Ask HN: How do you like my file sharing app?
Ask HN: How do you like my social app for niche <x>?
Ask HN: How do you like my twitter app?
Ask HN: How do you like my facebook app?
Ask HN: How do you like my iphone app?
Ask HN: How do you like my facebook app that writes twitter apps?
Ask HN: How do you like my game?
Ask HN: How do you like my photo sharing app?
Ask HN: How do you like my video sharing app?
Ask HN: How do I monetize my free flashcard app?
Ask HN: How do you like my app that helps other hackers to do <x>?
Ask HN: How do I get traffic to my freemium app?
Ask HN: How do I get angels/VCs interested?
Ask HN: Look what I wrote this weekend!
Ask HN: Look what I wrote in one night!
Ask HN: Look what I wrote in 7 seconds!
Customer 1: How can we sell through Amazon.com?
Customer 2: How can we reduce inventory by $300 million?
Customer 3: How can we increase conversion from 2% to 4%?
Customer 4: How can we use software to reduce energy costs?
Customer 5: How can we migrate one app into another?
Customer 6: How can we get our phones to talk to our legacy apps?
Customer 7: How can we take orders through the internet?
Customer 8: How can we get our software package to do <x>?
Customer 9: How can we reduce credit card fraud?
Customer 10: How can we increase SEO effectiveness?
Customer 11: How can we connect fulfillment and ecommerce?
Customer 12: How can we increase revenue?
Customers 13-200: How can we increase profitability?
Women have money. Go take it. Nobody else wants it in tech. (Well, aside from Groupon, Zynga, and a few other companies that missed the opportunity to make an iPhone app that you could wiggle to share photos.)
What do they want?!? I could never figure that one out.
So, think culture development. Talk To Customers. (And don't try to flirt. Look at their faces. Write notes.) Talk to them both individually and in groups.
Have a partner actually in the demographic.
I imagine a lot of people are in the same boat. It's hard to talk to people in a way that reveals product opportunities. That's why they make things for the only people who will actually tell them what they want — themselves.
It's strange so little companies focus on them
Any ad you see that you don't understand, any product you think is irrelevant, someone must be buying it or it wouldn't exist. So, pause for a second and think, this is not for me, who is it for?
> someone must be buying it or it wouldn't exist
(actually this does seem to work in the Harlequin romance corner of publishing - if you can apply this to a startup, more power to you)
Also, your joke is not funny.
Yet very few startups seem to target these areas.
We took a product into a badly serviced industry and were wildly profitable within about a year on minimal funding. I always worry that there is a growing amount of speculation on "great teams"/social media and less focus on creating useful stuff that companies/people want/need (and, damn, there is a lot of it).
My boss always moans when I talk to him about startups and VC's, he usually says "if you give me $100,000 and 6 months I could come out with at least 5 profitable pieces of software and sales to return your investment by the end of the next year".
Perhaps you're seeing an artifact. Generally the startups you hear about on HN and elsewhere are trying to generate 'buzz' and 'raise awareness' to get to 'closing a funding round.'
As you yourself demonstrate when one starts a company to solve a problem for which there are already customers in pain (and thus willing to buy the product), they can generally, if they execute well, get started and get profitable early on and then grow organically by expanding out from their customer base to adjacent markets. All without any big funding round or 'buzz gathering.'
Solving known problems well, gets you a steady paycheck, its not 'sexy' and its not usually 'disruptive' and it is very very rarely even brought up in places like this.
Because the problems are known it also means are are usually several players trying to get to the same dollars and margins are limited right from the start as people compete to be the chosen solution out of a variety of solutions.
Disruptive changes on the other hand, take a market with a reasonable capital flow and shift it all to a single player. Depending on how long that shift lasts, the return on investment for that player is 10, 100, even 1000 times higher.
The other problem here is that if you are a VC fund you can't leave the money you've raised in T-bills forever, you really really do need to invest it. So there is pressure to put it out there and get it working for you, and if its been getting 2 - 3% in T-bills and your clients were expecting 20 - 30% then the longer its been sitting the bigger a pop you want to spend it on. A very strange but measurable forcing function.
Dealing with just the development side of it in my day job, no way does dealing with them on my own or in a small startup team appeal.
In fact; as hackers we are actually at an advantage selling to corporates, so long as you "get" the process, because they tend to be "attuned" to the sort of tactics employed by sales types. Often you can cut through that using feigned ignorance and a little simple social engineering :)
And at the end of the day... once you have a little traction hiring a dedicated sales guy is easy :) Many startups do exactly that when completing the first major round.
The few things that spring to mind:
Be polite but persistent
Procurement people at corporates are used to really pushy sales people; so if you barely make any effort you won't get through at all :)
Judge who you are talking too
Most people you talk to won't be able to give you a "yes", get past them as fast as you can (I usually just ask straight out to speak to their superior/boss etc.), they are there mostly as a filter. Also consider what sort of firm you're calling - in a 50+ person company it is likely to be a specific department who buy things (even if it is just an individual), below that the person probably has a different day-to-day job. I've had a lot of success, when talking to smaller firms, with the line "lets just drop all the corporate nonsense, we're both small firms and there is no need for me to make this the normal pain in the neck".
Forget all the marketing nonsense
You'll see a lot of "marketing best practices"; I mostly ignore them, they are designed for a company with a number of sales people to normalise the sales routines. You're hacking the sales routine, so take it naturally.
I particularly advise avoiding the template emails that you stick a name in front of... keep the templated stuff to short paragraphs in your emails & material you attach (i.e. PDF's) and try to write an honest "personal" note.
Honesty does get noticed BTW, it can set you apart from the usual inundation of marketing they get.
