I often wonder how much of Facebook's revenue (for example) consists of valley startups trying to micro-target indifferent consumers. Pretty much any time I look into a VC-funded consumer company, I find that they're spending money on Facebook ads, Google ads, mobile ads...you name it. When that money dries up, the "ecosystem" of ad services takes a huge hit.
I'm sure there are consumer companies that have organic growth, but it's hard to tell when there's so much money sloshing around. One King's Lane, for example...they were buying ads like crazy. At their peak, they had big, unicorn-y revenue. They're probably going to sell for a fraction of their total investment, and have never been profitable .
Meanwhile, the theoretical market cap of all current private-market unicorns ($300-$500Bn, depending on the source) is something like 10-20x the market cap of every IPO issued in 2015 (~$30Bn) . It's pretty clear that the economic status of San Francisco is at least correlated to the huge influx of VC money since 2012, and that a lot of the resulting value is creative storytelling. I don't see why people are so confident in a soft landing if that same money goes away.
> I often wonder how much of Facebook's revenue (for example) consists of valley startups trying to micro-target indifferent consumers.
During the dot-com boom, a large fraction of Yahoo's revenue was coming from startups, who were using their VC money to pay exorbitant amounts for partnerships with Yahoo. You can guess what happened at Yahoo when the party ended in 2000 and the money men went back to NYC.
There's this great segment in eDreams where the founder of Kozmo.com flies to Seattle to announce a partnership with Starbucks, wherein Starbucks gave them a small amount of money, and they committed to paying Starbucks $30 million a year over five years to put their boxes in Starbucks' stores. Kozmo pitched this as an investment (personal aside: lol), and Starbucks announced that this would increase earnings by five cents a share for fiscal 2001 . Kozmo was, of course, dead by early 2001.
It's painful to watch this now, but it really seems like the same things are happening again. The flow of money is just happening in real time, and not being projected forward on a five-year basis and booked as current revenue. (That happens at the unicorn stage instead, where we seem to have made up fun new ways of booking future recurring revenue as present-day revenue growth, and traditional accounting rules do not apply.)
Indeed, Starbucks pulled almost the exact same thing in 2012 with Square:
This partner overall sounds better for sbux.
Cisco for example, in the 4th quarter of 2000, grew sales by 61% (55% for the year). Famously they had basically accelerated growth every quarter for a couple of years. The projections had gotten almost insane, about how big Cisco was supposed to be in just a few more years.
The money quote from August 2000:
"We see no indications in the marketplace that the radical Internet business transformation in practices like customer service, supply-chain management, employee training, empowerment, and e-commerce that is taking place around the world today is slowing -- in fact, we believe it is accelerating globally," said [then CEO] Chambers.
WeWork is in my mind, a good example of a company that will suffer once their customer base burns through all of their VC money.
For example, service discovery is still service discovery. You still have, say, a hundred machines running the listeners API. Are you going to keep a manual tally of that? Or better to just start consul client from the ansible/chef provisioner, and let "dns" handle the load balancing. You can implement "connection draining" by downing the health check url before going offline on a node. Just one example, but yea, there's a lot of ease and maturity in the new services way of doing things now.
Those big players spend so much money. If the funding river dried up then sure, sooner if there smaller ad-tech might be at risk, but the big dollars will stay put.
If "regional effects" follow a power law this isn't true. We know valuation does, so why not these effects?
who employees more people: FB or the countless "on the come" app cos /free-to-play game cos that are paying FB $10 per app install?
VC money is sucked up from around the US (via LP's as foundations, etc) and deposited in SF for use in Payroll for companies that are loosing money, and transfering VC money to FB, that inflates FB valuation, a valuation that VC's feed back into their models of expected returns on investment, there by increasing investment. In this way the positive feed back loop is completed.... and $3,500 per mo 1-Bedrooms are created as a side effect ;)
the payroll base of a profitable company is constrained by its real revenue.... the payroll base of an unprofitable company is not restrained by its revenue.
I am sure there are many unicorns that are overhyped and are going to fail.
The 300Bn is same as market cap of Facebook. If one invested in every one of Unicorns at current market, I think its most likely they will make profit on the investment.
Don't forget everyone thought FB was Way over valued when MSFT invest at 15Bn valuation.
So when the tide goes out....
There is a knock on effect too in where the risks aren't entirely understood. For example think about mobile/web analytics companies. Tons of their revenue comes from other unprofitable companies that are propped up by VC cash. Even if the web analytics company is doing well in their own right there is a huge hidden risk with the business model of such companies since a big chunk of their revenue comes startups propped up elsewhere with VC cash and that cash is about about to start drying up really quickly. In other words a lot of companies that think they are doing well are in reality just also propped up with VC cash indirectly.
In short, the tide is going out and we're about to see who's been swimming naked.
We are going into a 2008-style financial crisis, with the Fed already zero bound and China heading into a deflationary collapse. The banks, at least, have better balance sheets on paper this time around, but the carnage is going to be breathtaking.
How many cycles of "things are amazing -> a new, permanent plateau -> I see no evidence of a bubble -> soft landing for sure -> no one could have seen this coming" do we have to go through, folks?
The business cycle remains a thing.
"It is in the nature of markets to move money from the many to the few."
The shorter version shows up in the writings of many stock traders. "The markets are designed to take money from the many and distribute it to the few.", is from Bruce Babcock. "There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses." is from William Eckhardt. "The purpose of the markets is to redistribute wealth from the many to the few" is from Peter Brandt.
Marx wrote in an era when capital for enterprises was hard to accumulate. Now we have a capital glut, but a demand shortage.
Economic policy-making hasn't caught up to this yet.
And why would the author assume, based on one quarter worth of data, that any sort of landing of any kind has occurred? Surely you'd want to let the change of direction play out a little longer before making any type of claims about whether there's a meaningful change and at what speed it's happening.
They're really whole different worlds, perhaps best separated as private vs public companies, and it's strange that we haven't clearly made a verbal distinction between the two.
Seems like we might see a shift away from a few "unicorns" to an ecosystem with more smaller to medium sized companies trying more things. That's probably good, and is probably more likely to produce more Googles and Facebooks than betting the entire farm on a few dozen over-inflated ventures.
Of course the future is also likely to be more geographically diverse. Silicon Valley might no longer just be in Silicon Valley. That's also a good thing.
Maybe we'll no longer have to pay $3000/mo for a 1br.
That's not true yet, not by a long shot, but I hope we get there soon.
But maybe the hubs can. Perhaps SV can pass the torch to Seattle?
Spending VC money on "advertising", or attempting to generate the same "buzz" for free on social media probably amounts to about the same thing...
Is the "circus" (startup) being advertised to investors the "real deal"...ah, the risk of the bet...will it scale, or will it fail...?
It seems that the savvy are becoming a bit wary of relying on the hype of an Advance Man (advertising)...when marketing is required to establish a product as opposed to the product establishing itself, through proven utility, the ground is certainly shaky...
Can someone ELI5 what a "roughly similar basis" might be? How did they arrive at this number?
"What, me worry?"
It's way too early in the impending downturn to draw conclusions like this.