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Paul Graham's Letter to YC Companies
645 points by emilepetrone on June 5, 2012 | hide | past | favorite | 185 comments
Jessica and I had dinner recently with a prominent investor. He seemed sure the bad performance of the Facebook IPO will hurt the funding market for earlier stage startups. But no one knows yet how much. Possibly only a little. Possibly a lot, if it becomes a vicious circle.

What does this mean for you? If it means new startups raise their first money on worse terms than they would have a few months ago, that's not the end of the world, because by historical standards valuations had been high. Airbnb and Dropbox prove you can raise money at a fraction of recent valuations and do just fine. What I do worry about is (a) it may be harder to raise money at all, regardless of price and (b) that companies that previously raised money at high valuations will now face "down rounds," which can be damaging.

What to do?

If you haven't raised money yet, lower your expectations for fundraising. How much should you lower them? We don't know yet how hard it will be to raise money or what will happen to valuations for those who do. Which means it's more important than ever to be flexible about the valuation you expect and the amount you want to raise (which, odd as it may seem, are connected). First talk to investors about whether they want to invest at all, then negotiate price.

If you raised money on a convertible note with a high cap, you may be about to get an illustration of the difference between a valuation cap on a note and an actual valuation. I.e. when you do raise an equity round, the valuation may be below the cap. I don't think this is a problem, except for the possibility that your previous high cap will cause the round to seem to potential investors like a down one. If that's a problem, the solution is not to emphasize that number in conversations with potential investors in an equity round.

If you raised money in an equity round at a high valuation, you may find that if you need money you can only get it at a lower one. Which is bad, because "down rounds" not only dilute you horribly, but make you seem and perhaps even feel like damaged goods.

The best solution is not to need money. The less you need investor money, (a) the more investors like you, in all markets, and (b) the less you're harmed by bad markets.

I often tell startups after raising money that they should act as if it's the last they're ever going to get. In the past that has been a useful heuristic, because doing that is the best way to ensure it's easy to raise more. But if the funding market tanks, it's going to be more than a heuristic.

The startups that really get hosed are going to be the ones that have easy money built into the structure of their company: the ones that raise a lot on easy terms, and are then led thereby to spend a lot, and to pay little attention to profitability. That kind of startup gets destroyed when markets tighten up. So don't be that startup. If you've raised a lot, don't spend it; not merely for the obvious reason that you'll run out faster, but because it will turn you into the wrong sort of company to thrive in bad times.


Note incidentally that I'm talking about the performance of the IPO, not the performance of Facebook itself. I think Facebook as a company is in a strong position. The problem is simply that Mr. Market (http://en.wikipedia.org/wiki/The_Intelligent_Investor) doesn't think so at the moment.

Or perhaps Mr. Market thinks it's a solid, say, $25 or $35 billion company that was just way overvalued at the IPO valuation of $100 billion plus. There's certainly a whole lot of commentary along those lines in the financial press, like this example from a few days before the IPO: http://marketday.msnbc.msn.com/_news/2012/05/15/11702548-is-...

That's certainly a defensible position: the company is stable and profitable as is, but the current valuation has a lot of growth priced in, which could only be realized by growing revenue per user substantially, and they haven't yet demonstrated how they're going to do that.

Mr. Market sounds pretty reasonable the way you describe him. But just 7 days ago he thought Facebook was worth 25% more than he thinks it's worth now. So he looks to me like the familiar Mr. Market portrayed in Benjamin Graham's book.

Seconded on the framing comment from lucianomt, and I'd also keep in mind that the people buying and selling 7 days ago were not the same people buying and selling now. At the IPO you had two special classes of participants. One the sell side: insiders and the underwriting investment bank. On the buy side: IPO speculators (i.e. people who specifically try to play IPO events, as opposed to people motivated by fundamentals and technicals).

On the technical side, the bulk of algo and technicals trading above a 1-2 day timescale would presumably not have been trading at the IPO. I'd venture a guess that these algo and technical traders provide the bulk of day-to-day price stabilization so their opinions matter, rightly or wrongly.

Ratio-driven fundamentals investors often look for, e.g. quarter-to-quarter metrics (changes in margin and so on), so they too lack the information to participate in their preferred manner until the next earnings report. I'd guess that the bulk of big pension and mutual funds operate in this fashion.

In short, the people transacting 7 days ago were not particularly representative of the market in general.

Graham doesn't think Mr. Market is always reasonable to begin with. But I'm not sure it's fair to attribute that valuation to "the market" as a whole. It was set by the underwriters, who might have been expecting a flood of "greater fool" buyers as in the late 1990s. They did exist (I'm sorry to say I know a few), but obviously not in sufficient numbers to generate the classic "pop"...

That's just framing. Had the IPO come out at $20 and popped to the very same $26, everybody would be celebrating it as an amazing success.

But Goldman Sachs and DST had to get their money back somehow...

Out of curiosity, why is it that Facebook's IPO would hurt early stage valuations, when all of Facebook's early investors made hundreds of millions or billions of dollars? I could see it getting harder to IPO at a good valuation for a few years, but that shouldn't drive down early stage valuations all that much. Also, to me the most interesting thing to watch (beyond Spain) is these new crowdsourcing laws going into effect January 1st. That has the potential to drive hundreds of millions of dollars into the angel space overnight, sending valuations through the roof or at least keeping them propped up for a while.

I suspect it's because investors think that one of the few routes to 'exit' a company and cash out your investment just got closed down, at least in the short term. That increases the risk of investing and therefore lowers the valuation.

I believe investors and startups that are / were looking for Facebook as an easy exit were not building a company / business anyway. Such a situation is better overall for everyone - only the teams that are focused on building a real business survive and create value for everyone involved.

It's not about a Facebook acquisition no longer being an exit, it's about an IPO no longer being an exit.

Since long ago Facebook is too big to be adquired. Now even less. Who can pay so much money?

I believe he's referring to an acquisition by Facebook being an exit option, not an acquisition of Facebook.

Investor sentiment (as irrational as it sounds) is very important. The "apparent" failure of FB IPO along with the less than impressive performance of web 2.0 companies in the public markets have casted a dark cloud in the industry. Nothing has changed in the material sense, but this narrative is a great opportunity for investors to bargain for better deals.

In the next few months Facebook will create over 1000 new millionaires. Is it to much too assume that many of them will get into inventing, which could actually cause the opposite affect of what you're suggesting where there is even more money available?

People won't start investing necessarily. Look at the 10,000 millionaires that came out of MSFT in the Redmond area...... only a fraction are investors.

Not sure if you meant investing or inventing (or both). But either one of those could have interesting implications in the valley.

Whoops. Yea I meant investing. My assumption was that some part of a 1000 new millionaires would hopefully be putting some money back into the system through investments. I also think you'll see some people leave Facebook as they vest to go start companies of their own.

The number of millionaires created and the amount they have available to invest are directly related to the stock price. If the price is low, shareholders won't sell, so there won't be new cash to invest in other startups.

At the rate FB is falling, there won't be 1000 new millionaires by that time

FB is still going to be worth $40B?. Its not $100B+, but there are plenty of people that are going to make a lot of money if they sell.

Also check out Fred Wilsons response (http://www.avc.com/a_vc/2012/06/some-perspective.html). He makes some good points about the returns still being pretty damn good.