Be open to adaption, but have a firm limit
I once committed us to a normal sale but "with a few tweaks", it took me the best part of a month to get the tweaks in place. :) Accomodating companies requirements gets you a good name, but really consider if it is worthwhile, and be happy to say no.
Be prepared to walk away
You can't sell every time. And if you are desperate to sell then they can take advantage of it! Either by getting impractical modifications (see above point) or drumming down your price. Either that or they are just not interested, and you end up sounding desperate and silly.
Invest in CRM
Biggest piece of advice IMO; it is so so so so so easy to forget who you contacted & about what. It might take you weeks to find the right person to talk to at a firm, but in 6 months when you try to upsell them the new product you don't want to have to do all that work again :) Plus I had a silly incident a while back where I kept emailing the same introductory email to a poor CEO; I think he got it about 86 times before calling to ask me to stop :)
Call the CEO
Doesn't work all the time, but sometimes (particularly in smaller firms) you can get things moving (and seal a sale) by calling the CEO. It takes a bit of balls and a fast pitch (or social engineering) to stop them hanging up :)
My favourite line was "X suggested I call you about this product, Y, we're selling you so you can have an idea of how it will improve your business"
Where X is someone in the middle of the food chain who has, at some point, said "you need to talk to my boss". :)
There are loads of industries/areas to disrupt, a quick list from the top of my head:
employment databases,auditing,ISO,internal communications,document control,security control,anything government,caterers (booking systems, big area)
There's a disconnect, but it's in the social web world, not just HN. And I would say HNers are trying to capitalize on the hype.
I think the reason you see those kind of posts is that those kind of applications are low-hanging fruit. The development of Yet Another File-Sharing App or Social Media Service can be accomplished by anyone with a "Learn Rails In 21 Days" book and a credit card.
Companies that are also getting tons of funding right now are biotechnology and solar energy startups, but I have never seen anything along the lines of a "Ask HN: Review my research on getting 3.3% more current per solar flux unit by doping gallium with boron" post, despite the fact that such an accomplishment would likely garner extremely good investment and/or business prospects.
Don't get me wrong: it's cool to be an awesome hacker... but if you don't know about anything outside of hacking.. chances are some neck-beard somewhere has already solved all of the problems of which you are aware.
I'm saving that quote for later use.
A very good friend of mine worked in IT for like 10 yrs. He was quite good programmer, CTO etc.
One day he decided to radically change his carrer and opened... 5 Subways in Eastern Europe (he is originally from there). FFW 2 yrs => his restaurants making him $400-500k/yr, he spends zero time managing them and just focused on opening new ones.
His lesson: IT industry has one of the hardest competition rates cause all super-smart geeks are competing on relatively small marktets. Other industries competition (esp in emerging markets) is seriously overrated.
Another example - my very stupid app for selling video files just crossed $1000/day mark in sales. Ppl just need simple tools to get things done.
It is, but there are a few of us around. I'm working on an enterprise software startup, focused on information retrieval and knowledge management. Pretty far removed from the typical HN "location aware, social photo-sharing with gamification" stuff, but I think it's actually more interesting. But that's just me...
That's a very difficult thing for a 23 year old hacker to get exposure to. In order to get that job in the first place, you'd need a mechanical engineering degree, then spend several years at the plant.
On the flip side, we've just started to place ads on our sites via google's adsense, and we're getting > $15 RPM already.
B2B is where the easier money is, in my opinion. (That also applies to women-focused companies).
I have a couple ideas for B2B type systems, my real problems are how to market and sell those applications. I guess I don't really have knowledge in how companies adopt technology. It seems easier (although less profitable) to sell to individuals since it's one person's decision process, not an entire organization.
Most geeks that I know aren't trying to build apps that make money, they're trying to build apps that are fun, and that their friends think are fun.
If you offered me two choices
A) Make a million dollars a year doing something you hate that nobody will know about or care about
B) Make no money doing something you love that your friends think is cool.
I will almost always choose B, and I think most hackers will also always choose B. I would go as far as saying that choosing B is one of the defining characteristics of a hacker.
I got into computers because it was fun, not because I saw dollar signs at the end of it. Writing a video sharing app is a lot more fun than writing a software that reduces credit card fraud.
A) Make a million dollars a year doing something you love that nobody will know about or care about OR
B) Make no money doing something you hate that your friends think is cool?
If the question that you're trying to ask is, with all other things being equal, would you:
A) Make a million dollars a year doing something that none of your friends would know about or care about OR
B) Make no money doing something that your friends think is cool.
I would choose A every time. Also I'm not sure how you can say that writing a video sharing application is a lot more fun that writing software that reduces credit card fraud without knowing about the techniques used in the particular pieces of software. I'm interested in algorithms and neat techniques, not sharing videos or credit card fraud.
I'm still vain enough to think I'm a hacker, though:)
A) Make a million dollars a year doing something you hate that nobody will know about or care about
B) Make no money doing something you love that your friends think is cool.
I will almost always choose B, and I think most hackers will also always choose B.
I would go as far as saying that choosing B is one of the defining characteristics of a hacker.
Doing cool things, things "friend think it is cool" is nice, but you cannot go to the grocery with, nor pay your bills with it, right?
Besides, that cool thing, will soon loose it glory to something cooler unless it will be maintained and evolved. Money is a great way having one stick to a project and keep it up and running.
But seriously, I understand that option A almost never pays that well and is usually not guaranteed. For example, working for stock options that you'll most likely never see vest.
Also option B is not guaranteed to make no money either, and at least you like option B. So, I'd take B too.
Some superficial examples--Zynga, advertisements for female facial creams, etc. But I feel it goes much deeper. It's like an emergent phenomenon, a parasitic infliction upon our society. Imagine where those dollars and energies and attentions could go.
