Startups are pummeled in the ‘great unwinding’
nytimes.com
nytimes.com
By our very nature, we need months of runway just to keep running. We're designed to weather this kind of storm because "zero revenue" is the default state.
Hearing about Bird cutting 30% of their workforce is awful. But it's nothing compared to the thin-margin Mom & Pop, or medium sized private enterprise that had 1 week of cash on hand and ceased operations overnight.
My friends and family in startups are doing fine, for the moment. It's those that chose to work at the more stable, traditional work environments that are getting wiped out, and much less likely to return when the economy starts back. Because when it does, there will be money ready for investment - extending your runway to get there for a startup is more straightforward. But when you're a bigger business with little cash and no-one is buying assets right now, you literally are unable to make any decision to help.
I've got friends in manufacturing, hospitality, services, and so on that will not return to work because their businesses are going to or have already failed, for good. That's the fucking terrifying thing happening right now and it's more deserving of attention than us tech bros.
Recently-funded or reasonably conservative startups should be able to do okay with that, but ones without a lot of runway are going to be in a really difficult position.
I'm not saying they are wrong. But the premise that anyone has a fucking clue what's going to happen on what timeline is ludicrous.
When you get old and wizened you'll notice the pattern whereby the VC investor types will express the same certainty about everything all the time, even when shifting their opinions 180 degrees regularly and pretending like they've held their most recent opinion the whole time.
Even after September, there will be a lot of unknowns with massive economic implications. Will cruising recover in 1 year, or in 10 years? How much more friction will there be on international travel, and for how long? What's the risk of a coronavirus resurgence, both globally and locally? How different will the new crop of small businesses be from the ones that got eliminated in the shutdown? If you're going to give a startup huge chunks of cash, you need a high degree of confidence in the mid-term future, and in most areas that won't be available for a while.
* Cruise firms pay their taxes and aren't allowed to use flags of convenience
* They're required to look after and pay their staff properly
* They're required to dramatically improve their fuel usage and efficiency
* They're required to protect the environment, in particular their mooring and waste disposal practices
* They're required to improve their onboard sanitation so that the spread of noroviruses, bacterial infections and other transmission is much better filtered and controlled.
You're absolutely right though. There are folks who are getting decimated who are part of the sustaining normal economy, and comparatively speaking having a "war chest" of capital, either VC supplied or otherwise, is a much more comfortable place to be.
Why is that restaurateurs deserve a special shake when your local HVAC guy does not, especially when the margins are so thin probably because they cant charge a premium for their offerings as they don't offer anything distinctive or compelling?
My comment was calling into question the viability & competitiveness of most restaurants that cannot weather a sudden change of fortunes. They are not be confused with long-lived, well-run and meticulously managed restaurants that stand the test of time because they offer something compelling. Most restaurants don't fit that bill and never had those ingredients baked into their DNA, to begin with.
Peter Thiel has opined on this in splendid detail:
In 2001, my co-workers at PayPal and I would often get lunch on
Castro Street in Mountain View, Calif. We had our pick of restaurants,
starting with obvious categories like Indian, sushi and burgers. There were more
options once we settled on a type: North Indian or South Indian, cheaper or
fancier, and so on. In contrast to the competitive local restaurant market,
PayPal was then the only email-based payments company in the world. We
employed fewer people than the restaurants on Castro Street did, but our
business was much more valuable than all those restaurants combined. Starting
a new South Indian restaurant is a really hard way to make money. If you lose
sight of competitive reality and focus on trivial differentiating factors—maybe
you think your naan is superior because of your great-grandmother's recipe—your
business is unlikely to survive….
The history of progress is a history of better monopoly businesses replacing
incumbents. Monopolies drive progress because the promise of years or even
decades of monopoly profits provides a powerful incentive to innovate.
https://dealbreaker.com/2014/09/peter-thiel-will-not-be-open...