If you do the arithmetic, yes there will. At any rate, you don't need to be a millionaire to do venture investing.

At the rate FB is falling, it will be worth less than 12 billion in 3 months.

It's these kind of forward projections that cause booms and busts, ie. people assuming that housing prices will increase at a steady/regular rate over time. Just as we saw that this doesn't happen in a steady way, nor will facebook steadily decline over the next 3 months.

Certainly the path to IPO is so long that someone seeking VC funding today won't be in a climate defined by Facebook. For all its faults, SOX did kill the "retail VC" style of IPO popularized in the last bubble. Getting to IPO now is a very long road.

Actually a cyclical stock market cycle typically last 4 years. It's generally accepted that we've been in a bull cycle for the last few years, which is prone to shift, with the lackluster Facebook IPO as "the warning sign". If you're raising VC now, you've probably been in business for 1 to 2 years, which means if you exit in another 4 years, it could very well be a terrible secondary market by then. At least some investors will think so.

Poor market sentiment also affects M&A. I remember from my banking days in 2008, where one of my clients with $2 billion in cash wouldn't even fork over $100 million to acquire a company at 9x revenue with 80% revenue growth.

So over all exit options are appearing less attractive for VCs, thus they're likely to fund less companies at lower valuations.

If people investment was purely logical, you'd be right, but I suspect it is the negative news surrounding the valuations of Facebook and Zynga that will put a bit more fear into the investors willingness to take risks.

You know, you'd think someone who had a real job investing other people's money would be at least as rational as some guy on a message board....

The bad performance of Facebook will cool the attitude of institutional investors towards online investment.

That will make it harder for the B-Grade VC companies to raise money, which will reduce the valuations anyone else has to pay to invest.

That has the potential to drive hundreds of millions of dollars into the angel space overnight, sending valuations through the roof or at least keeping them propped up for a while.

Not really. The crazy valuations were typically occurring when VC's got involved at the A round or later - not when early stage investors are working. A lot of early stage investing is done using convertible notes anyway.

One reason why the FB IPO can drive down valutions can be the following:

When VCs are worried that they won't ever get a multi-billion dollar IPO to cash in and thus generate returns they will be forced to get the same junk of any given start-up for less money in order to create the the same return factor.

Anyone correct me if I'm wrong.

We ran out of 401k money to buy IPOs

You say Mr. Market doesn't think Facebook is in a strong position.

How do you evaluate that? Facebooks Market value is 70 Billion. Its P/E ratio is 86. If that isnt an appraisal of a strong position, what is? Where do you draw the line?

Stock price.

> I think Facebook as a company is in a strong position.

Just curious, but I'd like to hear your opinion on why this is the case, vs all the naysayers that are betting against the company now. Do you have any specific point you find that Facebook can leverage to maintain success?

I don't think they've even tried to make money yet. They've just been focusing on growth. But they have so many users now that they could do whatever they want. Ideas that would entail a chicken and egg problem for anyone starting from scratch (e.g. marketplaces) do not for them.

Plus Mark himself is such a fearsomely effective person. And so young; he's only a little older now than Larry and Sergey were when they started Google; so he still has the energy and mental flexibility that's usually the only asset of founders just starting out.

Yes. Wall Street grades Facebook by drawing lines through dots of revenues and margins. The more accurate way to view Facebook is as a powerful coil that can spring in multiple directions. (I say this as someone who questions whether Facebook is a positive force on the web).

This is a cryptic comment. Yes, Wall St views Facebook as a powerful coil, but no one knows if it is compressed or stretched, but it certainly is.

All it takes is for Facebook to go from $4 a user/yr to $8, or for teenagers to say "email me, I don't check facebook often". A powerful coil indeed.

>>"email me, I don't check facebook often"

Facebook exists because I would not like 500 friends to email me every day about their photos or jokes. That sort of thing doesn't scale well with emails.

Social networks exploded because they created an interaction that previously wasn't possible.

They have now become a tax on life - like email. A set of hygiene actions you have to perform every day.

Do not underestimate how much the next generation does not want to conform to the restrictions of the previous generation.

It's entirely possible future generations do not want to be tracked and targeted 24/7 - they may choose to just switch off and drop out.

50% youth unemployment in some first world countries right now. These guys may just decide to do things differently - what is social technology doing for them right now?

Helping them pass the time certainly, and perhaps helping them get laid.

You're dead right that each generation wants to be in a social space that feels "theirs", but I don't think that precludes using the same infrastructure.

When I was a teen, I drove on the same roads and used the same telco and USPS as my parents, even at my most rebellious times. In Facebook's case, each user "feels" a tiny piece of the overall universe, and one which is vastly disproportionately populated with people they've mutually selected. That, coupled with meeting jwz's use case above, makes me feel that Facebook is pretty well positioned to succeed.

Terrible comparison, I use the roads because there are no other, better alternatives. When given a choice I always pick UPS or FEDEX over the post office for shipping, and looking at the financial position of the USPS I am in the majority.

Those industries exist because of the government monopoly, a new better social network can arise in an instant.

Ahhhh yes the famous cash faucet that just needs to be turned on. Why would anyone that could have been making more money not made it before? Growth and profit are not mutually exclusive.

MySpace did what you suggest. They monetized heavily, harming UX, and creating space for a cleaner modern user-friendly competitor. That's part of why they failed.

I think they're just waiting until they've completely solidified their #1 position to concentrate on making more money. It will seem obvious in hindsight that they make $20+ billion, the way it does for Google now. It may never be quite as good as Google though, but max potential is especially hard to predict.

Growth and profit are not mutually exclusive


But if you are constrained by your team (ie, you can't work on everything at once, which Facebook says is their biggest constraint) and you have plenty of easy money from investors, why would you try and profit now and risk another service taking your audience when you could possibly build something that can profit for years to come?

Constrained by your team? I can see you making that case for Instagram with only 12 people, but according to Yahoo Finance, FB has about 3500 people. Not one of them is thinking about how to increase revenues? And they don't have enough engineers to try out some of the ideas?

Do you own any Facebook stock?

I think YC got a small amount as a result of an HR acquisition, but I'm not sure.

I actually think this is backwards: The primary reason why Facebook can be successful is because it is organized such that it could realize the vision of a technical founder, who has a foot in tech and a foot in business.

You're right that they haven't tried to make money yet. I once raged to a friend at Google that Facebook's use of ads displayed an utter lack of creativity or seriousness about building a business. (I also argued that Google should not try to tackle Facebook on its home turf, but if it really wanted to attack it head-on, it would need to build a destination site instead of merely "socializing" all their products. Sadly, that destination site turned out to be G+, and then they used it to socialize their products.)

There are two Facebooks. One is an identity service, built on a noisy social graph accreted over the years, which Zuckerburg is hoping to make as fundamental as DNS for the modern non-anonymized web. The other is a micro-blogging and photo sharing site on top of that identity service. Both are going to be hard to make money with.

It is really difficult to directly monetize the core identity service. They can attempt to provide the service as a bona fide piece of Internet technology (e.g. opening up retail locations to verify accounts in-person, or by partnering with wireless providers that sell their eventual phone), but then governments and others will get into the act and require open API access to the user information and graph data. As soon as that happens, they've given out their crown jewels.

