
Startups Once Showered with Cash Now Have to Work for It - marban
http://www.nytimes.com/2016/05/21/technology/start-ups-once-showered-with-cash-now-have-to-work-for-it.html
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swingbridge
This is generally a good sign for the market. Not so good for bloated startups
without a viable business model or cash positive finances (including probably
the majority of the unicorns out there at the moment). For such firms it's
about to be a bloodbath, but hard facts are that there's a lot of junk out
there that got funded in loftier times and now needs to be flushed out of the
system.

For lean startups with a strong business model and profitability, or a clear
and viable path to profitability, washing out the junk startups will only
help.

~~~
aswanson
Yup, same as it ever was. I remember back in 2001 saying to myself, "Good, all
the bullshit is flushed out. Anything that survives this is real and should be
invested in." Too bad I didnt put a few thousand into YHOO and AMZN back then:
[http://finance.yahoo.com/q/hp?s=AMZN&a=04&b=16&c=1997&d=04&e...](http://finance.yahoo.com/q/hp?s=AMZN&a=04&b=16&c=1997&d=04&e=21&f=2002&g=d)

~~~
paulpauper
AMZN and GOOG would have been great investments and still are

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paulpauper
I know but it was founded in 1998 and survived.

~~~
lazaroclapp
Sure, but what he means is most normal people wouldn't have been able to
invest in GOOG then.

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paulpauper
Unlike the 90s, It has never been easy to raise $, so this belief that
companies are being showered with cash indiscriminately is wrong. Ycombinator
is inundated with applications, for a modest amount of money at a fairly large
chunk of equity, suggesting a market that has much more supply than demand.
Many start-ups get much less than a million. What we're instead seeing is a
flight to quality: the cream of the crop getting showered with cash but
everything else fighting for scraps.

~~~
Rylinks
Ycombinator is a poor example. The modest amount of money is not the important
part of the program.

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meddlepal
It's just a pendulum. It wings both ways and right now it's swinging towards
startup ideas and investment where the companies have solid business models
rather than hopes and dreams.

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kordless
> “Investors have materially more time to do diligence than before,” said Ben
> Ling, a partner at venture capital firm Khosla Ventures.

In other words, "We're getting less deals to look at, so we're looking at the
ones we have more closely."

~~~
GCA10
Actually, it's the VCs' fear map that changes most radically. (Hire enough
associates, and you can call 20 customers/prospects/former associates in an
afternoon.)

In boom times, VCs cut short their due diligence because if they dawdle or
seem too skeptical, they won't get to be in the next Theranos round.

In jittery times, VCs check everything because otherwise they will be in the
next Theranos round.

I saw an echo of this with mortgage appraisals. In the housing bubble, we got
refinanced one time with an appraisal that didn't involve stepping inside the
house. The appraiser just took two photos from the street and didn't even ask
me if the home was habitable.

After the housing finance crack-up, the next appraiser not only walked through
every room, he clicked dozens of photos of everything from our smoke detectors
to the straps holding on the hot-water heater. It was almost like having a
crime-scene photographer pay us a visit.

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Aelinsaar
Good? I don't wish anyone working hardships, but being "Showered with cash"
has created plenty of problems, and there is nothing at all wrong with working
for it.

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hammock
How many startups are "underwater" now- they are unable to raise additional
funding at their current/previous valuation?

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JBReefer
Also called a "down round"

~~~
bsbechtel
Which means the most recent investor's investment is underwater, but not
necessarily the company as a whole.

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endymi0n
That and usually all employees' stock options when talking liquidation
preferences, with some of them knowing and some not. At that point prepare for
talent bleed until either some very good plans and news or a long, slow death.

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blazespin
tldr, The fed raised the funds rate.

~~~
Ankaios
That, plus it seems like in the last couple of years many people got more
careful about estimating the values of privately-held companies. A $100
million investment for 10% of a company in its latest round doesn't indicate
that it's worth $1 billion if there are liquidation preferences or other
similar favorable terms.

I might be misreading things, but I think that has made people more
conservative about what scales of exits are eventually attainable.

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carsongross
This is bad news for bootstrapped startups.

If cash stops being a cocaine-tier obsession for these guys, we might have to
compete with them. Sad.

