Hot Tech Startups May Have Higher Funding Hurdles
nytimes.com
nytimes.com
Tech startups that can show viable business models with actual profits will weather the storm. However for those that are living on 'user growth' and hype, well it's going to be a bumpy ride.
In boom times it can be a challenge to control burn for even well-run companies because the markets for things like employees or office space become distorted due to high demand. In bust times these expenses naturally go down, which helps well-run companies.
So, longer than 1-2 years, which seems disturbingly typical for a lot of startups I've talked to.
In contrast I once interviewed at a startup that had a net burn rate low enough to keep running for 7-8 years without needing additional funding, even assuming no revenue growth. Presumably they'd be in a better position to weather a tech downturn (though one has to be careful about what a downturn would also do to said revenue - companies building products and services for other tech companies are especially susceptible).
A) The business generates enough profit to be self-sustaining, or
B) The business is bought and thus this is all someone else's problem now
C) The business manages to convenience investors that all it needs to get A or B is throwing more money into the pot to keep things going a bit longer
When the market tightens A is king and B/C become a lot harder hence why everyone stops caring about 'soft' metrics like fluff and user growth and starts caring a lot more about hard facts... like is this great idea actually making any money!
Practically speaking, there is little difference between 3 years and 10 years of runway, because a company that stagnates for 3 years is likely to lose key employees and momentum whether or not there is money left in the bank. The goal of a startup isn't necessarily to survive at all costs, it is to make sure to survive long enough to see if the concept works.
That is where there is no exact answer, because it depends. If you are a startup where increasing revenue isn't on the near-term road map, you might want to be more conservative because you will eventually be depending on investors in the future. If you are a startup with really strong unit economics and a path to profitability, you can be more aggressive because in the worst case scenario you can probably reach profitability via the backdoor (layoffs, cutting expenses, etc).
Likewise the resulting contraction in the job market can impact even very talented developers, contrary to the widely held opinion that as long as you're a talented developer you'll be okay in the job market. Saw this happen a bunch in the last go-round in 1999/2000. Once everyone goes into panic mode and starts the cycle of layoffs and hiring freezes if you happen to be a talented developer left out in the cold of the musical chairs that occurs when the market starts shrinking, you could be in for a really bumpy ride for a bit (hopefully you have some savings) before the stronger, still-alive companies loosen the purse strings enough to start bringing new people back on-board.
I'm not suggesting this sort of cleansing isn't a good thing for the industry over all, in a lot of ways it probably is, but it brings with it too much potentially life-altering collateral damage to individuals for me to be very rah-rah about it.
Uber is a real business, as is Airbnb and several of the other unicorns. Real world businesses, small and large, buy advertising online, which means that companies like Snapchat and any other company that can grow a large audience cheaply have justifiable value as well. We live in a fundamentally different world than we did in the 2000's, so I am not too concerned (except if I were looking to raise capital in the next few months).
If it takes a dot-com 2.0 crash to weed out all the frothy optimistic-but-useless startups and drop housing prices back to normal instead of $4,500 per month in SF/NYC, it's probably worth the economic hit.