Any other mechanism for monetizing the identity service is tantamount to providing advertising on the back of your driver's license, or making your social security card into a frequent-diner loyalty card. People won't like it, privacy advocates and anti-corporate doomsayers will have a field day, and governments will start interfering with their core tech. (A good strategy for Google might be to work on a stealth, open-ID based "Plan B" to have in their back pocket, for the day if/when Facebook does shoot itself in this foot like this. They've certainly screwed the privacy pooch before.)

And as for the other half of Facebook, they are in a crowded, fickle space, and their offering there isn't actually that great (and I say that as a user and a technologist). Twitter, Pinterest, and a host of small startups are very real threats. Mark paid $1B to keep Instagram from Twitter and maybe Google; how many more of those can he afford? Furthermore, Apple has enough cash in the bank to buy two Facebooks, even at its massively inflated P/E, and its gaming platform is tied to a much broader, more sustainable group of customers than Zynga's "whales". I've personally spent over $100 on iOS games - and barely noticed that that was the case. It was easy, casual, natural, and I will probably continue to dump more money into the iOS ecosystem, because it works great. I've spent exactly $1.98 to buy two Zynga games, mostly to get rid of the annoying ads, and I've stopped playing both.

Lastly, Amazon, whose customer profiles include credit cards and addresses, and whose social information is tied in to actual purchasing intent, has yet to reveal the punchline in its Kindle strategy. Just as 'selling books' was not the ultimate purpose of the company, I am fairly certain that 'reading books' is not the ultimate purpose of the Kindle. One concept: A Kindle fire with a barcode scanner turns every single aisle in every brick & mortar store in the country (with 3G signal) into a showroom for Amazon. Add passive background RFID scanning as the user walks the aisles, and it's a brave new world of retail.

TLDR: Mark is a smart and capable guy, now backed with fresh cash, but he's got to apply some creative thinking to demonstrate that he can actually milk his cash cow. His worst case scenario is to become basically Verisign, and I have not seen them demonstrate any new thinking to suggest this will not be the case.

FB is a strong company and they'll probably get back to a $100bn valuation in a few years. However, I don't think FB is the source of the current tech boom. It is driven by smart phones and app stores. Suddenly, there are a billion people walking around with internet tablets in their pockets. FB benefitted from this new platform just like Instagram, Dropbox, Airbnb etc.

But I think, its now going to be all the more tough for them to figure out how to improve their ARPU dramatically, as they don't have the benefit of obscurity.

For example, even slight change to the feeds, like inserting what vaguely seems like an Ad, raises a huge uproar from people.

In contrast Google had got Adwords figured out (but it was not as widely known) before their IPO.

Changes to Facebook are like fluctuations in gas prices though. People grumble and complain, then just go ahead and don't change their habit.

I'm pretty conspiracy-theorish on the whole Facebook thing. A part of me wants to believe Mark managed to hack the entire system. He got the maximum amount of money out of the IPO to build up a huge cash reserve for his company. He made his big acquisition before the IPO; future acquisitions may be harder now that the share price is what it is. But he has also sent a shock wave through the entire eco-system. If things cool off a bit, he'll be able to find more talent to work at Facebook at more reasonable prices. He won't have current employees looking to run off and start a bubbly startup. It just seems like a brilliant hack :) I'm probably reading far too much into the whole situation.

During this cooling off period, Facebook can disregard their short term share price and experiment wildly until they figure out something that works. There's not an investor alive who thinks there's anybody more capable than Mark Zuckerberg for Facebook CEO. Nobody will oust him in the short- to medium-term.

Facebook is a very much in the same position that Amazon.com was in around 2001. They have the means to figure this out. Other startups trying to follow suit don't have this luxury any more. But Facebook sure does.

EDIT: For context, this was a contrarian opinion of Amazon.com in 2001 http://money.cnn.com/magazines/fortune/fortune_archive/2001/...

>Changes to Facebook are like fluctuations in gas prices though. People grumble and complain, then just go ahead and don't change their habit.

IMO, its like this. We spend a lot of time here on HN. Just like a whole lot more people do on Facebook. But we come to HN for a specific purpose to engage in these kind of discussions. Just like it will be difficult for PG to convert this into something else which makes more money (PG gave the example of a market place), I think it will be no simpler for Mark Zuckerberg.

PS: This was my take on FB, before the IPO http://news.ycombinator.com/item?id=3949048

FB has insane guaranteed users. Imagine a 'search the internet' or 'search videos' bar somewhere in the Facebook homepage.

Even Google knows that's dangerous.

One's local circle of friends on FB makes for perhaps 1%, in terms of its quality & value, of the overall number of signals(200?), that Google uses for its search.

Just like we come to HN for discussions, which our social circle on FB is not able to satisfy. Similarly, people will continue to go to the best search engine for searching for information.

Even today, if you want to get an overall sense of what people are thinking in general, you go to twitter search. Facebook you mostly search for persons, and what they are doing. It will be very difficult to change that.

PS: I realize my first para is speculative. And the rest is opinion.

>>Similarly, people will continue to go to the best search engine for searching for information.

There is no reason why Facebook can't become that. If Apple can make phones and Google can make phone OS. If Microsoft can make gaming consoles.

There is nothing stopping FB from doing it.

Yes, that's possible. But then it will be doing something new and different, isn't it? And it has to be more based on the spending power it has. And not related to its social network power.

Google put G+ on its home page, with not much success. Similarly, why should FB get a leverage out of just putting search on its home page. Unless the search is really better than Google's. What advantage FB has over say blekko in competing in search?

They don't need to do anything new or different. The barrier to a user to use a new search is miniscule. It's even less if you're already spending 90% of your online time on that site to begin with. G+ didn't work out because there is a huge barrier to users to become active on it. The two are vastly different.

FB already got their $16 billion. If your in it for the long term, uproar away that nest egg should be able to last a while. Check ins, ads, app platform, lots of monetization strategies. The only people burned are short term investors who buy in at a bad time. FB ONLY potential problem is losing RELEVANCE. You don't lose users by not monetizing mobile, but you can lose users by monetizing mobile however. Short/steady wins the race, especially with 16 billion in the bank

Many ebay users also use FB. And a lot of FB users use Paypal. Think about it.

Ads, movies, music, even games aren't really what will help then make huge amounts of money. Transactions will.

Agree transactions will make money for somebody.

Let me take just take one example of 'movies' from your sentence. Would you think of Youtube or Facebook as a natural choice for watching paid videos/movies?

Likewise, IMO, there will be specific things for specific purposes.

I will proffer that the specific purpose for FB usage are things like vanity and managing one's image (how one wants to be seen in their social circle).

Recently I am seeing some 'xyz watched some <abc video> on Social cam' kind of statuses on FB, of some xyzs who I am sure have not noticed such broadcast to their friends. These kind of mistakes, might just result in some very embarrassed and angry people.

(Am I the only one scared of clicking on anything, on any web page on the Internet, that is wrapped in 'Facebook blue' ?)

I believe the privacy concerns of these kind are going to spread to a wider base of people.

Edit: rephrase

>>Recently I am seeing some 'xyz watched some <abc video> on Social cam' kind of statuses on FB, of some xyzs who I am sure have not noticed such broadcast to their friends. These kind of mistakes, might just result in some very embarrassed and angry people.