The article stated that a group of college (MBA perhaps) students was surveyed and asked "would you work for the highest paying salary once you graduate?", or "would you work for what you want to do and enjoy after you leave college."
The answers were compared against reality and the respondents life after a few years - It showed that whoever chose to do what they were interested in were more successful in monetary and career terms than people who chose to follow just the cash.
It does have further support, in that we generally value passion and drive as key predictors of success over someones ability to choose better paying jobs.
I knew a guy who wrote software to reduce credit card fraud and he thought it was great fun with lots cool statistical analysis and data mining problems to play with. And personally I think that sounds a lot more fun than writing video sharing apps.
You're right about the triteness of those Ask HN examples, but let's not go so far as to suggest that we should all be building for businesses, and only businesses.
A1) Well, this [file sharing/social/twitter/facebook/iphone/game/photo/video] application sure has people's attention. Their developers are wicked smart and have a plan for monetization by utilizing the geo/demographic/taste data of their customers to make it easier for you, the b2c business to target them with advertisements.
Q2) How can we increase revenue?
A2) See A1.
Q3) How can we increase profitability?
A3) See A1.
See also: why should anyone publish this magazine, TV show, blog?
This is not so say that innovative and "cool" apps don't have a place - they do. But it is to say that there's something concrete about making a product people need that solves a basic human problem. “My damn phone won’t take a sepia toned picture,” is not a basic human problem. In terms of a bubble, and more so, in terms of revenue – making a product someone needs assures revenue and harkens back to the old timey adage.
So is there a bubble? Yeah. Can it be quelled by a return to making products that help people with basic needs? Yeah. Do I want a camera app with sepia tone? Sure. Do I need it? No.
It's not boring if you want to become very wealthy. For reference, see jasonlbaptiste's "How to become a millionaire in 3 years?" post:
These bits in particular:
Charge for something- Building a consumer property dependent upon advertising has easily made many millionaires, but it isn’t the surest path. It takes a lot of time and scale, which due to cashflow issues will require large outside investment probably before you are a millionaire. Build something that you can charge for. That’s how business has worked for thousands of years prior to the 1990s.
Make Sure You’re Robbing A Bank- When Willie Sutton was asked why he robbed banks, he said because that’s where the money is (Thanks to edw519 for this phrase). Make sure whatever you’re going after is where the money actually is ie- a customer that will pay you. Consumer markets are tough, especially with web based products. People expect everything to be free. Businesses are usually your best bet.
If you buy into that, then reading about customers (and business customers in particular) is VERY interesting.
I'm wondering if anyone has explored the outsourcing of inventory? In other words, would it be viable to establish a giant warehouse of all things that people could use as their own personal warehouse... like co-locating a server.
There are reasons some companies do well at this. A lot of it has to do with setting expectations, and giving accurate information about pricing and availability.
Company B may only ever sell to a handful of other "retailers".
I can't speak for all the other companies out there.
A bubble is all-pervasive and extreme. It represents a systematic investment mania where everything becomes surreal. People sell vast tracts of land for a prized tulip. Junk companies with nothing to offer but a vague concept about revolutionizing how this or that will be done owing to some new phenomenon such as the internet make serial stock offerings to the public and get hundreds of millions for a modest percent of their unproven company. Lenders pile on with countless real estate loans to unqualified borrowers secure in the belief that what are really worthless loans will make them huge profits because they can be packaged and disposed of through artificial securitized instruments and because housing prices will continue rise broadly for endless periods. All this begins to occur in endless and ever-expanding streams until, in the end, large numbers of people are sucked into the vortex.
In such cases, broad markets affecting an entire society are sent into a frenzy by which average people start both to get rich quick and to want to get rich quick. Large numbers of people leap in, therefore, in the hope of making fast money and abandon their common sense in the process. And when things go bust, this has a major systemic effect on the broader economy. A stock market that had reached stratospheric heights loses 70% of its value. A real estate market that had become so pricey as to make housing unaffordable for average buyers plummets to the depths, taking down people's savings en masse.
The current phenomenon represented by high valuations in parts of the startup world is more transient and limited. It has not affected the broader society at all, only an insular investment community. If it fell apart today in toto, it would leave a trail of victims within the VC and angel communities but would be felt scarcely at all in the broader economy, or at least would likely have no systemic impact.
Viewed from the standpoint of the broader society, I think what we are looking at here is a speculative frenzy affecting a comparatively narrow asset class. The prices of some startups have increased considerably. The prices of companies generally in the business world remain moderate, if not depressed. Is it a pricing frenzy within a particular segment of an asset class? Probably. Is it a bubble? No. Or at least not by historic definitions.
Again, I wouldn't disagree with a single specific point made in this piece, and the author as usual makes some astute observations. I would disagree about the terminology, though, and would say that we should reserve use of the term "bubble" for the sorts of massively dislocating events that it historically has come to represent.
The question I've been asking for a while now: what's the next great financial innovation that's going to revolutionize access to some market to which average people don't currently have easy access?
I want to be on the upside of the bubble.
My boring answer has always been: commodities. Yeah, ordinary people can buy and sell precious metals now. But wouldn't it be more convenient if you could just directly buy a nicely packaged product online (with no service premium) that represents whatever arbitrary commodity or commodity future (or whatever it is you trade) you desire? I'm sure this would do wonders for oil prices. All those gold trading services that advertise on cable seem to be a niche example of the phenomenon.
However, I just came across something which may offer a more interesting answer: bitcoin, or more generally, currency. I going by what I was just reading here:
I don't fully understand what bitcoin is. But I'm sure that will only be part of its charm if it ever goes mainstream. At any rate, just an idea.
I think the overall point is that what we're currently engaged in isn't sustainable and the contraction is going to be painful when it hits in 6 months to a year once all the cheap money dries up. There's a bubble within our asset class.
