almost nothing about finance and haven't ever managed or worked at a
for really reals startup, so let me know if I'm way off here. I would just
like to get some people's perspectives on this. Sorry for the rant.

~~~
zxcvvcxz
>Can somebody explain to me why every startup company(or at least every one
that articles are written about) feels the need to raise as much VC as
possible ASAP?

>The only reason I would postulate for this trend is an increasing amount of
non-technical founders who need to pay for developers to make and maintain
their product, but don't want to give these developers significant equity in
the company.

I think this is the best explanation. It's not just tougher to find engineers
period, but you have to incentivize them away from the big co's who are paying
like 120k/engineer. Equity helps, vision helps, but more than anything so does
cash. However it is telling if companies need to rely primarily on cash to
incentivize rather than the first two.

Maybe this could be a good litmus test for you as a founder: can you get your
early engineers to work at half, or less, their market rate? If so, it implies
you're putting something together worth working on (or you're really damn good
at recruiting). But if not, if you have to pay close to their big co salary,
then I think there's a problem.

~~~
Bahamut
If you want the really good engineers from those companies, they're often
making more than $120k - they can be making up to $160k.

Speaking as an engineer who has already been pitched at by others working on
startups due to my formidable scalable productivity in my domain (while only
being in the Bay area for 4 months), I prefer the security of a good salary
and a good amount of stock. It would be very hard to convince me to leave
without offering some level of immediate financial security.

Note: I work at a startup that raised a Series A round - I was offered $140k +
signing bonus & generous stock options. I believe the company has been very
happy with my results so far.

~~~
Iftheshoefits
I'm a decent engineer; not top 10% necessarily, but maybe in the top 25% and
certainly well above the median. I earn almost $160k doing pretty
basic/routine software work at a non-software/tech company in the Bay Area.
I'm underpaid (as an hourly contractor)--that is, I know for a fact that the
hourly rate I'm currently working for is 20%-30% less than what I could get
doing something else. Your salary, if you are as good as you claim, is less
than what it should be by a good 10%-20% (factoring in benefits and bonuses).

------
mbesto
I'm guessing it's in 18-24 months. Companies are still getting acquired left
and right and BigCo still has cash to spend (especially Yahoo, Google,
Facebook and Twitter). As long as BigCo is acquiring, VCs will continue
pumping.

------
seanmcdirmid
Nice link baity title. I thought this was about the new Game of Thrones book
being released soon.

~~~
AVTizzle
Heh, I can see where the confusion would stem.

Somehow though, maybe because this came a day or two after Suster's response
to the Gurley interivew, I had a good idea going into it that the post had
something to do with the impending VC crunch.

------
recalibrator
Stupidity and greed are year round.