This is true. Since I observed this. I take care to log out of Gmail/Facebook/Twitter once I am done with them. And I never browse anything when I'm logged into into one of those sites.

>>Am I the only one scared of clicking on anything, on any web page on the Internet, that is wrapped in 'Facebook blue' ?

A lot of people are scared. I had to call friend to tell him personally that the <abc video> he watched that is showing up as the status might be embarrassing and he had to login and delete that from this status.

I don't logout, but try to open any links from within FB in 'incognito' mode.

There's a lovely browser addon called 'Facebook Disconnect' than blocks all third-party calls to the Facebook API. Available in Chrome and Firefox, and probably others.

>Likewise, IMO, there will be specific things for specific purposes.

It would do techies a lot of good to realize this is not true for most people. People do not have "specific sites for specific purposes". To most people the web browser is the internet. The distinction between different pages is fuzzy at best. And at this point facebook itself is the internet to a lot people. If facebook offered a compelling X experience (X can be anything here), people absolutely will use it. Do not fool yourself into thinking most internet users compartmentalize their internet usage. They absolutely do not. That is the power of facebook.

Replying to both your comments here.

Agree on your point that barrier to entry is higher for G+ than FB Search (if it launches).

Regarding Search: I would ask, how many people overall use Google search and how many use Facebook in the world. I would guess that the number is sort of equivalent, with google search users being slightly more than FB users.

And if that's the case, then what is to make people not use google search and shift to FB search (which is yet to be, BTW!), unless the quality is vastly superior. Which in my opinion is not an easy thing to achieve.

Also regarding any generic feature X, I doubt if people who are very new to Internet can start flashing their credit cards, if FB asks them to. Yes, they could be perhaps made to click on any thing, which again means just Ads. But, even in this, I think, we could be underestimating the intelligence of an avg. Internet user.

Also Google Adwords has a strong knowledge of user intent. And hence the Ads are useful for sellers. Over here, they are like TV Ads, but with a difference. And that difference is they can be ignored.

edit: minor rephrase

The reason that people would potentially shift to a facebook search would be for simplicity. Instead of having to go to google.com they can just search in a box that's on the page they're already on. Of course, this isn't so easy anymore as there are many ways to search google now. So I don't think just having an internet search box on the page is enough. But I don't think it has to be much more. Just the fact that you could search while remaining on facebook might be compelling enough for a non-trivial amount of users. Also a "socially informed" search could be a key feature, even if its trivially implemented. Just having a "trusted" friend's icon next to certain results could seem useful to a naive user.

The point is, I don't think facebook has to do anything fundamentally better than google to win many converts. The results just can't be obviously worse. And for what most people search for, I don't think this is hard. Celebrities, sports, products, etc; I'd say that's low hanging fruit considering the amount of brainpower facebook has on its payroll. The long tail search that google is famous for isn't likely to matter to the facebook user targetted here.

An obvious case study to a company leveraging their userbase to grow out of their original business model is Amazon with its kindle. It was a great product certainly, but the benefit having it advertised on the top of their landing page can't be overstated. So many people are intent on putting facebook in a social box and saying "well they can't monetize social so they're doomed" is short-sighted. Social is just the hook, there are literally endless ways they can monetize all those eyes.

Okay, looks like we will continue to have difference of opinion on this one. But nice getting to know your thoughts. Hopefully continue later some time ...

Actually they have tried to make money. The only thing that is working for them is ad-revenue. For 8 yrs, why would anyone think they haven't tried to make money? They are running out of time before they become a penny stock. In internet years it is a long time in existence and they better have some additional revenue streams.

Agreed. Facebook could do everything.

Any economical transaction involves a social transaction as well. Facebook, can be the underlying architecture of every economy.

Facebook is at the core of a large, new economic ecosystem: apps, websites, ads, mobile, causes, almost everything you can think of. They can enter in any business, and for sure they are going to expand these below, to rich an enormous amount of revenue over the next years.

Ads: I don’t know about any platform that will be able to show ads to (soon) +1B people. Their current page views is impressive, around 1 trillion/month. Ads revenue still small, compared to the amount of users they have, because the right formula to show the ads to the right people takes time to arrive at a perfect level. But when it does, it will be like a sniper, it will show a product/service you want, the moment you want. The social graph is becoming the DNA of the entire world population, it will increase its value as time passes.

Platform/Apps: They have built one of the biggest platforms with 9MM apps. Third-party apps integration and the entire FB platform is just one the most powerful things on the internet. It allowed new companies to plug into the FB community and scale a new user base quickly. FB is basically becoming an app ecosystem, maybe more powerful than Apple itself. Millions of devs are implementing their FB authentication system “FB connect”, giving FB the ability to know every detail about an app usage, the ability to gather data and visualize those data to people that matter to them. Moreover, with the new App Center they can send a big portion of traffic to various mobile app stores and take a cut out of the revenue for all those “price x install” apps: in May 2012, 90MM users were sent directly to Apple’s App Store. 7 of iOS Top 10 apps and 8 of Android Top 10 apps are integrated with Facebook. App maketing is very lucrative. The ‘LIKE” button is having a tremendous impact on media, brands and basically on the overall internet traffic; it’s a viral machine. And being able to show “events/actions” in a user timeline, is incredibly powerful; listen, watch, read, cook…can you get an idea?

Specific APIs: There is some sort of overlap between APIs and FB platform. As of today all FB APIs are free. But I don’t believe in giving for free additional value will last forever. Directly or indirectly FB will start to monetize its API calls. Directly by charging the premium usage of the Social Graph data or other specific ad-hoc new APIs and indirectly by taking a cut of the revenue that third-party developers are generating by leveraging FB APIs. The Social Graph owns more than 100 Petabytes of user data, that’s 2x the size of the entire written works of mankind. 12,8% of the world population generates real-time data, analyzed and stored by Facebook. Obviously, some APIs will remain free but the rest will be a cash machine.

Coupons/Deals: They failed here, but they will not give up. With FB Mobile, they know where you are. They can show you related deals the moment you enter in club or a grocery. A Groupon-like experience, but empowered with a more accurate location, your personal tastes and of course, friends with their recommendations. 

Facebook Credits/Payments: I believe this is going to be a tremendous revenue stream over the years. It may even surpass the Ads revenue one day. I envision a world, where every time you have to pay over the internet and offline you will have to just click a button: “Pay with Facebook Credits” from Ebay to Expedia or use your FB mobile app at the cashier. It will become the universal currency.

Much more: there are a tons of things that they can do, from user subscriptions (imagine having just 10% of the users paying $9/month to access premium services); travels, to organize weddings. But you know what? They don’t need to, there is the platform for that.

Facebook is basically becoming a new kind of telco. Facebook is speed. A new version of Facebook is released every Tuesday, there are 12,000 modifications per month, more than 1000 developers deliver code to be released each week.  Facebook average employee is 26 years-old.

FB could do everything.

Just for perspectives on "all the naysayers that are betting against the company", the percentage of stock on loan (e.g. for shorting) for Facebook was about 1% versus 5.3% for Zynga and 4.1% for LinkedIn as of May 23rd (the most recent I have data for) per Bloomberg.