My question is: how does one short this phenomena?
This is what struck me when I heard about the deal. Color is cobbling together existing technologies and not creating anything new. This deal pushed me into the "There is a Bubble" group. They had better have an ace up their sleeve.
from the perspective of 'can these guys spin a $40M investment into something that is worth more?', the answer is probably yes (probably enough to worth investing in)
it isn't a bubble because this is still VC money, not crazy mom and pop shooting at the NASDAQ money. during the bubble this company would have already IPO'd and been worth $5B, and you parents would have called you up to ask about it.
Is there a $40m+ market for a group photo album app? This app is free, so they'll need a great monetization model even if the market is there.
Color, on the other hand, if they at least solve the problem of figuring out where somebody is I can see someone paying 200M+ for that (fb or google)
who knows, they might end up powering location for foursquare, facebook, and google etc. in 3 years time as the new GPS.
But saying a company will likely succeed and deserves an investment does not mean VCs shouldn't be making rational valuations based on real business metrics. And as the OP remarked, this is probably funding at a $80m+ valuation for a company with no product (when funded), no revenue, and plenty of competition.
They need to show their investors that they're doing something, so they throw a grip of money at a company with a solid group of founders and a roadmap full of the hot buzzwords of the day.
The moment when everyone shut up and start to join the bandwagon is when the bubble bursts. <-- That's from my experience.
Regarding exponential growth. We need to think carefully what kind of efficiency improvements can SUSTAIN exponential growth. The adoption of the Internet to the mainstream was a major event. I guess people might be betting that mobile/tablet is another one. I thought this was already priced in about 2 years ago. I can't think of what has changed in fundamentals that justifies the current situation (except for inflation perhaps).
Did anyone consider that maybe Sequoia, who have invested in companies that make up over 10% of the NASDAQ know what they are doing?
Companies like Color, AdKeeper and Flipboard have "crazy" valuations based on the founders having ridiculous resumes. They have all created billions of dollars of value for their investors, hell, why wouldn't you invest in that potential again?
Rationalising this metaphorical bubble to domain prices is absurd, since domains have always been traded for eyebrow raising prices. You think that the domain color.com or path.com will be worth $10 in 5 years time? Seriously?
Color almost certainly didn't require $41M to get to the product you see today, did people ever consider the company is - gasp - launching early and has the capital to iterate and scale for the next few years? I can think of lots of startups that raised $10M - $20M at company formation and has then spent the next few years (or more) iterating.
Investors are less interested in where you are today, compared to where you are going
- Is calling the investment "crazy" really offensive to the entrepreneurs? It is more a compliment to them than anything else. The investment may be crazy, but the entrepreneurs managed to get people to shell out $41M. That takes serious talent.
- Getting $41M for color is insulting to a lot of other entrepreneurs that have dedicated their lives to products like color and received nothing. Give half of that $41M in $250,000 chunks to 80 other startups and Color would still have $20M to play with.
If you know how these large investments work, $41M in Color may seem very sane, but to a large percentage of the population, it does appear crazy, particularly in light of the dot com bubble.
Perhaps you could point us to a good article showing why this is a sound investment?
For the same amount as this investment you could probably set up seed funds in 10 cities and cover all of the overheads involved. I know which option I would pick.
Neither Merril Lynch nor Lehman Brother knew what they were doing.
"Investors are less interested in where you are today, compared to where you are going"
Yes the future is important, but there's the risk-reward trade-off. If a company looks badly risky today, a rational investor will steer away from it.
"If nothing else, posts like this are terribly offensive to the entrepreneurs that dedicate their lives to products like Color."
And for your first point, a well functioning entrepreneurs ecosystem require both dedicated entrepreneurs AND rational investors. This is not to demean the entrepreneur.
"Rebecca Black signed onto the same record label as Miley Cyrus, I think the label knows what they are doing" ... "We all though Lehman Bros knew what they were doing, dude"
Anyway, I like people that stray from the field and do contrarian things that other people think are crazy, if nothing else in 10 years it'll be exceedingly satisfying for these kinds of investors to point at all the haters (and if they fail, well, everyone was right blah blah serves them right for taking risks)
Also, being a contrarian investor means you sell in a bubble (when everyone is buying) and buy in a crash (when everyone is selling).
So its a little like sympathetic magic - if we get guys who were close to that other success, maybe some of the halo is still stuck to them and voila! investment rationalization.
Some of us have seen dozens of sure-fire new companies, staffed with experienced professionals, fall on their faces. Younger, perhaps naieve investors still have some lessons to learn.
Admittedly, the article pointed to 6 indicators of a bubble which are probably not quite right; then defended only 1 of them, and waved their hands about the others. That is what I found a little offensive, but to my logical sensibility and not as an entrepreneur. Entrepreneurs have to weather a lot more than link-bait, and need to grow a much thicker skin.
I'd prefer to see evidence of success before assuming it will happen.
They've given a long runway to Color, and if the airplane takes off those investors reap far more rewards then they would have if Color is wildly successful and other investors were able to participate in subsequent rounds of investment.
I cannot emphasize enough that this is a strong team (investors and owners). There are almost certainly specific targets and objectives this team needs to meet before they collectively decide to spend the entire 41 million.
Which means this thing could crash and burn after spending 3 million, and they unwind from there.
A long runway? Sorry, but I had to chuckle on that.
That would be one hell of a runway. More akin to a wormhole.
It reminds me of a few years ago when people were all googaw over social networks, because they were social networks. That seems to have passed now and they're focusing a bit more on how social can help this cause or that business model.
Pumping bubble is intentional. Financial world knows and uses this technique for years. They KNOW we have a bubble and THEY pump it up.
