Steve Blank: 'VCs Won't Admit They're in a Ponzi Scheme'
inc.com
inc.com
In business as in IT the basic rules stay the same. If it is healthy to go public with five consecutive successful quarters, then aim for that with your business. If you are editing text better spend time learning vim or emacs than the newest flashy text editor. No need to hype the explosion or burst of any hype.
Thus, I'd rather see us discussing about how to make a business work. And I'm really disappointed that Steve Blank, who always was about core marketing values, participates in such a attention seeking article.
So far I've identified:
1. Commercial real estate. Could take a short position on any public companies (ex. CBRE) though they're likely too diversified to drive them down to zero.
2. Hiring. Could bet against LinkedIn? Most local recruiters / agencies are privately owned and the public ones are diversified.
3. Ancillary services. Seems like start-ups serving start-ups so there's no publicly available position to take.
4. Tax Revenue. Assuming a contraction, can you bet on local municipalities being short on budget / revenue with a smaller tax base?
Might be a fools errand to short these if the excess capacity can be picked up by all the behemoths (Google, Facebook, Apple).
I wouldn't dare take a short position on SF residential real-estate although outlying areas might see a larger contraction.
Geographic diversification of the industry seems to be a thing. A few years ago the major SF/SV VCs were pretty much restricted to investing in Bay Area companies only. Today I see a lot of non-Bay Area things in their portfolio. YC is a stubborn holdout here but in general I see the industry diversifying. The real estate costs are a factor-- in our own case moving to the Bay would about double our burn rate. That doubled burn rate would be going only to real estate (by way of higher salaries to afford it and higher office space costs).
Investors should just start cutting checks to real estate rentiers directly and bypass the middleman.
Alas, you may be underestimating just how politically dysfunctional the Bay Area is.
Of course your argument does boil down to the old "markets can defy reality longer than you can short them." Shorting is high risk.
400k/yr can buy you a home in the Bay Area easily.
Plenty of people are bullish on VC and Silicon Valley, and almost by definition have plenty of money to bet against you.
[1] https://www.crunchbase.com/organization/linkedin/acquisition...
Mirror in SF is building a platform for that:
Disclaimer: I'm an advisor.
If you stop thinking about the valuation being the price of the company, and instead being the price of a financial product which includes shares AND these protection mechanisms (e.g. liquidity preferences) do these valuations still seem irrational?
They had virtually no business model (and lost money on every order) and got millions in startup capital. The whole company imploded within a year, but some of the interviews with the executives of the company are pretty telling: they never intended on making a profit. The intent was to either get bought out by a larger company or get an IPO and bank the proceeds.
E-dreams is a really good documentary for anyone interested in seeing a small sliver out of the early days of the first .com boom/bust.
I watch it once-a-year to remind me of the craziness.
First, this is a very carefully selected story, not a representative sample, so it's anyone's guess how bad a measure it is of the absurdity of the overall situation in the late 90s. If we are selective we can find similarly crazy stories from last year, so that it is only a matter of selling the story that the craziest stuff is representative.
Second, the problem is not merely that people take silly risks, the problem is when too much is staked on those silly risks. If everyone thought the market was wacky and outrageous, they wouldn't stake very much. The really serious situation, where too much is staked, is one where everyone is saying things like "can't lose" leading to a system which is structured for catastrophe.
Third, to say it was worse back then implies that we know how bad it is now, which really drives us to the heart of the issue - what evidence we have today. It doesn't really matter about how crazy we think it was in the late 90s.
The Economist seems to have broken the link to the content on their site, but below is a video the Economist posted on Youtube and the articles posted on the personal blogs of Blank and Horowitz. https://www.youtube.com/watch?v=AfX9VLsUWwc http://www.bhorowitz.com/debating_the_tech_bubble_with_steve... https://steveblank.com/2011/06/15/the-next-bubble-dont-get-f... http://a16z.com/2011/06/17/debating-the-tech-bubble-with-ste... https://steveblank.com/2011/06/17/are-you-you-the-fool-at-th... https://steveblank.com/2011/06/22/the-internet-might-kill-us...
It seems like a bubble could take more than 5 years to pop. Blank makes an analogy to the housing bubble, in which housing prices grew somewhat steadily from about 1970 to a peak in 2007. Economists started claiming a bubble in the early 2000s, and housing prices after the bubble popped only went back down to about where they were in the early 2000s. https://en.wikipedia.org/wiki/United_States_housing_bubble#I...