> In 2001, my co-workers at PayPal and I would often get lunch on Castro Street in Mountain View, Calif. We had our pick of restaurants, starting with obvious categories like Indian, sushi and burgers. There were more options once we settled on a type: North Indian or South Indian, cheaper or fancier, and so on. In contrast to the competitive local restaurant market, PayPal was then the only email-based payments company in the world. We employed fewer people than the restaurants on Castro Street did, but our business was much more valuable than all those restaurants combined. Starting a new South Indian restaurant is a really hard way to make money. If you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your naan is superior because of your great-grandmother's recipe—your business is unlikely to survive….
> The history of progress is a history of better monopoly businesses replacing incumbents. Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate.
Starting a restaurant because you think your great grandmothers naan is superior is not dumb.
Neither is it dumb to start a restaurant because you love feeding people, or a bike shop because you love repairing bicycles, or <insert any other scenario>.
As long as you know what you’re getting into, it’s a perfectly honorable way to live your life and there are ways to make it work.
EDIT- at least there were ways to make it work during non pandemic times. I hope we will see an upswelling of these types of businesses in the wake of this, although you couldn’t pay me to take bets on a timeline.
If you are having to seek alms just to pay the bills or resort to charity to even sustain yourself as a restaurant, there is something fundamentally wrong with the makeup of what you offer. Simply put, far too many people think they have what it takes to run a restaurant. Their abilities and resourcefulness cannot match their over sized egos.
There are lots of startups that sell physical products. I work for one of them. We're doing pretty great for now (we sell, among other things, toilet paper and hand sanitizer / soap and cleaning supplies), but we also recognize that we're lucky, and that luck is unlikely to persist if this "great unwinding" lasts longer than the COVID-19 panic unless we do everything in our power to reduce costs and extend that runway as long as possible with the current tailwind. Most startups selling physical goods ain't so lucky (see also: the ones in the article, even if the article didn't really go into much detail on it).
That’s not a negative despite what the tech bro’s think. I hate the idea of success for a company seems to be “we got another round of funding while losing money”.
- Mark Cuban
Otherwise, "just" spending less than you make and trying to make it on their own only makes them bootstrapped, don't you think?
By contrast early generation SV companies took relatively small amounts of funding if at all. Intel for example took the equivalent of $18.4M US in 2019 dollars prior to IPO. [1]
At least that is how lifestyle business is slung here. No one in my local business association would scoff at businesses growing at a healthy pace and no debt. Also nice if no VC gives me another round, I don’t have to shut down tomorrow.
We're lucky to have a customer base that spans many industries. We've lost some chunks of income.. chains of malls closing, restaurants, lobbies, DMV offices, customers getting live sports info.. but it's all temporary and we're well in the black. Instead of worrying if we'll make it we're looking for opportunities and how we can best take advantage of our strong position.
If there is a profitable decision I could take, like investment / partners / whatever, I prioritise the fact that I want to keep running this company myself without interference over profit. I prioritise my job satisfaction.
Maybe I could hire a more competent CEO, but that's not what I am trying to do here. I could get a mentor thou.
This business could be funded by debt, or investment, though not normally.
Now I might make a lot of money and grow the firm to 10k people, or I might take long holidays and go bankrupt - that's a different problem entirely.
Arguably with current rates we are going to have cheapest money ever possible. On top of that a lot of traditional investment vehicles are contracting.
On the other hand large funds like SoftBank are clearly under-performing. Cracks in that model were already appearing prior to Covid-19. So yes, interest rates are low, and equities should benefit in general. However it does not follow that VC investment funds are overall a good bet. To make that argument you would have to trade off against alternatives like real estate, more traditional industries, on-shoring of supply chains, etc.
And with all the stories coming out of Berlin's scene, and to a lesser degree Munich's, I came to the conclusion: "lifestyle businesses" businesses without external funding are hard. They are traditional small companies, the have to rely on positive cash flow, profitability and banks to keep running. Quite tough, especially if the founder and employees have to actually live from the profits.
Startups on the other hand, they life of VC money. As long as the founding team can sell their vision to VCs to get more VC money, they run just fine. So the founders can live the startup life with other people's money. Sounds more like lifestyle businesses to me.
And I imagine some of those clients may have money problems resulting from the crisis too, directly or indirectly. Nobody is totally isolated.