They earn money on stocks rising while bubble rises.
The more they invest, the more people come to them with the money (for investment). They earn money on those people (commissions, investment credits, accounts, personal advisory). And as more and more money pours from the sky, the market rises. And they earn on stock rising.
Suckers (commoners like we) believe that they can catch a train with next Facebook and sell houses or use life savings in hope for a fortune. And financial world earns.
At the proper moment leaders of this mess bail out and we have a "crisis".
Most people decide to invest too late (for example now it's much too late) and also bail out MUCH too late (after few hours or days from bubble blowout).
But those managers and capital owners.. People cry, media report suicides and they just are buying another Ferrari and houses in the Canarian/Carribean. They smoke a cigar, drink whiskey and looking at the sky think: 'suckers, so long till next bubble'.
Works like charm for years. So sad that for example my country's currency ex ratio and stock exchange is so vulnerable to this.
Financial managers are not stupid. They are pragmatically cynical.
Round Color's (err) round up to $43m. Then say that Milner's 150K was actually $1m with the same terms (convertible debt). You'd have 2 investments of $43m. Track follow up rounds for the 43 YC alumni and Color and see which pot grew the most.
EDIT: I guess it could be patent licensing. I don't buy the technological complexity bit, personally.
Also, if you know that everyone's headed towards a bubble, what is the correct response if you are a rational entrepreneur? Riding the bubble to the top and bailing before the crash does not jive with me.
For entrepreneurs crashes are the best times to innovate and launch new ventures because while everyone else is angsting about cutbacks and surviving just another day, the entrepreneur can launch lean businesses and products AND usually get great deals on people, equipment, office space, services, etc.
I agree that a bubble doesn't mean all startups with autofail. I would like to learn from the past and understand what worked.
I seriously doubt that modern democratic-capitalist societies as a whole can avoid bubbles. Individual business owners OTOH can not only survive but also thrive in the aftermath given that some basic conditions are meet.
The geospacial indexing can be accomplished by creating a 2-dimentional index of picture buckets where each bucket contains the pictures taken within a small geographical area (say 2000x2000 meters) then all you only have to iterate over the pictures in the buckets that are within the current distance from your location. The clients can easily sort their images before their are uploaded.
It may sound complicated but games do that kind of thing all the time, and often with bigger constraints (skipping a picture or two isn't going to be a big deal).
So yeah devs are not cheap, but a technical co-founder should be able to develop this.
The service behind? No, but I highly doubt they have been spending only a weekend on it.
In two months? Properly, though it assumes that there is nothing more to it than has been described so far.
I don't see what they need $40m for that's going to deliver real value.
More power to 'em.
- It is creating a scarcity in developer resources. This just forces me to relearn how to write good software, definitely not a bad thing.
- It is generating a lot of interest and investment in various tools that I can build, saving me effort and producing a better product.
Those are the good impacts.
It does create a sour grapes type of emotion that I try to put aside. $41M would go a long way towards funding a lot of small startups, or supporting animal shelters that are swamped due to people no longer being able to afford their pets, or building companies that would employ people that lack high tech skills or the opportunity to employ those skills if they could acquire them.
(And if you think "Oh, anyone can refocus themselves and get in the game, come live in the rural midwest for awhile and then tell me that.)
My point was more that you can't just assume that because smart people think X, X is true. I think this is especially true in the world on VC investment where the investors don't believe that every bet they make will come off - what they're looking for is enough of them to work out that they make a profit overall rather than that every single one nets them a return.
For the rest of us we can point and laugh for the most part because, hey, that's fun, and by coming on here and running our mouths we, in our own small way, bet in the investors do (though we gain or lose tiny bits of our reputation rather than cash). But we might also want it to inform our decisions when it comes to investments and choosing our next job.
If they can get everyone using their software before someone else comes along then the collaborative nature of it gives them a significant advantage in that there are more people you can collaborate with.
But even that isn't a particularly strong lock in when the apps are free or cheap and available near instantly anywhere you have a data signal. Someone using a different app? Just go grab it - it's not like convincing all your friends to leave Facebook to go somewhere else.
If they're looking at something with a bricks and mortar component that would be different but I'm generally with DHH on this one - businesses of this sort can grow quickly without the need for this sort of capital.
isn't it strange? well, as a software devs we seem to have longer and harder path to breakeven.
but consumer startups seem need even more money to serve millions of customers, and the success chances seem a little higher than that of a lottery, as you should predict and check if the inconstant masses would like the app or not.
why we're not in a bubble then?
The lesson here is not to blame the idea guys, they will profit from it dearly. Or blame the initial and subsequent investors all the way up to the (ponzi) pyramid, they will profit too. Or even blame the guy who signed the deal when bigCorp bought them, he got his cut under the table too.
Blame the poor souls who own shares of bigCorp for not enforcing accountability in their C*Os spending money left and right chasing the next bubble.
[Are we in a bubble?]
“Maybe,” says Naval, “Certainly valuations are creepy up quickly in all stages of deals. On the other hand, 10 years ago when we all felt like this last time the total market size for any company was at maximum 100 million potential users. Now we’re in the billions of users. Facebook connections alone bring 500 million, Twitter 200 million. 10 years ago we only connected for brief periods of time when we were at our PCs. Now we’re connected to apps all the time, everywhere we go. So maybe there’s a bubble. It’s hard to say. But we’re also looking at unprecedented opportunity.”
And then we're not REALLY in a bubble until Air.com, the leader in the social breathing space IPOs at twice that.