... phrase be "prematurely correct".
Not a good position to be in, but some people insist in telling the truth, poor asses.
("Premature antifascists" was how the US communists and sympathizers of the 1930s were designated later, when WW2 got underway. Embarrassingly enough, those people were highly agitated when the Axis powers were chasing communists and making trains run on time, but calmed down for the couple of years that the German-Soviet pact lasted. History is more fun than a barrel of monkeys, except for the bits where people get killed.)
This permanently broke the house-buying process as a whole to various degrees in that most people can no longer afford to buy a home to live in.
But also, it's plausible that the flood of money coming into VC is a part of this general flood of money - a flood that supports the US economy but not a "healthy" condition but with jobs around growing these inflated capital assets taking up a large number of well paid jobs, etc.
The former does not seem to be in a bubble per se, though we have seen a cool down. A "hot" market is not a "bubble" and a cool down is not a "crash." Bubbles are violent and insane and that's not what we've seen in seed/series A.
The latter may well be a bubble.
What I'm hearing about right now is that it's getting a lot harder to raise money in later stages if you don't have great revenue numbers and real revenue growth. Earlier stages have cooled a bit but not catastrophically.
Then instead of a bubble, how about a "Foam?" It occurred to me about a year ago that an "ecosystem" where you had a lot of startup companies serving the needs of other startup companies would be the perfect place for one to pump-up the size and perceived potential of the "ecosystem" in a way which attracts yet more money and increases the perception of further value creation in a positive feedback loop. However, since no one company, no single investment instrument is involved, there is no single perpetrator to blame.
It's exploiting the same social proof dynamics, but in a highly distributed fashion. It's technically and legally not a Ponzi scheme, even though it's powered by the same mechanisms.
So this should probably be the next frontier in the startup world -- preventing or at least mitigating this form of corruption. Or is it just to be adopted as the "startup business cycle" -- justified by the minority of companies that come out of such foam-swells that actually create value?
"Froth" is the standard terminology for this concept.
I think that this is, ultimately, the way that this will either remain or be replaced by something else.
If the foam-swell actually ends up producing value despite all of the other garbage that gets produced, it might very well be better than anything else that we can come up with. In the startup world, more crap is perfectly fine if it leads to more value.
Things like Product Hunt, Clerky, etc. obviously qualify, but what about Stripe? They started that way but have diversified quite a bit into more stable and traditional businesses.
Lots of startup-startups: hard landing
Not very many: soft landing / minor correction
Economic incest via marketing was a major cause of the 2000-2001 dot.com crash. Many dot.coms had revenue based on selling ads to other dot.coms, so when then bottom started to fall out there was a massive cascade effect.
Of course the other major cause of 2000-2001 was that it was a leveraged public market bubble. Public markets are notoriously panicky and leverage multiplies movements. 2012-2016 is neither leveraged nor public. It's private cash investors mostly. Movements will be slower and less violent due to lack of leverage amplification.
My understanding is that silicon valley VC culture started out because people were building hardware and this required some investment to get started. Software is totally different and with AWS and the like, building software is so cheap. But no, now it's basically: take money, give out stuff for free and take more money showing the free customers and get even more free questions and take even more money and so on. In the end, nobody knows the true value of the company - the founders, the VCs or the customers. True money is made by either ads, selling customer data or lock-in by making migrations to another service very expensive.
What irks me is that this scheme overly favours VCs and to some part the founders. The thing is the stream of founders who are willing to do this is never ending (same thing about privacy. the number of people willing to give up their privacy consciously is never ending). Even YC thinks of the whole thing as a game (if you followed the snapchat thing). I am cynical but this is really about rich people having fun and everyone else (customers, employees) is getting suckered. None of these companies are being built to last.
Yes and no. Developers aren't cheap. Lobbyists and lawyers (e.g., Uber) even less so. AWS makes it cheap to get started, but it's not so cheap once people actually start using your service.
If I were starting a business, I'd aim for organic growth. But admittedly, in hyper-competitive spaces or businesses that involve scaling a user base fast and cashing in on ad revenue after you have a lot of eyeballs, there can be a lot of legitimate up front costs.
The original dotcom boom threw all that out the window, companies were going public on the smell of an oily rag and no product just because people wanted to buy a piece oif the web, we've forgotten what it takes to make a real company that lasts
I don't understand this line of thinking. Snapchat is emerging as one of the largest content platforms out there. The Snapchat pitch competition is simply a way to reach a broader audience. I have been watching the pitches daily and a large number of them have turned out to be substantive, high quality pitches. It's also a great way for young founders to learn about pitching a startup.