That sort of startup probably also counts as a “traditional small businesses.”
Startup = Growth
Companies large enough to serve multiple different organizations may be able to re-balance their services.
“By our very nature, we need months of runway just to keep running. We're designed to weather this kind of storm because "zero revenue" is the default state.”
The markets present an even more compelling opportunity for high risk return at the moment.
I'd argue that VCs (being opportunists at heart) are very likely to redirect funds and shun startups for a while e.g. likely as long as post tech bubble timeframe.
One might argue that the signal indicated lower risk, but this runs at odds with the mission to find potentially large payoffs. That is, derisk enough, and you de-reward. Add to that, that there is no "sure thing", or ultimate de-risk. There are no silver bullets in this process, and signals you think may indicate one thing, actually indicate something entirely different.
A friend’s medical practice will implode April 30... their business is down 90% and they won’t be able to pay rent or the employees. They are only staying open in hope for some sort of aid or debt jubilee. The partners will lose pretty much everything.
People with cash aren’t going to keep plowing money into startups, they are going to buy depressed assets. Every leveraged real estate company will be broke in 90 days or less.
I wouldn't imagine they are a GP? This crisis would increase their traffic. Cosmetic surgery?
But honestly I think it's too complex to attempt. Perhaps some form of managed debt jubilee will work "no rent for six months" or something. but the unintended consequences will be huge.
Good luck to your friend
Edit: we should probably focus on the areas that can be easier made whole - finding landlords with extant contracts and just paying them for the contract will be easier than getting their tenants paid, finding businesses with employment contracts easier than paying individuals...
In 2001, VCs actually pulled back investments from startups. People think that once cash is in the bank it's theirs.
Startups are not in any way, shape or form, "better" than any other traditional business. In fact, maybe worse.
It's a global turmoil and it's too soon to make assumptions about how great of a shape we're in.
Are we better off than baristas? Likely.
The economic fallout from this is going to be huge. And if you think tech startups are immune to that you’re in for a shock.
A startup that recently closed a big round (and the need to close the round wasn’t necessitated by massive debt or existing expenses — so think almost all of the money can be used as future runway) might be in a better short-term position than a business that is relying on net-30 or net-90 payments from clients that might not come and that will struggle gaining new revenue needed to pay bills. This is especially true if the startup can pause or slow-down hiring for now to extend the runway — but that’s a short-term advantage.
Longer term, there is absolutely nothing inherent to being a “startup” that will make it any better at weathering the future than any other type of business. And when investments come back — and it could take years, we just don’t know at this point the extent of the economic situation — it is the biggest/best-connected that will benefit. Plenty of startups won’t ever be able to raise that future round. Plus, they get the additional disadvantage of trying to figure out an actual business model during a recession. At least existing businesses — even if they don’t survive — had a working business plan in place first.
> I've got friends in manufacturing, hospitality, services, and so on that will not return to work because their businesses are going to or have already failed, for good. That's the fucking terrifying thing happening right now and it's more deserving of attention than us tech bros.
This is the only part I agree with. I don’t want to see any business fold — but I’m much more concerned about people who aren’t venture-backed founders right now.
this has a bit of a silver lining: it'll help filter out bullshit business models that appear to work in the times of plenty.
This allows certain parts of their business empire to fund the less performant ones e.g. adventure parks. Hilton has no such option, they're quite invested in the hospitality industry which leaves very little room for pivoting.
I'm sure most bootstrapped founders are ecstatic that their competitors who have been dumping product at below cost for years are now mostly going out of business. Not seeing much complaining on Indie Hackers.
I think the assumption is that "longer term" is "within your runway" for some set of startups. Early stage startups can have years of runway.
If you're a startup that's recently closed an amount that will carry you through this period I think you're probably in the ideal position. There is an open and obvious question as to how long that may be, but if you have multiple years of runway it feels safe.
I can think of a few things:
a) expecting no revenue for a while anyway
b) mostly can work from home / remote
c) early startups can cut back to a few founders on ramen
None of that really applies to mom and pop restaurants / retail etc.
