Startups Selling to Other Startups: A House of Cards?
techcrunch.com
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I hear a lot of doom and gloom "the apocalypse is upon us" headlines, but I have yet to see numbers that show that all of these overly-funded startups without sustainable businesses going poof will have a massive impact on the broader picture (or the public markets outside of a few edge cases that are already seeing corrections).
Sure some people will be out of jobs, and that really sucks, but the market is still hot and they will be scooped up into companies that are doing just fine. Are there really enough people employed by unsustainable startups to do sizable damage to the economy or the housing market should they all disappear overnight?
Serious question--I've seen lots of hearsay, but little actual data on this specific aspect of things.
Total VC funding in the US is on the order of $50 billion per year. If you assume 20% of that goes straight to advertising, which is unlikely, that's $10 billion. Facebook and Google sell about $100 billion a year worth of ads.
I would guess that Google and Facebook have less than 1% of their revenue concentrated in VC-funded startups. They simply don't have enough money to matter relative to the size of the broader economy. It is not 1999 -- Yahoo is not making headlines with money it got from startups whose valuation is driven by Yahoo making headlines.
People in the startup community think the startup community is co-extensive with the tech industry. AppAmaGooFaceSoft beg to differ.
It's about #theCapitalCycle of an entire ecosystem...#theUnicornEconomy
You wouldn't happen to have any on the more local housing and local economic impact of startup employees would you?
I'm convinced that as the rest of the world burns or stays stagnant, they are looking for a scapegoat, and the geeks who are suddenly rich and in some cases pushing them out of their homes and away from their families make a mighty easy target.
The world wants their economic collapse because God forbid this economic cycle go on for longer than the last (but I'm sure it would be just fine if they were profiting from it).
I'm not doomsaying, but if there's a big movement in anything it tends to have weird action at a distance.
My guess is not much at all. They almost certainly don't have enough total employees to dent the housing market because there is still huge demand to live here for other demographics, and the broader economy has many other healthy businesses that wouldn't even notice if all the VC money disappeared overnight.
People think the VC ecosystem is larger, and has a greater impact than it actually does.
On the other hand, if you sell to just a few, now your own volatile future is coupled with theirs. You might run out of cash, hire bad people, make bad decisions -- the company fails, and that chance is now multiplied by the chance that other company make bad decisions, bad investors, burn through all the cash etc.
So it seems the answer is to just sell to a lot of startups, to spread your risk. That might end up like the sub-prime mortgage crisis. The risks everyone thought were decoupled from each other, weren't actually. So when start-ups start imploding and investors start looking at ... I don't know solar, hyperloop, or robots, the panic spreads etc.
Some degree of a "House of Cards" certainly exists. Look at Y Combinator - part of its value is being able to sell within the network to other YC startup companies. At demo day, many of the logos on the "current customers" / "traction" slides are other YC companies. When a company doubles in size every year, almost everything breaks - from HR to communication to hiring - so, of course it make sense to start sales with customers whose pains are so dire that the sales cycle is days instead of months. The customers may be startups, but revenue is still revenue. A startup is defined by growth, though, and at some point leads in the startup market get exhausted and a company must search for prospects beyond other startups to continue growth.
Breaking out of a single vertical, whether it's selling to other startups, a market outside of San Francisco, or even a product that doesn't cater to just high-end consumers is the key to making it huge. Uber started in a niche market - high-end on-demand chauffeur services to people who could afford their own car, but Uber managed to go beyond that vertical. Shyp just shut down Miami - that's a far bigger signal than the health of their SF market. Can Mattermark find a market outside of tech investors? That's the key to justifying their valuation. Many startups will not develop a repeatable growth strategy outside of other startups, but alas many startups do not succeed.
No startup can continue the growth prospects that define them as a startup by just selling in a narrow market, whether it's startups, San Francisco, or on-demand black cars. There's low-hanging fruit in any approach, and the ability to continue growth beyond that defines success.
There's a whole wide world of people and businesses that could benefit from software.
What we all can, and should, complain about is the practices of VCs themselves, which are turning the tech industry and a lot of things in its immediate wake into a complete disaster.
[0]: https://fundersclub.com/ [1]: https://angel.co/
[1] Though some laundromat empire can be staggering in scope I imagine.
[1] http://www.investopedia.com/terms/a/accreditedinvestor.asp
Thats to say nothing of other investment vehicles like treasuries or real estate.
SV is an important side show in the investment arena, but it is just a side show.
I won't speak to whether SV has a problem with being insular as I don't have any information one way or the other. Your comment though might be titled exhibit #1 for "lack of wider vision".
When people talk about the insular nature of SV they are usually referring to the echo chamber it creates. To those of us on the outside looking in, it seems like SV is more interested in "a social network for X" or "Uber for Y" than branching out to those other major industries.
Not in some metaphorical way. You, xyzzy4, and all 8 of my downvoters across my couple of comments here would consider investing in a silicon valley social network but would never consider investing in the above. Just won't happen.
if you want this to change you have to take out your pocketbook and start writing checks. that simple. it's like complaining that mcdonald's doesn't sell vegan hamburgers while buying 7 big macs a week. they don't sell vegan hamburgers because people buy big macs but they don't not buy vegan big macs and then complain to mcdonald's then they can't - and anybody that tried to open a vegan fast food hamburger joint competing with BK, McDonald's, and Wendie's would find that people do not show up, do not take out their cash, and buy a vegan big mac.
It is what it is! Fast food restaurants don't sell vegan hamburgers because people don't buy vegan hamburgers, and startups don't operate outside "social network for X" or "Uber for Y" echo chamber because investors - specifically you, whatever reader you are - don't invest in these things. if you want this to change, take out your pocketbook and write a check.
- Willing to try new products that help them focus their (limited) resources on their core product.
- No legacy integration issues.
- Generally high quality employees that provide strong product feedback.
- Willing to move quickly.
The downside is of course that they may not have a lot of money and in total, usually represent only a very small part of the market, so you have to use the initial feedback / momentum you got from your work with startups to move into more traditional customer segments, but they are still a great way to get started. The risk is of course that you end up building a product that only works for startups, but as long as you understand that risk and validated that the problem you are solving is not exclusive to the startup community, in my experience you should not avoid working with (reasonable) startups.
Do executatives actually believe AWS and Twilio are saving them money? That seems like the least sensible reason to use the services.
I thought the AWS/Twilio value was based on the fact that most companies don't have the know-how or time to recruit or manage or build their own infrastructure, and it's better to spend more so you can focus on your core competency.
Regardless, I don't think the causality exists to the extent you're describing. It's no different than any open source dependency. Sure, I know how the functions in underscore work. That doesn't mean I need to take the time to roll a deep clone. Saving time and money doesn't imply cheap and broken.