LinkedIn for one, despite way more short-sellers than FB and despite the past month or so, still seems to be doing okay despite "all the naysayers that are betting against the company". Facebook is complicated, but undoubtedly is well-positioned for a lot of potential upside.

(Disclosure, I don't have positions in any of the companies mentioned here nor do I intend to initiate any in the next 72 hours.)

Get updated numbers, the crash the past 2 weeks have came from shorting the stock.

I think many people misinterpret the IPO crash. It's not that the market thinks Facebook is a weak company, or in a weak position. I don't think there are many financial analysts that would say Facebook as a business is on the decline (a la RIM). The return was simply not worth the price at the previous valuation.

Agreed. It's bullish on Facebook to value it at half of, say, Amazon. It's absolutely ridiculous to value it equivalently to Amazon.

Don't you think that has more to do with the fact that they asked for 25x sales than some sort of fundamental end to the financing market for technology?

Do you think this applies equally to B2C and B2B startups?

It's very possible that the Facebook IPO came early enough in this bubble to actually prevent a huge disaster. I did not like where things were headed with most startups in the past couple of years. The Facebook IPO was like a fire extinguisher that happened to contain a small fire before it got way too out-of-control.

If your startup has no business model, you better think of one fast. If your startup has no revenue or a lack of it, you better start generating a lot more really soon. If your startup has a solid business model and is cash-flow positive, it's time to start leap-frogging the competition and adjusting the course. This is the time when good companies become great ones.

I read this with a heavy heart, especially after working at Facebook before my current startup.

Facebook is an amazing company with some of the best people in Silicon Valley working to make Facebook a once-in-a-generation company.

But if Google debuted at $25b, and grew into a $200b company, how can Facebook grow by a similar multiple starting at a $100b valuation?

In my opinion, opening at $38/share sucked all the oxygen out of the room, in the IPO market, especially the later stage market, and potentially downstream as well.

Instead of debuting at $50b or even $75b, the delta was the price of the collective hope of entrepreneurs and early stage startups everywhere.

Because at the end of the day many investors will ask, "If even Facebook couldn't do it, who can?"

The price of leaving a little money on the table for most retail investors would have been worth the good will and Facebook's reputation. Because Facebook really is a great company that is doing and will continue to do great things, but PG is saying the air is gone, and no one knows if more will come.

Is all this a bad thing? Perhaps more companies should be valued based on revenue in stead of API calls/month etc.

It's important to remember that pre-IPO Google was a vastly different company than post-IPO Google. It wasn't just the Eric Schmidt factor, which cannot be ignored, but the way the company seemed to position itself. With billions in the bank they could take more risks, explore new markets, and branch out in somewhat unpredictable ways.

In 2004 Google Maps didn't exist. Android was an independent entity. The Google server farms were still few and far between. It was a search-based advertising company and nothing more. You could argue they're still fundamentally the same, but that's just because they have a rock-solid foundation to expand from.

Facebook in 2020 could be a completely different company and who knows, maybe a $500B one.

Maybe, that's a possibility.There is a very good possibility that Facebook will be in the same range as Google or Apple. an if any companies have a chance at $500b in 2020, Facebook are probably in the run. It's just not all that likely.

There is also a possibility that Facebook won't be able to monetize with the same effectiveness as Google. It's also possible that Facebook will have fewer active users in 2020.

Valueing a company purely in terms of its current cashflows and assets without taking into account its potential is wrong. I'm not saying that. Companies have quality and Facebook is absolutely a quality company. This way of thinking about businesses (good companies & bad companies) is rightly ingrained in the way we talk about companies. Talking about them as over/under valued companies seems shortsighted and it is, especially if you are talking about startups. When good startup investors make their most hopeful investments, valuation comes second.

This is also true of bigger companies. Google has quality that Yahoo doesn't. Facebook has quality that Groupon doesn't. Warren Buffet evaluates companies this way - great companies at a fair price.


every rule of thumb has a reductio ad absurdum. "Valuation doesn't matter if the company is a great company" only goes so far. The way Facebook was/is valued takes into account their potential to grow like Google. It takes into account their potential to be the biggest company in the world. It doesn't take into account their potential to fail. The way its priced even defines as failure outcomes that should be defined as success. If Facebook can double its profits every 3 years for the next 10 years they'll probably still be a moderate failure for those who bought at $100b. If they double every 5 years, it'll be a bomb.

I think the thing that people need to remember is that Facebook really only IPOed because the had too. If Google had tried to wait things out as long as Facebook did, then it's quite possible that it would have IPOed near $100b (Sep 2005) and grown to the $200b they are at today.

The money that was there to be made in the Facebook IPO was made before Facebook went public in the secondary market. For professional investors that are getting in at the seed round until the C round or so, Facebook isn't indicative of a problem. Those investors can still make money, it's just that they are going to exit via secondary markets now instead of an IPO.

true wrt filing, but still doesn't change that the market doesn't value Facebook at $100b. The current P/E is just too high.

Will Facebook get back to $100b and beyond? yes as soon as it starts making more money.

I don't think anyone disagrees that the P/E is way too high.

Some people (including me) just think the E is going to move up, rather than the P move down. I made this mistake with LNKD -- thinking it was an absurd P/E, not realizing that the costs were relatively constant and that increasing revenue would produce huge increases in profits.

To those having fun saying "pop", contribute value not onomatopoeia.

The clearest message in PG's letter is simply "The startups that really get hosed are going to be the ones that have easy money ... So don't be that startup."

If you have a viable business then you can either a) proceed without venture capital or b) prove yourselves enough that you'll get the terms you need. Yes, (a) may make you move slower, and (b) means that potentially brilliant ideas that have a bright side just past the edge of horizon are more difficult to get off the ground, but this has always been the case.

One of my mentors always quotes "you don't know the value of your captain until you hit turbulent waters". These are our turbulent waters. For those of you ready for it, this is a time of opportunity.

So here is an idea for an email feature/gmail plugin: 'Semantic Scramble' Basically, any sensitive email that you send to a bunch of people is automatically scrambled (retaining original meaning/correct grammar, just a small shuffling of words) so that each person gets a unique email. Easy to find out who leaked it. You could add a similar unique jitter for sensitive photos/images...

Considering PG didn't strike down the story I presume to think he expected it to leak out or didn't ask it to remain confidential.

Re: "Semantic Scramble", this was/is used quite successfully in a university course I tutored. Students are supplied with Java code featuring a unique comment style (/ * */). So many students blindly copied code out of another student's assignment and submitted it as their own that we could effectively generate a map of the plagiarism without even looking at the code -_-

For images steganography would work easily enough and for "semantic scramble" see "Practical Linguistic Steganography using Lexical Substitution"[1] from EMNLP 2010 =]

[1]: http://www.cl.cam.ac.uk/~sc609/pubs/emnlp10frannie.pdf

Or pg realizes that once the cat is out of the bag, you can't put it back in. If he takes it down here, it will be posted elsewhere.

At least this way the cesspit that is Business Insider doesn't get any extra pageviews from YC.

But there's another idea: when you want to share a sensitive e-mail, you run it through a 'Semantic Scramble' so it can't be detected that you specifically leaked it.

Generally in high security environments, you don't transmit sensitive information on systems where you're one button (intentional or accidental) from sending the information to the public.

