
Andreessen Goes on Tweet Storm About Burn Rates, Says to Worry - lnguyen
http://techcrunch.com/2014/09/25/andreessen-goes-on-tweet-storm-about-burn-rates-and-says-worry/
======
kylelibra
Here's the entire tweet storm if you find the embedded storify version
difficult to read:

1/Cash burn rates at startups: Recently @bgurley and @fredwilson have sounded
a vivid alarm -- [http://online.wsj.com/articles/venture-capitalist-sounds-
ala...](http://online.wsj.com/articles/venture-capitalist-sounds-alarm-on-
silicon-valley-risk-1410740054)

2/I said at the time that I agree with much of what Bill says
([https://twitter.com/pmarca/status/511617992757506048](https://twitter.com/pmarca/status/511617992757506048)
…), and I want to expand on the topic further:

3/New founders in last 10 years have ONLY been in environment where money is
always easy to raise at higher valuations. THAT WILL NOT LAST.

4/When the market turns, and it will turn, we will find out who has been
swimming without trunks on: many high burn rate co's will VAPORIZE.

5/High cash burn rates are dangerous in several ways beyond the obvious
increased risk of running out of cash. Important to understand why:

6/First: High burn rate kills your ability to adapt as you learn & as market
changes. Co becomes unwieldy, too big to easily change course.

7/Second: Hiring people is easy; layoffs are devastating. Hiring for startups
is effectively one way street. Again, can't change once stuck.

8/Third: Your managers get trained and incented ONLY to hire, as answer to
every question. Company bloats & becomes badly run at same time.

9/Fourth: Lots of people, big shiny office, high expense base = Fake "we've
made it!" feeling. Removes pressure to deliver real results.

10/Fifth: More people multiplies communication overhead exponentially, slows
everything down. Company bogs down, becomes bad place to work.

11/Sixth: Raising new money becomes harder & harder. You have bigger bulldog
to feed, need more and more $ at higher and higher valuations.

12/Therefore you take on escalating risk of a catastrophic down round. High-
cash-burn startups almost never survive down rounds. VAPORIZE.

13/Further, to get into this position, you probably had to raise too much $ at
too high valuation before; escalates down round risk further.

The blog post author then goes on some further back and forth about specifics.

~~~
AnonymousRant
I find it very hard not to get angry at these posts. I'm thinking also of Fred
Wilson's burn-baby-burn piece from a week or two ago.

I am the cofounder of a bootstrapped startup company with 7-figure annual
revenue, a better than 100% growth rate for the last several years, a great
team, a fantastic market, and a genuinely useful product.

One of the biggest problems facing my company right now is dealing with all of
the venture-funded idiots coming after my customers, market and employees
without so much as a hint of a viable business model. They outspend us on
marketing 1000-to-1 and they offer to serve our clients essentially for free,
apparently just to be able to win a logo for the "traction" slide in their
deck in the hope that they will have enough proof points to get them their
next hit of venture money.

I know that nearly all of them are going to vaporize eventually, but in the
meantime they completely poison the well for all of us who are trying to do
what Andressen, Wilson and the rest pretend they want startups to be doing -
creating sustainable businesses in sustainable markets.

Posting this as an anonymous coward because who knows - I may need to raise
venture money myself, though I'm pretty sure we wouldn't qualify with "5x
being the new 2x" I don't think anyone is interested in mere 100% growth, even
if it comes with the advantages of sustainability built on the back of a real
business.

~~~
bane
> They outspend us on marketing 1000-to-1...

In most industries this is called "dumping" and it's absolutely destructive
and infuriating.

[https://en.wikipedia.org/wiki/Dumping_(pricing_policy)](https://en.wikipedia.org/wiki/Dumping_\(pricing_policy\))

Between this problem and all the other issues that are coming from this age of
startups (like trying to build a business on a startup and then it just _poof_
goes away one day), the Startup world is in definite need of maturity and more
grown ups.

------
Blackthorn
VCs give startups money, complain about startups using that money. News at 11.