In the grand scheme of things, I'm not sure pitching a startup is all that valuable of a skill, outside of Silicon Valley.
With the cost of living there, particularly the real estate component, you could also argue it's lost alot of its feasibility. Getting started there isn't cheap if any part of your plan requires hiring people or finding space to accomodate them early.
(Obvious plug: If you happen to have a few desks or a small office spare, please email me.)
I work in one of their offices and it's horrid.
One of two elevators in a 15 floor building was left broken for 6 weeks at the end of last year. The second elevator still breaks for a couple days every month. I hope you enjoy a 15 minute wait to get in or out of the building. Alex is the smarmy liar who runs it, and all he can say is, "So sorry! Not my problem!" while declining to have WeWork give a damn about the building's terrible maintenance.
These morons can't get the lock on the floor to work reliably; you badge in, the reader turns green, and the door lock doesn't unlock. This has been going on for probably 5 months. We now just leave the door to the whole floor unlocked all day, which is awesome, since there's street trash all over and eventually we're going to have stuff stolen.
They can't make the A/C work; I hope you like wearing blankets at work in the winter and working in 75+ degree weather in the summer.
These idiots built a bathroom with no exhaust fan. Since our floor is full of men, imagine how it smells by the end of the day. I'm surprised there's still paint on the walls.
The only thing WeWork is competent at is cashing your rent checks.
Oh, and the offices themselves are ludicrously loud. They are giant square boxes with no sound insulation, so enjoy a total lack of productivity the second your officemates, or people in offices near you, start talking.
ps -- those phone booths they talk about? Busy most of the day.
Avoid them at all costs.
Newspapers were complaining about the public being unable to invest in unicorns, with all the benefits going to wealthy private investors. Then people on HN started echoing these sentiments (the part where stuff from newspapers gets planted into the heads of normal people and becomes their opinion is really scary, I guess it must be happening to me, too. Really scary to watch this happen though, reading some weird idea in a newspaper and then reading/hearing it repeated by people the next month.)
Will newspapers remember to thank wealthy private investors for taking the hit when the bubble pops? (BTW, what AFAIK doesn't exist but could is a VC fund with publicly traded shares. Of course the average VC produces below-average returns.)
What is not a smart investment is funding some company that is planning on making "the next social media analytics platform". There are what, 200+ companies all doing that?
The issue is mostly one of perception: What happens when investors realize this and want their money back? The house of cards comes crashing down, and might take out some smaller, legitimately innovative places in the process. Money flows out of the industry, it is no longer seen as viable. Investors see VCs as some kind of get rich scheme, it's only a matter of time before reality intercedes. When that happens, it may even take out the biggest players. VCs are a great idea but often poorly executed, basically due to greed.
I think the author may be conflating (as most do) VC investments at the left side of the power-law curve, and those on the right side. Meaning that the investments on the left (that produce at least 100x returns) are likely valued correctly, whereas investments on the right (at the tail end of the power law curve -- or even those in the center) are supposedly overvalued.
Even so, the Inc author's insinuations about Uber and Airbnb are not exactly the smartest things I've ever seen written. Since I fully expect that within 10 years Uber will be running a massive network of electric, self-driving cars and busses (and perhaps even long-haul networks?) in every major and even minor city in the world. The global transportation infrastructure is absolutely worth MUCH more than $50bn.
For entrepreneurs, Blank warns, the future is clear: "Startups are going to find it much, much harder to raise money, and the liquidity pipeline will bounce back to the good old days -- when you actually had to make money to have some liquidity event [go public]."
I don't see many companies going public nowadays, so it isn't like there's a mad dash of premature IPOs. If anything it's harder than ever to go IPO. Due to Sarbanes-Oxley companies are getting much larger before the exit. Due to activist investors, companies want to have the future 5 or 6 quarters in the bag (in addition to the past 5 or 6) before going public.
Yes, a ponzi scheme requires most participants exiting with more money than they started -- until they don't.
Is a "VC firm filing for bankruptcy" the only indicator?
Can someone more knowledgeable share some thoughts on this?
0: http://www.wsj.com/articles/is-the-tech-bubble-popping-ping-...
In enough numbers to make the graph deflect.
Now really, how many places online can you go to get a humorous ESOS reference? Thanks HN :)
http://store.hbo.com/silicon-valley-conjoined-triangles-of-s...