In '00 we had a market crash after a dramatic run up of stocks in general and tech in specific. In 1998-1999 rates were low and credit was easily available . As we led up to the millennium changeover ("Y2K") unprecedented amounts of short term capital were made available to banks and other institutions to allow them to weather any run on banks that might occur . This money made it out the the markets and proceeded to whip them into something that was similar to a drug fueled frenzy: the nasdaq has never come close to those levels again. Alan Greenspan later noted that he believed his actions played an important role in the boom/bust. Once the fed windows closed for Y2K and interest rates were pulled upwards quickly all the money disappeared. Coincidence?
After the dot.com bust targeted rates were lowered dramatically to attempt to smooth out the markets. Check out this chart of historical fed funds rates as it is really easy to spot the cycles . The next bubble was in housing, and predictably it began to burst when interest rates were raised again.
Look at that chart again . The last couple of years have seen the lowest interest rates that have ever been available since the chart started more than 50 years ago. They have been approximately 0 for some time. In addition, the quantitative easing programs that the fed has engaged in (currently, QE2 composed of $600BN worth of treasury debt purchases) has left monetary policy so easy that if it were a woman the village would be talking.
I've heard some confusion about how this money makes it into the markets. It's really quite simple. Many people and organizations who would normally put some of their money into safe debt like treasuries decide not to because they can't make any money off of it and they are concerned about the effects of inflation. This causes them to look for better investments that will have a chance of returning something decent. The explosion of angels in SV is directly related to this process - these geeks, unable to make a good return in some traditional markets switched to making private investments. If more money comes into a sector, valuations will naturally rise and the quality of the companies funded will likely fall (or at least that seems reasonable to me).
QE2 is scheduled to end June 30th, 2011. Unless it is followed by a "QE3" (which there is probably a strong chance of) monetary supply will contract and interest rates will rise. At some point fed target rates will need to rise as a response to current growing inflation in the commodity markets and the retail increases in food and gasoline. Once the fed signals that the party is over, a ton of this money is going to run for the exits . Don't expect to be able to close your next round unless you're of stellar quality or can hold out for 2-3 years.
Or at least, that's one version of it.
Of course, no one whose business relies on the expansion of public and private equity prices will explain this to you. The reasons for that should be relatively obvious.
[NOTE: I am not an economist. I wasn't classically schooled in this stuff. I'm also not a tea partier nor do I have any particular political axe to grind here. I am just a coder who has been watching carefully since the dot-com crash when I took a very big haircut. Take it all for what it's worth]
There's a number of reasons for this: demographics, peak oil, the massively deflationary effect of certain technologies, etc. The west really looks a lot like Japan, which has pumped cheap money since their economy went through a similar cycle of stock bubble, real estate bubble, and crash.
So expect bubble after bubble...
That being said, the existing hype is nowhere near 1999 levels. If this is a bubble, it's a mini-bubble. I lived through that time, and it was an entirely different ballgame.
Deflationary collapse is the only path back to a sustainable model, but it's extremely painful in the short term and so nearly unthinkable that a politician would choose it unless all but forced. Are you thinking things just won't get bad enough to bring the situation to a head?
Alternating cycles of inflationary bubble economies followed by deflationary collapse. Basically think 1995-2001 in .com or 2002-2008 in real estate, over and over again, forever. Inflation, deflation, inflation, deflation...
Beneath this alternating bubble-bust economy will be an underlying trend that I've heard called in-deflation: deflation in the value of everything you own, inflation in the value of everything you use.
Food, energy, and fuel in particular have nowhere to go but up for the reasons I mentioned at the top. Things like owning a car and driving it everyday are about to get orders of magnitude more expensive.
From a social point of view, the bubbles will serve a kind of bread-and-circuses role. Everyone will get to think they're going to get rich in the Next Hot Thing.
In Australia, inflationary breakout led to the "Recession we had to have". Our Reserve Bank governor quite brutally broke the back of inflation in the late 80s to early 90s , culminating in an early 90s recession. With a quite conservative monetary policy we've done quite well since then.
(The mining boom has been a free kick though).
It seems unbelievable that we as a population could keep being fooled by the same trick over and over, but when you look at the sums involved for those who benefit, it starts to make sense. This racket dwarfs even the military-industrial complex. It's rule-the-world money. In my opinion, anyone who tries to portray the situation as obscure or highly complex either has a stake or has succumbed to propaganda--printing money always causes artificial booms, and artificial booms always lead to busts. It's been true since fiat money was invented and it'll be true until we evolve beyond it.
Right, this according to the brilliant minds who created the crisis in the first place.
Clearly the financial situation is bad. Your 'good, gradual inflation rate' is WHY we're on the precipice of disaster. It's not like we now have a choice between an economic meltdown and a land full of unicorns and rainbows if only we keep stamping more paint on more pieces of paper. Our only option is damage control, but you'd rather keep piling on the damage.
Google some of the predictions made by Bernanke and his colleagues in the years and months leading up to the crisis. They've been dead wrong every step of the way. Yet now we are supposed to believe that inflation is no concern when food and commodity prices are at all time highs and causing revolts around the world? Talk about absurd.
Not so fast. Lenders factor in expected inflation, so it's only unexpected inflation that benefits debtors.
And, making payments isn't the only way to handle debt - bankruptcy works too. You don't get any more "pay later" pizzas, but you get to keep the ones that you already ate.
However, inflation hurts folks whose income doesn't match inflation. After they stop paying their debts, they still need to buy food.
My cat's favorite food went up 25% last month. Since she was already on the cheap stuff....
Let's be serious here. Net effect of QE is 0.
It's unclear why/how though, as the vast majority of new US mortgages end up with a GSE that is heavily dependent on govt support, so the increase was a political decision.
How is that working out so far?
The fundamental flaw in this idea is the assumption that increased production/consumption will in turn increase employment. At the end of the last two recessions, production and consumption have increased, but employment has not. The old theories no longer work.