Maybe they'll be a little more careful about who they give their money to next
time.

edit: To put it a little more kindly, if startups without viable business
models keep getting gobs of money _maybe the problem isn 't the startup!_

~~~
notacoward
The VCs own compensation structure practically guarantees that they will raise
as much money as they can and invest it however they can, no matter how much
they have to lower their standards. As in the semi-obvious biological analogy,
they don't really care about what _kind_ of offspring they're producing. They
just want to reduce the per-company expenditure so they can invest in more
companies. That's entirely what this is about. Any good that the "be very
careful about hiring" advice does for the companies or founders is purely
incidental.

~~~
ultimape
Sounds like a bit of a simplification though. There are surely more other
incentives involved with what companies they fund.

------
idbfs
_10 /Fifth: More people multiplies communication overhead exponentially, slows
everything down. Company bogs down, becomes bad place to work._

Warning: pedantic.

Adding people increases communication overhead quadratically, not
exponentially. To see why, consider the complete graph on n vertices (people),
K_n. The number of edges (lines of communication) in K_n is n(n-1)/2, i.e.,
proportional to n^2.

~~~
dragonwriter
This assumes that "communication overhead" is proportional to the number of
dyads; I can certainly see why one might suspect that to be the case, but I
certainly don't see that it is implausible that that overhead would expand
faster than that (I don't see an obvious theoretical foundation for literally
"exponential" growth, but I wouldn't reject it out of hand, either. Of course,
you'd probably want a clearer operationalizations of "overhead" to answer that
question.)

------
trhway
a16z is scared of how high stakes got at the game he has helped to escalate
the stakes at. He is getting out priced by new money coming into the Valley,
and the only way he can stay in the game is to increase stakes
(funding/valuations) even more. Unfortunately, at this level of
funding/valuations the start-ups receiving them stop being lean/agile in any
sense and become a fat small BigCo-s which just burn the incoming cash with
obvious end-of-game.

------
owenwil
Can't Marc Andressen just get a blog?

~~~
jkestner
Build a site that turns
[http://site/@twitterhandle](http://site/@twitterhandle) into a blog compiled
of tweets from that Twitter user that start with [0-9]*/ , and maybe he'll
fund it, if you don't spend it all on Herman Miller furniture.

~~~
grinich
[http://pmarcatweetsasblogposts.tumblr.com/](http://pmarcatweetsasblogposts.tumblr.com/)

~~~
jkestner
But Michael, that doesn't scale! Even better:
[http://tweetstorm.io/user/pmarca](http://tweetstorm.io/user/pmarca)

------
ojbyrne
It sure seems to me that if anyone is responsible for excessive valuations,
its a16z.

~~~
fooaway
genius.

------
ritchiea
Can someone tell me what changed? Hasn't this been the climate for a few
years? Are people just now starting to get antsy and feel like things can't
stay this way? Not because of any real metrics but a group shift in
psychology?

Just a few months ago I listened to a principal at a VC firm in NYC talk about
how things aren't going to change anytime soon because a bunch of firms just
raised new funds. Now he was primarily talking about seed rounds and as far as
I can tell the concern about burn rates is targeted more at companies like
Uber & Lyft that have raised nine figures. At the very least there appears to
be a different climate around seed stage investments than there is around big
growth stage C & D & beyond investments. But let's say the big late stage
companies go up in smoke and there is a new reluctance to invest at later
stages. Is there then an entire generation of companies that received seed
funding when the market was hot that are now on quiet death marches? I suppose
that's the disaster scenario.

~~~
jseliger
_Just a few months ago I listened to a principal at a VC firm in NYC talk
about how things aren 't going to change anytime soon because a bunch of firms
just raised new funds_

Timing is famously part of the issue. Alan Greenspan's famous "Irrational
Exuberance" speech occurred in 1996–three to four years before the tech bubble
burst. People started predicting a housing bubble in the 2003 – 2004 timeframe
(Megan McArdle, for one), and if you believed there was a bubble in 2004 you
spent four years with people telling you that you're stupid. With other
crises, like Long-Term Capital Management in 1998, I don't think anyone saw
the bubble coming.

This: [http://www.theatlantic.com/magazine/archive/2008/12/why-
wall...](http://www.theatlantic.com/magazine/archive/2008/12/why-wall-street-
always-blows-it/307147/) is the best popular piece I've read on bubbles, ever,
and explains why they form and why it is probably inevitable that they will
form.