~~~
manigandham
This is great news for bootstrapped companies which are likely used to running
lean, might actually be profitable, and can outrun and outlast an inflated
competitor.

Major cashflow changes tend to be disastrous for most companies, it's just not
that easy to realign everything. If you're up against a competitor that has
raised a lot easy money and now needs to show results, you should be happy to
see this.

~~~
x0x0
Perhaps. Or you can be stuck competing with a company that is pissing money
into a hole and offering what appears to be a similar product for free. How
are they ever going to become a functioning business w/ revenue > expenses?
Underwear gnomes!

Been there, done that, it sucked.

~~~
infinite8s
That's what is happening now. Once those companies run out if easy money
they'll be forced to actually compete on value instead of just handing product
away. Which is great news for bootstrapped companies that are used to
functioning without bleeding cash.

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alecbaldwinlol
Money that comes easily, goes easily.

Where did the VCs get the money from [1][2]? If they didn't break a sweat,
they won't hesitate to throw it around without asking questions about
profitability.

EDIT: People who are downvoting are trying to hide the truth of the market,
whether it's a bubble or not, this is the source of the money and in turn,
your livelihood ;)

[1] Probably from banks who got it from the gov't who got it for cheap, right?

[2] [http://agilevc.com/blog/2014/10/29/where-do-venture-
capital-...](http://agilevc.com/blog/2014/10/29/where-do-venture-capital-
dollars-actually-come-from/)

~~~
epistasis
VC funds getting money from banks? I've not heard of that and your link
doesn't support it. Unless the government connection you're trying to assert
is that low interest rates drove more money into VC funds in order to seek
higher returns.

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merrywhether
> Unless the government connection you're trying to assert is that low
> interest rates drove more money into VC funds in order to seek higher
> returns.

This is a constantly overlooked factor in what's been driving the VC climate
for the past few years. "Cheap" money (in the form of low interest rates)
pushes more money into riskier positions, and the VCs have to give that money
to someone. It's no coincidence that the correction is coming at the same time
as interest rates finally rising again.

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SilasX
I get the theory there but it's never seemed realistic to me. What VC would
actually change their mind about pulling the trigger on an equity by because
of a fractional point change in the risk free rate? It just doesn't make
sense.

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nostrademons
It's not the individual VC that changes their mind. The LP that funds the VC
has to work harder for returns when money is cheap. They're incentivized to
put more money into potentially higher-yielding investments (or even just keep
the same asset allocation, but a bigger pool = more money going into VC at the
same allocation). That in turn means they're incentivized to fund more
marginal VC firms, and then it's the marginal VC firms that fund the marginal
startups.

Good VCs usually maintain the same investing standards in good times and bad.
But during boom times, there are _more_ VCs, and many of the newcomers aren't
particularly good at it.

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SilasX
That's my point: a change from 3 to 3.25% in the prime rate doesn't suddenly
make CoolApprfy into a good vs a bad investment. The need to earn higher
returns on cash doesn't make CoolApprfy more likely to go big and pay a
return; reality doesn't work like that. If you're investing in CoolApprfy to
"win back" some income streams, you're doing it for the (very) wrong reasons.

~~~
nostrademons
My point is that there's a wide variety of _beliefs_ as to whether CoolApprfy
is a good company. To get funded, CoolApprfy only needs to identify one person
who believes it is.

When money is cheap, it is much more likely that they will be able to find
someone controlling money who believes it is. When money is expensive, the
intersection of [people who have money] x [people who believe CoolApprfy is a
good company] is much smaller. For companies that _are_ actually good
companies, this intersection will likely (although not always; good companies
fail to get funded in challenging fundraising climates all the time) still be
non-zero. For companies that are bad companies, it's much more likely they
will be unable to find anyone who believes they are good companies.

Markets are made up as individuals, but they don't behave like individuals. An
effect does not have to be observable on the individual level for it to be
observable in the behavior of the market as a whole.

~~~
SilasX
That would still suggest that the set of "VC investments that depend on Fed
policy" is the same as the set of "VC investments that will sputter out
anyway" (module the fortuitous luck factor).