Here is an interesting article that appeared in the WSJ opinion section a few weeks ago. I found it to be quite insightful, and it presents a workable explanation about why we might currently be causing inflation and not wanting to admit it.
The Federal Reserve Is Causing Turmoil Abroad: http://www.marketwatch.com/story/george-melloan-the-federal-...
Finance is pretty easy to understand, relatively speaking, but the signal-to-noise ratio is far too high. The average finance news site tends to be a wretched hive of investment advice nuts and unreliable emotional opinionators.
The Fed's version of core inflation is the core PCE price index as you stated. The "core PCE price index [...] excludes the more volatile and seasonal food and energy prices" .
While you may reasonably take issue with my wording of "quite narrow" as I perhaps wasn't choosing my words carefully enough, core inflation/core PCE certainly isn't "the most general measure of inflation that is theoretically possible". I assume you weren't meaning to refer to "core PCE" - but never the less it is clear from federal reserve speeches that it is this measure that has been playing significantly into federal reserve monetary policy.
Core inflation makes sense in trying to smooth out seasonal or short term moves. However, the effects on global food and oil commodities that are traded in US dollars seem to far exceed any seasonal or short term influences. In that case discounting food and fuel influence on actual inflation rates seems unwise.
Bernanke seems to be acknowledging this. The WSJ reported on the 13th of March in an article titled "To Avert Criticism, Fed Avoids Saying 'Core'": Now, Mr. Bernanke is taking another tack in his public communications. In two days of testimony on Capitol Hill earlier this month, the Fed chairman never uttered the words "core inflation" while explaining the central bank's aims and policies. .
As a side note, as I've noted I'm in no way trying to put myself forward as an expert on these subjects. I get a significant amount of my financial news and analysis from the WSJ and Marketplace (public radio) (and Morgan coverage, which admittedly is not particularly hawkish here). I'm not above admitting that I could be making some serious mistakes, so if you'd like to suggest better sources of information I am all ears.
Nevertheless, overall inflation remains quite low: Over the 12 months ending in December, prices for all the goods and services purchased by households increased by only 1.2 percent, down from 2.4 percent over the prior 12 months. To assess underlying trends in inflation, economists also follow several alternative measures of inflation; one such measure is so-called core inflation, which excludes the more volatile food and energy components and therefore can be a better predictor of where overall inflation is headed.
The takeaway is that core inflation is an "alternative" measure used when volatile components are obscuring long-term trends. The intent is to get a good feel for what the real inflation number will look like in the future. This is a big difference from "using" core inflation as the primary measure, and I don't know what you gain from confusing my statements about the PCE/PI with core PCE. I never claimed that core PCE was the most general measure.
Anyway, this is far from the original point, which is that you have some silly conspiracy theory about printing "rule-the-world money", and you won't tell us what it is. But at least I got you to stop citing MarketWatch.
I did link to an opinion piece from the Journal that suggests that the Fed is exporting unrest to MENA via inflationary monetary policy. Whether this is intentional or accidental is hard to determine, but it would make a certain amount of sense if it was on purpose. None the less, I didn't write the piece nor is it my theory.
Note that the marketwatch article is a direct reprint from the Wall Street Journal (which I noted). The WSJ version is behind their paywall.
You seem to suggest that I hold a lot of fringe conspiracy views, yet the theories you take issue with come from the Journal editorial pages. Does that mean you hold the WSJ to be a fringe conspiracy paper?
You're right, I'm sorry.
But it's curious that you cite the WSJ editorial pages specifically. One of the things the WSJ is known for is how incongruously stupid the editorial section is, compared to the rest of the paper.
I like the comment, but that's just sexist and offensive on so many levels that I lost count.
If this is their real company strategy, the $41M investment actually makes sense.
Now to give the VCs a return on their investment they're probably expected to exit at north of a billion, which means they're going to have to show Facebook something special in terms of revenue or user-interaction generation or targeting they can't get from any of the many other smart developers who've taken less funding for their location startups.
I think Color have committed themselves to trying to build something big enough to be considered a Facebook alternative. Taking $41 million in a Series A buys you a lot of premature optimisation or a lot of runway if you don't think you're going to get a better valuation in a series B round. It also more or less rules out the quick exit.
SOMEONE has to generate a profit based on the technology which justifies the investment or acquisition cost, whether it's color or their eventual acquirer.
None of the investors mentioned (Sequoia, Bain Capital, SV Bank) are Facebook investors yet.
So far I'm missing the special sauce that makes them a must-buy-can't-clone.
B2C = Business to consumer
B2B = Business to business
B2A = Business to acquisition?
Edit: I'd like to clarify that the business model I'm suggesting feels different somehow. Yes people have built companies to flip before, but their valuation was still based on what they do as a company.
If what I am suggesting is true, Color's valuation is based on potential shares in the company that it's being flipped to. These VCs are essentially investing in Facebook, pre-IPO (set for 2012) without going through Goldman's special purpose vehicle, and without dealing with the SEC's 500 shareholder regulations.
If true, that would make this Color investment a very clever hack.
They need investment opportunites and investing in real estate probably isn't popular. Hence angel funds have tons of money to throw around.
The pension isn't using that money (right now anyway), so the VC is free to do with it what they want, and in the end the money comes back to the pension in multiples.
At least this is my understanding talking to an actual VC (not in a fund-raising situation, just casually).
For you young whippersnappers who were too young to remember the 90's, a bubble is a manifestation of irrational exuberance- with (almost) everyone saying it's a whole new market, it doesn't matter how much the thing costs it's worth it to buy it because it's price is just going to keep going up up up, so do whatever you need to do to buy in now, because the longer you wait, the less you make.
In other words- it's a bubble when everyone is saying it's not a bubble. But if everyone is saying it IS a bubble, then it's not a bubble.