Clearly labeling every instance of the information with how sensitive it is also helps (per page or per paragraph).

It's unrealistic to build a separate semi-airgapped network for most business purposes, but email is broken for sensitive information -- some kind of document room/DLP/etc. system is probably a good idea.

That's called salting, and many firms already do it. I'm not aware of any software packages to automate this, but I haven't looked either.

The canary trap.

This is how the music industry does it with material they send out to different parties like reviewers or magazines with tools like Haulix, except they use watermarks that are undetectable to the ear but encoded in the file itself.

Wrt email however, I don't think Paul really minded that it was leaked or just realized it was futile to stop it, perhaps that's why he un-killed it.

For those not familiar with the term:


PR people do this, it works

Wouldn't this be easy to defeat by changing words around yourself before distributing? It would either match to someone else's copy of the email, or not match anyone at all. It would need to be highly resilient to a lot of tampering, which doesn't seem reasonable for relatively short documents like emails.

This happens every couple of years in tech. I've personally witnessed 3 downturns now. One was real and two were arguably the best time to start companies. Raising money might be harder, but generally only for bad companies.

Three? 2001-2002 was basically nuclear winter in my experience. 2008-2009 wasn't actually that bad except outside tech (although, I was in Iraq and Afghanistan during all of it). Before that, you'd have to go to early-1990s, when I was...12, and some HN readers weren't born.

I was thinking of 2001-2002 (genuine downturn) and then separately 2003-7 (great time to invest - e.g when I invested in Skype). Obviously 2008-ish (RIP good times) was the 3rd. Maybe I shouldn't have called them "downturns" but instead "depressed VC periods".

I was working in banking 2007-20010, and wasn't so wired into the startup scene then. What was good for startups and tech during that time? (Disclaimer - expecting a repeat of it in the next few years, want to be prepared).

I would think QE 1 + 2, where the abundant institutional capital eventually flowed to VCs since the private markets in the tech sector was the only thing that was really performing post early 2009.

Why would they be good times to start companies? Less clutter for investors to sort through and more available talent?

Mostly: Less competition for users (e.g. there are 600K iOS apps now - too many), and easier to hire (main alternative right now is to get funding and start a company).

Also, fewer marginal companies over-funded and thus competing with you (maybe by selling at below long term cost).

When I saw PG's email, I thought this was a self-fulfilling prophesy, even if it was only seen by YC founders. But now that every has seen it - it will be in Forbes and TechCrunch soon no doubt - it seems almost certain.

If just YC founders see it, then they'll take less money, and get lower valuations, etc, leading the tone of the valley. But if everyone sees it, investors will close their wallets, people will declare the bubble is now popped, and the prophesy will fulfil itself.

I don't like this attitude. Sending that letter out is the honest thing to do. If you're gearing up to try and raise money, that is some important insight, your business is potentially in the balance right now.

I've been trying to wrap my mind around the FB IPO for a while now. FB was ordained by the media. It was the next great Silicon Valley company, Zuck is the new Gates/Jobs/Dell/etc.. All the hype was about "biggest ever." There was very little real criticism, there were some doubters but nobody expected the stock to perform like this. FB was/is a legitimate Google competitor... I think in some circles people were skeptical about the value of social and its real 'value' but still, nobody was predicting this. It was going to climb up to $70 and then settle in around $45-$50, that's what everybody wanted and expected.

To me, it shows that the investors have already closed their wallets. Maybe it shows something worse. Talking about it legitimizes the concerns people clearly have been having already but that doesn't mean they weren't there already or that it's suddenly worse. It may accelerate some things by making for less stupid people that aren't in the know but it was already happening. The stock market has done well the last 4 years but I don't know how many other indicators show that the whole economy is doing well and I think a lot of people (think not elite web hackers) would think or say we're still in the great recession, employment is still in the 10% range (maybe higher depending upon who's spin you want to take to heart) they're still sorting out mortgages and all that ilk, who knows how useful all the people coming back from the wars are I'm sure they've got some emotional issues but who knows when they'll surface, what percentage of college grads have no jobs? and then you've almost certainly got to unwind the Euro from Greece and who knows how that's going to work. Worse, if it goes pretty bad, then it's probably bad for the whole world and if it goes really well then the uncertainty could continue as there might be pressure to boot other countries out of the EU rather than bail them out.

> I don't like this attitude. Sending that letter out is the honest thing to do.

I wasn't criticizing the sending of the letter (at least, I didnt intend to have that attitude). Indeed, I found it very useful to read. Much less happy that it was leaked, of course.

I hope the leak doesn't prevent pg from sending his honest advice to alumni, but if the honest advice leaks and has wider implications for his portfolio, well that would be pretty bad.

I don't know how much this will affect investors. It's not like the lackluster performance of the Facebook IPO is insider information. This just seems like a way to tell companies what they might expect when they need to fundraise. Without more data, it's impossible to know exactly what this will do to valuations. And the advice to run lean isn't exactly new advice from pg.

Founders will still try to get the best deal that they can, regardless of the market.

Only the Social Network bubble is popped -- which is the majority of companies that YCombinator funds. Social network websites that can be built in 3 months and have zero paying customers or any potential profitability really shouldn't have existed in the first place.

Agreed with pbiggar about trolling. Most YC companies are by far not social network websites. You have not done your homework, or you're just trolling.

I'm not sure where you get your information, but it looks like you didn't read pg's email or my comment.


They're trolling, the best response is calling it out.

I was calling the comment above me catty, which it was. I'm not trolling, but trying to convey that sharp sarcasam doesn't really ad much to a conversation. If people want to downvote me instead of the sarcasm, that's cool (I just don't necessarily understand it).

Sorry, miscommunication. waveform was the troll, not you (though I dont think adding single word replies ever adds to the conversation on HN).

point well made. I could've been more elaborative.

I am not sure what will cool the investment climate more. The fact that facebook's IPO was a disaster or that PG sent this letter and recommends to be cautious.

Facebook IPO disaster, coupled with Yelp and Groupon and the others, is the real death knell. PG's letter merely states the obvious.

The goal of the VC game is to get 10x+ returns. That only happens for early or mid-stage investors if there are investors down the line investing at higher valuations. Those late stage investors depend on the IPO exit. If the late-stage investors lose confidence (which is what appears to have happened), the mid-stage investors lose confidence and thus the entire market contracts.

From the other side, the entire wall street game is crashing. People, for better or for worse, are convinced that the entire equities game is a sham. Volumes (which lead to commissions and revenue for the firms) are down in all of the asset classes, and the bonds have reached near-ponzi yields (swiss bonds actually have negative yield, which means investors are actually paying interest ...), so the "retail investor" who traditionally buy into the IPOs aren't playing a significant role anymore

But PG's argument is the Facebook IPO will put off investors investing in __startups__, this is the very definition of early investors, which for facebook has made a few billionaires and many millionaires.

You have to work backwards. The penultimate round of investors depend on future investors to buy in at a higher valuation. The third to last group depend on the second to last group. And you can walk this all the way back to the seed stage. If there are few people left at the end to buy up the IPO then the late stage investors dry up and the ripple works its way back to the seed and angel rounds.

I'm thinking that too. Reminds me of the "RIP Good Times" Sequoia effect. And now, other prominent investors are posting in agreement with this article, furthering the ripples.

