
Bill Gurley: startups seeking funding are starting to lower their expectations - mgav
http://www.wsj.com/articles/venture-capitalist-sees-signs-of-caution-in-private-tech-arena-1445366864
======
jluxenberg

      He said low interest rates have encouraged many investors
      to pour capital into private tech investing, fueling high
      valuations. If interest rates “stay at zero, rather than
      seeing a hard correction, you might start seeing volatility.”
    

VCs are investing in private tech companies expecting 10-100x returns on about
20% of their fund. Which works out to at least 20% return per year on a
10-year fund.

It doesn't make sense to me that an investor who would choose a VC fund as
their vehicle would suddenly choose a Treasury note when interest rates go up
1-3%. A VC fund should still outperform that.

~~~
memossy
Low interest rates are forcing asset allocators who have high (7-8%) nominal
return targets into PE/VC

I go over the logic of this here, many seem to miss it:
[https://medium.com/@emad/asset-allocation-not-share-
prices-w...](https://medium.com/@emad/asset-allocation-not-share-prices-will-
drive-vc-funding-723c0591d77c)

(my background: hedge fund manager/strategist with clients like those
mentioned in article)

~~~
Dwolb
In your experience is the risk of the real money managers unconstrained? It
seems odd these guys have to hit these rates of return, no matter what.

This same type of behavioral nuance comes up when looking at low vol
strategies: empirically, low vol outperforms per unit of risk than high vol
due to managers seeking high rates of return in combination with being unable
to leverage.

~~~
memossy
Yes, the returns are set due to actuarial liabilities to repay the pensioners.
Only other option is to hugely increase premiums for current workers & most of
these funds are already hugely underfunded.

As they follow Swensen's endowment approach risk theoretically diminishes as
they "diversify".

------
7Figures2Commas
> Mr. Gurley said the root of many of Silicon Valley’s problems is a
> resistance to taking companies public. By staying private for longer
> periods, startups have eluded the scrutiny of public-market investors that
> is needed to help companies mature and become sustainable, he said.

A lot of Silicon Valley's high-flyers are not yet great IPO candidates. Of
those that could be taken public, many would face much lower valuations in the
public markets, forcing them to raise less capital or sell more of themselves
to raise equivalent amounts of capital to what they're raising in the private
market.

As such, one could argue that the startups have been acting completely
rationally by taking advantage of the willingness in the private markets to
invest at exorbitant valuations. Sure, the late stage valuations are all
engineered and companies will pay a hefty price if they can't deliver the
returns they're increasingly having to promise late-stage investors, but I
think a lot of these startups have made a calculated decision to raise as much
capital as they can selling the least amount of equity, and worry about the
consequences later.

It's not surprising the traditional VCs aren't thrilled with this.

~~~
themartorana
This seems so odd to me. It's like working the odds to stay as VC-funded as
possible and basically avoid growing up - and most of them must understand
that profitability simply doesn't exist in their model (before they pivot to
being another advertising billboard).

The first step is admitting you have a problem, and as long as people keep
giving you money, there's no need to admit anything.

Heck. As long as people keep giving you money, is there really a need to make
money in another way?

~~~
rl3
The flip side of that coin is that some companies, under pressure to "grow
up", become misguided—destroying their core product and user base in the
process.

I would argue some business models aren't necessarily suited to generating
significant or otherwise self-sustaining levels of revenue. However, that
doesn't preclude these businesses from being incredibly valuable to larger,
more established corporations with sizable cash reserves.

Of course, publicly admitting you're building for an exit is tantamount to
suicide in the present climate, so it's no wonder the current situation is
what it is.

~~~
InvisibleCities
>The flip side of that coin is that some companies, under pressure to "grow
up", become misguided—destroying their core product and user base in the
process.

If your core "product" is massively unprofitable, it's not really a product at
all.

~~~
rl3
> _If your core "product" is massively unprofitable, it's not really a product
> at all._

Tell that to Instagram or Snapchat.

~~~
austenallred
> Tell that to Instagram or Snapchat.

This is no longer true for Instagram. It should generate $595 million in ad
revenue this year, and is expected to reach $2.81 Billion in annual ad revenue
in 2017. (Remember: this company was purchased for $1 Billion.)

So, to recap, Instagram was "massively unprofitable" for five years, after
which it started bringing in revenue most easily measured billions.

In other words the notion that a product isn't "a product" until it's
profitable is farcical.

------
grandalf
Easy money is not necessarily all that it seems: It drives salaries up and
creates an arms race for scarce talent that is crippling to many startups. It
also creates a hype/hockeystick contest which is also largely unhelpful.

~~~
rahimnathwani
But if there were no easy money then those startups would have less money to
spend on salaries as well. If we believe that easy money benefits established
companies more than it does startups (not sure) or funded startups more than
bootstrapped ones (almost certainly) then the net effect might be bad.

But an 'arms race for scarce talent' probably benefits a large proportion of
the readers here, and harms a much smaller proportion.

~~~
grandalf
It surely does benefit many HN readers, but overall the culture is harmed by
so many people jumping into software development just because of the money. It
has also lured many who would have chosen banking, etc.

And in spite of the better developer salaries, many startups can still not
afford to let developers be makers and creators, and must instead focus on
deadlines and other business metrics driven by fundraising.

If the runway for startups were longer, then longer-term thinking and strategy
would be more prevalent. Easy money reduces the penalty of a failed startup,
and makes it easier for anyone involved (including investors) to jump ship.

Since a startup is a stance about the future, this constrains startups who can
get funding to those that are able to show traction after about a year, since
there is little incentive to continue beyond that, and even a big series A
won't pay for much talent in the valley anymore.

I think there is just an inevitable tension between investment as a visionary
stance about the future vs investment as fuel for a machine that is hungry to
grow. Both are essential aspects of the startup ecosystem, but inflated prices
and easy money benefits the growth stage startup much more by crowding out the
kind of environment needed for ambitious future stuff.

~~~
rahimnathwani
"but overall the culture is harmed by so many people jumping into software
development just because of the money. It has also lured many who would have
chosen banking, etc."

You've got this backwards. People who would have chosen banking are the ones
who are attracted 'just because of the money'. IMO most people who become
developers do so because they're interested in software/tech, but most people
who become bankers do so mainly/exclusively because of the money (and
perception of prestige).

"...and must instead focus on deadlines and other business metrics driven by
fundraising."

This is not an issue for bootstrapped startups. For funded/fundable startups,
being beholden to funding cycles is the flip side of getting access to
capital.

------
idibidiart
Doom and Gloom. Tech shorting cycle has been initiated by the Borg.

~~~
taneq
Gotta push the market down before the next round of buy-low-sell-high!

------
nostromo
full article:
[https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&c...](https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB8QqQIwAGoVChMIxvS3_-7UyAIVGOJjCh3soQ5K&url=http%3A%2F%2Fwww.wsj.com%2Farticles%2Fventure-
capitalist-sees-signs-of-caution-in-private-tech-
arena-1445366864&usg=AFQjCNGo0ySDopngKnDdSt1IPgfmL00_XQ)

~~~
Mayzie
Thank you! Got hit with the subscription message.

~~~
kzahel
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