There is a difference between a healthy (or at least "not on death's doorstop") economy and a bubble.
We shouldn't condemn bubbles as automatically bad. We should be aware of them, though.
The founders get their investment from the investors.
The investors get their money back when the company is acquired (or makes money).
In the early stages of a bubble, this process generally consists of 'money being thrown around' as you say.
However, due to the hype of the returns from these 'investments' (e.g. Facebook growth) - it attracts the public investors into wanting to get in on the 'action'.
Typically this is done through an IPO, which allows the public to come on board and potentially pay all previous investors / founders down the chain their money back (plus more).
However, even without the IPO's of the last bubble (and they may still come!) - the public money is finding a way in (e.g. Banks setting up Social Media Investment Funds). Not to mention any other general investment companies having some of their portfolio riding on 'internet based stocks'.
Then when the bubble eventually bursts (The trend reverses and everyone tries to get out while they can) - it is often the public investors which are left out of pocket / losing their homes / etc.
The point made at the end of the article is, if you are in a start up right now (or even a VC) - it is better to get out early, than to get greedy and end up getting burnt when it bursts (e.g. GroupOn).
- How much institutional money (pensions, sovereign wealth, etc) is ending up in VC?
(My intuition tells me that the tremendous pressure on these funds to generate returns, which was a huge part of the housing bubble, is in turn fueling this bubble too, although not nearly at the same scale.)
Don't understand Twitter's business model? Promoted tweets have the ability to become AdWords for social. Millions of pieces of content are shared everyday giving insight into user's pleasures, dislikes, and lifestyle. This user data, when analyzed, has immense value for companies interested in purchasing. That information is worth a ton.
Bubble or no bubble, I sure grok their business model.
Or as was often the case, 'y' buys 'x'.
In order to make FourSquare clone, you don't need a lot of investment for development but you need a LOT of money to acquire users and become a player in that space.
However, the assumption is that there will be only few players and that is why there is a need for these kind of bold investment moves. I disagree. The system will become even more fragmented, democratized, and complex with many unknowns, so classical ways of getting market share will not work. In other words, even with 41M of investment, the company will not be able to fight against some weird and original apps / social network or even coupon buying system.
Just thinking aloud here, but how on earth would you make a trustworthy timetable out of that observation? What do you measure? Economy was size A in year Y2K, technological faciliation was a level B, there were C people involved directly with the market; now the economy is size X, tech is level Y, and Z people are at the table... like why would you think one previous bubble was in some way proportional to a present one?
One last thing, what to make of Max Andreeson's pet theory that there never was a real dotcom 'bubble' - that a few companies were ridiculously overvalued but overall most were ok and in fact more investment should have happened (in a more diversified manner)?
I actually quite like the concept - makes group photo sharing fun & easy. But worth $41m? Not yet
Let's talk about this chart for a second:
Ok, see that 4000% increase in 18 months? That's what a bubble looks like.
Now, please point out to me where on the graph it made more sense to invest your retirement money in the S&P 500 rather than Amazon.
Wait, you mean pets.com, not amazon.com? Fair enough. But now I'm not sure what your argument is. That color.com is going to fail and the investor are going to lose all their money?
That is what you're saying right? Because if you're saying they're taking a large risk that has a very small chance of paying off then you're saying nothing. That's what investors do. That's what makes us (as a society) all rich.
If your argument is that capital is being misallocated then you have to say why and where the capital should be allocated.
Which brings us to what is actually a bubble and not just people with lots of money taking big risks that may not pay off:
1. capital being invested by (otherwise) non-investors
2. who can't afford to lose
3. who have come to believe, with certainty, that they can't lose
That was the case in both the stock bubble and real estate bubble. It's not the case now. I guess the headline "valuations are unrealistically high" wouldn't generate as much heat and would require a coherent defense.
Give us a bubble! Spread it out, so that such 41mm deals go instead to a thousand teams. And we will give you the future.
That happens eventually, it seems, in a somewhat roundabout way, to some degree. Look at where the money from Viaweb ended up, as one example. Lots of successful people's money ends up as angel funding: Paypal, Delicious, and so on.
What about asking, "How has taking this amount of funding helped this business?"
Strategically, this much funding through all of the controversy it has generated, will guarantee this company/brand gets in front of nearly every early adopter over the next couple of weeks.
It will drive hundreds of thousands of people to try it out.
And that's before they've spent a penny of it.
Loads of Posts on HN alone excitedly linking to the app on Android etc (one on the front page right now).
After that, it will sink or swim on it's own merit.
Would that have happened if they hadn't taken this funding? No. It would have had 5 minutes on TechCrunch, and then been forgotten about because it may not have been remarkable.
Now all they need to do is implement a business model / some way to make money from it so their per-user revenue exceeds their cost of user acquisition, and use the remaining $38,000,000 as a marketing budget to spread it to everyone else. Profit.
There will always be some startups with over valued valuations but the big thing is startups don't think they are invincible, with Digg and Myspace startups know they could die if they don't work hard and try and find a way to make money, even twitter which has gone almost too far recently with DickBar.
Seems like they're attacking the chicken-egg problem in the easiest way, to me, the domain name and big dollar shine on everything make them look more credible and established. And they have enough runway to focus on product for the first few years while growing the userbase without having to monetize immediately.
Could still flop a million ways, of course. It just seems like going all-in could actually be a viable way to attack emerging social networky markets.
Perhaps this bubble is only present in the states, but elsewhere in the world, valuations are still reasonable.
Find someone. Take pictures together.
Party. Play date. Lunch?
Simultaneously use multiple iPhones and Androids to capture photos, videos, and conversations into a group album. There's no attaching, uploading, or friending to do.
Share together in a new, moving social network. Just look around."