Facebook waited too long. Part of the psychology on joe public's love of Apple has to do with APPL -- they got to invest in the stock while investing their time (and $) in their products.

Facebook decided to have all that growth in value for insiders only. And it's not like they wanted to be a private company, so the outcome is planned.

By not leaving any money on the table, and having joe public not share and invest in their success, when the government starts to beat down on them, there won't be much public support for FB.

And pg is right: nor will there be much support for those following in their footsteps. Scorched Earth. Those investors did well (and many HN peeps on SecondMarket). So well in fact, it won't happen again. Not for a long while.

Mmm, I disagree about psychology of investing stock, time and products together - in Aus, there's a lot of Apple love but little investment in it's stock. Doesn't harm the brand... In the end, investors may like a good stock but customers just like a good product.

Bubble 1.0 - Just have a prototype, and money will follow you.

Bubble 2.0 - Ship a product, make sure you have enough users, and money will follow you.

Post this bubble, is it going to be: "Make profits, because that is where your money is"?

I am not implying bubble as a bad thing, fwiw.

edit: grammar

Am I the only one thinking that Facebook's IPO was actually a success? The point of the IPO is to sell your company shares at the best possible price and Facebook did it.

Compare to an A/B/C round for a startup. If you know investors are willing to pay $50m for the round, but you settle for $25m, then you just lost $25m and gained nothing.

I think the main reason FB is falling now, is not because the stock was not worth $38, but everyone that expected it to quadruple overnight is now selling.

On day 1 it was a success, but now it is a disaster for several reasons.

1. It is harder to attract people to come work for you when you company's valuation is going down. Obviously FB can afford to pay for talent, but that cost just went up.

2. If FB ever needed to get more investment money, people may be more reluctant due to this situation.

3. If your company was getting acquired by FB would you want to be paid in cash or Stock?

The FB IPO sends a signal that certain exits are about 35% less lucrative than the most enthusiastic might have thought. And, the IPO wasn't the 'starter pistol' for another frenzy. I think the memory of 12 years ago hasn't faded entirely yet, and there's so much other uncertainty in the economic world no one can be a runaway optimist.

But the IPO results might actually boost certain kinds of deals. For example, would you rather sell your company to FB for $X million of FB stock when that stock is at 45 or when it's at 26? (Of course X is larger when FB is flush, but I doubt X goes down linearly with FB market-cap when there are other bidders. And psychologically, it may be easier to think FB grows 50% back into its peak, than 50% more above its peak.)

If there had been an indiscriminate frenzy, everyone knows that ends in a crash. When everyone's instead been reminded that companies are different -- FB isn't GPRN isn't AAPL isn't LNKD -- and the particulars of value and model matter, that's better for a sustained boom at a more measured pace.

This will probably be a self-fulfilling prophecy.

"The best solution is not to need money."

This always is a good rule for any kind of business. not only about startups.

Paul, you're trying to explain basics of business processes.

In YC application, Faq there is an item in which you're asking to state is there any programmers in startup team, and explaining that if not, you better should have one. I think you should add one more item, on which YC team should have experienced and successful project manager, businessman who make startup profitable and successful.

I am confused why the FB IPO is considered anything other than a failure of bankers to price the stock correctly. Did anyone who actually understands Facebook's business today expect it to maintain a 100B valuation? Did any institutional investors throw money into it hoping it would rise up to 150B? If you invested in Facebook at the 150 P/E or whatever absurd value it was you deserved to get burned and hopefully are not investing in startups.

I note that BI is called a "cesspool" in these comments, and that this email has been posted here so that you don't have to send any traffic to us.

Just so everyone is aware, you'd not be reading this email right now if us cesspool-splashers hadn't done the hard work of getting a copy and posting it. Now, by not linking to us, you are essentially punishing us for that work. I suppose you'd prefer a world in which you hadn't read this email.

The problems in Europe are a more severe weight on the market (whether generally or for tech stocks specifically). By any rational logic, the Facebook IPO went well:

- the company raised a lot of money at a good price,

- the company remains valued at a high multiple (ie, even today valued on the dream not on the numbers), and

- I can imagine no better antidote for bubble muppets than the performance of the IPO

Bubbles can be fun but they're not healthy. Recent events are far better than a crash. It's just a correction. The emotional hand-wringing will last about as long as it always does, and be forgotten just as it always is.

Events in Europe may turn out much more severe than the minor impact to date. And they may not. But that's a bigger concern than the over-valuation of social companies.

"The best solution is to not need money. The less you need investor money, the more investors like you". That's true if you are dropbox, airbnb and other startups that have a solid revenue avenues other than advertising. If twitter or facebook itself had been founded after that disastrous ipo (facebook ipo) they would be in a worse position than dropbox or airbnb in terms of funding and revenue. That said, i think facebook will get to its intended valuation within this year.

There is a fundamental problem with the way the web is working now. We're in a kind of limbo. Companies like Dropbox and Airbnb (and the company I mostly work with) actually sell a product and as you say they're good.

I've been having a hard time formulating what I'm about to write so I apologize if it doesn't make a lot of sense. I can't help feeling that the Facebooks and Twitters are using the web in a way that there really isn't a proper infrastructure for. They seem to be quite expensive to maintain and, by nature don't generate lots of money by what they do. In my opinion, if they charged they wouldn't be able to build the big networks of interconnected users that defines their value.

I think there are ways past this conundrum but I don't think that profit motive will be the what pushes them and I think they will require a somewhat different infrastructure than we have now.

With the risk of getting downvoted; why this letter was made to public? I think it was meant for YC companies only. FB IPO has nothing to do with early stage investing. It may be a good thing that IPO didn't pop. We've averted a major bubble. But making this letter public made situation even worse. Now all the investors will rethink their investments. Why? Because PG (of all the investors) has said it will be hard to raise money.

And expect Business Insiders, Venture Beats of the world to spread doom and gloom. After all it will attract more eyeballs. RIP good times indeed.

Edit: grammar and minor changes

Can someone explain the perception that Facebook's IPO was a disaster? Doesn't the fact that the stock has not risen mean that the offering had the correct price?

Opening at 38 and staying in the high 30s/low 40s would be reasonable. Maximum value for FB, Inc., stable price.

Dropping to 26, not so much.

Remember that 26 includes the value of $9B of additional cash on the balance sheet from the IPO. So the valuation of Facebook as a business is actually lower still, once you back out the cash.

I'd agree with you if the price has not risen. In reality, the price has fallen, more than 20%. It may be good for Facebook, but the price was not correct.

Interesting but Facebook was absurdly valued to begin with. At nearly 100 times earnings, it seems to me that Mr. Market actually responded appropriately for now.

Facebook has already been monetizing using traditional revenue streams (ads) and there doesn't appear to be much left to do there.

They may have another ace up their sleeve, but it's not Wall Streets job to guess that they may.

I have been mixed on this, and I think it will have an interesting impact on the IPO markets.

But, one area that I am still waiting to see play out is the intersection of secondary markets and IPOs. People have raised the examples of Groupon, Yelp, and FB (Zynga is another that comes to mind). All social, yet all different. Groupon has had some interesting accounting practices along the way, FB was richly priced by the secondary markets.