If there is currently a tech bubble—which seems plausible to me—we may find
out tomorrow, next month, a year from now, or four years from now.

~~~
callahad
So, presuming this will all burst at some point... what would you do to
protect yourself? What if you want to stay in software, even if it drastically
shrinks, or wages contract?

How did folks survive the DotCom bust?

~~~
noise
How did we survive? Skills, connections, and some luck. It wasn't that
everything vaporized, just a lot of fluff companies built on VC with no
profitable business model. Just as when times were good a lot of unqualified
people got into the business, when it imploded they got out.

~~~
infectoid
About right. Myself and many others made it through the dotcom boom simply by
working at companies that seemed to have rational business models and were
diverse in their interests. They never pegged their entire existence on one
product or industry.

------
idlewords
"An army of words escorting a corporal of thought"

------
iaw
Every investment vehicle is overvalued which led to a glut in, amongst other
things, venture capital. With more capital available than needed for viable
business models, a lot of founders created innovative new ways to spend
venture capital and soak up the available cash.

What's funny is that a founder of an unprofitable VC backed startup generally
still makes substantially more money than most people. What does it matter if
they're spending a ton? The people who ran Groupon into the ground walked away
and got other jobs, it wasn't their money...

------
cyphunk
Reminder, Andreessen is the same person that says Snowden is a traitor. He
blames Snowden for hurting the tech industry, with no thought of the stake
government institutions may hold in this issue.

------
jcrawfordor
Somebody get this man a blog, stat!

------
otakucode
Technology is still freaking people out. I suppose it's understandable. For
centuries, humanity progressed with just incremental little improvements in
productivity from year to year... then automation technology and computers
show up and everything explodes. Workers are able to produce 10x or 20x or
200x as much in the same time period. Wages were the first to go, immediately
divorcing themselves from any relationship to the amount of value the worker
produces for the company.

This sounds to me like an outgrowth of that. "Can this little bit of software
really be worth THAT much?" When it sparks exponential growth and enables a
company to be active in a global marketplace with a handful of employees, yes,
it absolutely can be. But with a voluntarily blinded eye turned to the actual
value of software, everything looks the same. An app to waste a few hours in
entertainment, or a system to automate part of customer service? Which one can
make a ton of money?

He may be quite right though. I've lost track of how often I read stories
about a startup and then am absolutely gob-smacked at the number of employees
they bring on. They start a project that could be easily and competently
handled by maybe 15 people, and they hire 1500. What most of those people are
doing is anyones guess, probably marketing and design work that should have
been done by contracted remote-work freelancers I suppose. They continue
ignoring everything and pretending like this is 1975, like offices are
something more than a gigantic drain on efficiency with no payoff. And they
plunk themselves down in Silicon Valley, paying $28000/mo to rent an
efficiency apartment above a garage. The actual WORK, the production of value,
seems completely ignored next to the rush of "playing the game."

If there is an invisible hand guiding the market, we will see "companies" as
such evaporate eventually. They no longer offer any value. They used to offer
almost all the value, by solving the problem of distribution, both of work to
workers and product to customers. Thanks to the Internet and software,
distribution is a solved problem. It's nearly worthless because anyone can do
it. All that efficiency that companies could afford while standing between a
worker and an end customer, skimming 90% off of every transaction between
them, is going to become their death.

Hooking workers up with people who need the product of their work will be
handled by software, putting together teams automatically, managing reputation
and portfolios to provide good fits to whoever needs a team of a certain type.
Without companies there to take almost all of the value being exchanged,
workers will find it only necessary to work occasionally. The massive
productivity improvements that have occurred since 1980, like a secretary
going from being able to answer 20 letters a day to handling 300 emails before
lunch, which were collected exclusively by the company owners and upper
management will make it so terribly easy for people to make a decent living
without working much. And when people do work, they'll do it from home because
there's simply no reason to gather them together in the same building which
costs more and lowers their productivity. For work that requires heavy tools
and things of that nature, I expect people will open community workshops where
people can lease workspace and equipment.

The industries where the service actually HAS to be carried out in person have
proven fairly resistant to takeover by small numbers of large corporate
concerns. There are always independent plumbers, hairdressers, and restaurants
everywhere. Thanks to the Internet, essentially everything escapes from this
need for fragile centralization.

Just ignore me, I grew up online in the 1990s...