I have yet to see any big name, non-social, companies really test the markets, and I mean when they are in a position to do so -- strong product, strong revenues, and strong path moving forward.

Given what is happening in Europe and the world markets in general, there will be an impact on investment.

There have been basically 3 downturns (as I believe cdixon mentioned) in the last 12 years, is this the 4th? Or is this a by product of new avenues like the secondary market?

I have no idea, but it will be interesting to see how it plays out.


This is not necessarily a bad thing for the new startups, in my opinion. I want to quote PG from his essay: The top idea in your mind (my favorite one btw)

{...} I'd noticed startups got way less done when they started raising money, but it was not till we ourselves raised money that I understood why. The problem is not the actual time it takes to meet with investors. The problem is that once you start raising money, raising money becomes the top idea in your mind. That becomes what you think about when you take a shower in the morning. And that means other questions aren't. {...}

This is actually how it works, and more or less always worked here in Europe. No investments, no money raising, only part of your daily job salary invested in your startup ideas, and endless nights learning, coding, failing in a loop....till you succeed and you start to make money.

because "down rounds" not only dilute you horribly...

I'm missing something here. What makes "down rounds" so dilutive? I'm assuming we're talking about a larger effect than the obvious "lower valuation = handing over more stock to raise the same amount of cash" effect.

The investors in the initial round usually have some sort of anti-dilution provision, so the founders get diluted much more. See this, for example:


Ah, thanks for explaining. I thought such anti-dilution provisions would have gone out of style a years ago.

I'm not sure what PG's intention was, but I bet that "under-the-table dilution" in the form of liquidation preferences, board seats, and veto rights on sales below Y% return is much more common in down rounds.

These investor privileges often drastically change a founder's control of the company, and their payoff vs valuation curve, even for a nominal valuation that is "at par" for the founder's nominal equity value.

The liquidation preference also bites you more as a founder because you are further away from not being affected by it.

I am not sure about this but I can imagine the down round VCs also want the same exit valuation guarantee, i.e. if first round got 1x liquidation preference at $8M valuation the down round VCs in a $6M round might ask for 1.33x liquidation preference.

I think this is a good thing, as startup valuations are already frothy, especially when based on users instead of earnings.

Perhaps this is what's needed to bring the game back to reality so that everyone can prosper.

Asserting that the decline in Facebook's stock price post-IPO has generalizable implications for early stage companies is helping the tail to wag the dog.

I agree with Fred Wilson that Facebook's present valuation should be a thrill to its early investors, not a chill http://www.avc.com/a_vc/2012/06/some-perspective.html.

It is natural to see personal meaning in well known events. Venus is passing in front of the Sun right now. Seems like a good time to call some investors.

"... But no one knows yet how much. Possibly only a little. Possibly a lot, if it becomes a vicious circle. ..."

The email is counter-intuitive because being truthful and signalling a possible crunch speeds up the observation. It also gets you trampled as the herd looks at the lead changing directions ~ http://news.ycombinator.com/item?id=4067278 but it also forces teams to 'adapt' quickly.

FB is a healthy message. Before the IPO it has been noted that late-stage financings were feeling out of control in terms of valuation. BDC-based funds have sprung up to "invest" in the "pop" but don't really help build companies directly.

Smaller, more focused rounds at lower valuations are probably a good thing. So is using sites like kickstarter to generate funded ramps for new products.

The more capital efficient you can be the better.

Late to this thread, but I posted this on May 31:

Facebook: Did they just pop the bubble and screw twitter?


Two outstanding questions: 1. Can we be done with the advertizing business models please? 2. How much did the Facebook IPO really shift the private equity market?

I spend so much time arguing and thinking critically about things that I've made a decision: I'm just not going to question Paul Graham. It's not worth my time, he's right enough where it's probably not dangerous and let's be honest: we all need something solid to lean on. I've realized I've leaned so heavily on his advice up to this point, so I'm just going all in.

Isn't it a bit early for someone like pg to be calling this?

Calling it publicly essentially creates the effect, especially from an accelerator lead.

Anyways, at least pg's making more founders angry with FB & Zuckerberg. Only good will come of that. ;-)

To play Devil's advocate for a moment, Facebook's IPO will also create a bunch of millionaires, some of whom will want to become angel investors. So it might become harder to raise money from VCs but easier to raise it from angels because the rising supply of angels will counteract the tightening market.

So FB clusterfuck of an IPO might end up being really good for them because now it will be much easier to hire...

Many of the people I know at Facebook are talking about getting into Angel investing or starting their own companies now that they have money. I'm most worried about all that seed money flooding the market, making it even harder for existing companies to find good talent.

Isn't it the case that there simply is too much money and at the end of the day, people seem to be desperate to invest it somewhere? I think that is a reason why most stock market crises don't seem to last very long.

"The best solution is not to need money". Best advice on this post.

As wise as a Warren Buffett letter to shareholders. Thanks, Paul.

Or just don't raise money and bootstrap from the ground's up.

In argentina there's almost not other way. BTW MG Sielge wrote about the FB IPO and said it was bad for short sight bankers but good for FB, is he wrong?

Did you hesitate before sending this out due to the fear that such a letter might itself push the market closer towards a vicious cycle?

Thank goodness. Now maybe it just might be a bit easier to find some developer talent now that the easy money faucet has turned off.

"The best solution is not to need money."

"The startups that really get hosed are going to be the ones... that pay little attention to profitability."

A post like this probably only helps push along the vicious cycle :) Not saying it shouldn't have been posted, but it's ironic.

PG's message sounds too alarmist. Facebook has a huge impact on the tech ecosystem, but FB's impact is I reckon overrated.

Who is emilepetrone? Did pg really write this?

Also why did this disappear from the front page, and then reappear?

PG wrote it but sent it to YC Companies, not publicly on Hacker News. emilepetrone took what PG sent and posted it here.

If he didn't, then business insider was certainly fooled. [0]

[0]: http://www.businessinsider.com/facebook-fallout-y-combinator...

funny how people copy paste stuff

I'm sure the Facebook IPO will hit seed/early stage funding less than the SF housing market :)

I think only problem is that we again got into 2000-dot-com thinking that "users == money".

Founder shares get diluted in a down round, but employee options go completely underwater.

how obvious this post. It just tells we're screwed now by the bad facebook ipo and find a business model fast. Now the party is not over but the drinks are getting fewer and the music gets silent. Cheers, Chris.

R.I.P. Good Times 2.0

R.I.P. Good Time v1.0 ended up marking the trough (not the peak) of the last cycle.

That said, I have more faith in pg's market timing abilities than in Sequoia's.

I think this advice is useful in just about all times.

word up pg. Let the winter come and lets see who can ski.

This seems ethically dubious.

I don't agree with the parent comment that I'm replying to, but I think this is a healthy skepticism to have. I don't think it deserves a downvote...

I appreciate the reasoned reply. I respect pg immensely, which is why I spend time on this site and why I found the post surprising.

Did I hear a bubble just pop?

A lot of people seem to think so.

I'm sure Peter Thiel wishes he could go back in time and not invest anything in Facebook, he only turned 500k into over a billion, but if the IPO went better he could have made it to 1.5 billion. I agree all those investors that might have invested in startups will be less inclined because of this. Who wants a measly billion when you could have 1.5 billion!!???

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