I don't think life is going to change much for pre-revenue startups still trying to find a market fit. Now, they're back to square one working out if they've got a product that can be sold somewhere.. anywhere! Uncertainty continues as usual.
But if a startup had a fit and were marketing for growth, well.. sucks to be them, unless they were in some kind of remote-collab space.
Given unlimited QE and huge rounds of fiscal stimulus, the financial markets in major developed countries with debts denominated in their own currency are unlikely to suffer for too long.
Once there is a glimmer of hope that Covid-19 will likely be contained or its effects significantly mitigated, the flood of funds seeking yield should start to pour into discounted assets and other investments with good risk-reward ratio.
Looking at Germany and South Korea, mitigation through concerted efforts should be possible within a year or less. Pessimistically, if containment and mitigation fail, the population will have herd immunity by 1.5-2 years.
Startups lose money, which means they are usually raising capital for runway, and can conserve as well.
Moreover, many startups don't have working capital requirements, retail rents, inventory etc..
Finally, a lot of products are digital and some booming.
So it's fair to say many startups have an advantage.
Many, many businesses are suffering in some way, and startups are not impervious to it either - a major question is who is able to suffer through this longer in order to come out the other side alive. The advantage of startups here is that they have more direct “supply lines” to capital to “hold out through the winter” whereas businesses relying on government help and bank loans are not in as good of shape to survive when depending on indirect third-party capital.
Long-term, this sucks the most for non-venture backed companies if they can’t hold out and die, or make it through and are hampered with debt so much that they are handicapped from returning to normal for quite some time. Conversely, I think this is where investors and venture-backed startups will see an opportunity to thrive because they could easily “sink the damaged ships” and corner markets in a new wave of cheap M&A deals and market share growth.
If future rounds aren't coming (guess what, in this economy, they aren't), you extend runway by cutting expenses. Anyone with a career older than ten years knows how this will go.
You don't have to be dumb to be inexperienced. An awful lot of startup founders are young and were propagandized endlessly about being entrepreneurs, etc. Downside risk is an alien concept to many of them. Many of them do not actually know how to cut expenses because they've never known a time when the now-no-longer current fluffy, cushy environment wasn't standard.
A whole load of VC stuff relies upon the larger market to predate, has stupidly vapid IPO targets (which the actual big boys, Central Banks, are now culling off, since their actual liquidity stuff like Reits etc are crashing) and basically 100% worthless business models.
"Juicer" or whatever it was?
Go look up what Glencore is doing (20% emerging markets just disappeared) and get back to this thread and start figuring out an exit.
No-one in this thread seems to note this: try finding some ex-Soviet citizens who lived through 89-96 and ask them some serious questions.
~
Seriously: I was told HN was were the semi-smart tech people hung out.
It's like WeWork in here.
Entire industries are pretty much relying on bailouts or they fold (leisure, air (non-freight), cruise, hospitality, restaurants) and the people who own the real estate (or lend it out, Reits / Mortgages) are going to get hit by their tenants / clients being unable to pay.
You're not in the "ramp to land" scenario - you're in "this VC is going to look at the contract and claw back the largest % of capital they can, in the next 4 weeks, due to margin calls and other commitments".
Anyhow: no-one will read this, but it's fair warning to you guys. You're about to get frack'd, hard.
(For whatever little it's worth, I suspect your assessment is correct.)
If there's one thing the dissolution of the Soviet Union proved, it's that a complete economic and political collapse does not prevent people from disrupting markets. Many Western companies got their first foothold in the region during that time.
Do you expect the Martian Axioms to help you?
Even if you have months of runway, vc’s are going to be very tight about funding for the next two years at least.
Startups with a little bit of runway have to cut costs now to extend it, i.e. staff cuts, or they're also on a short spring towards insolvency. All business negatively impacted right now are extremely adverse to new expenditures for the next few months, and might only be slightly less so for the next six months to a year after that. All spending not absolutely essential to keeping the lights on is getting cut.
My workplace had contracts with a number of startups (and some more established) that provide industry-specific services, and as a matter of course we insist on a "force majeure" clause in contracts. As a result we are strongly moving towards terminating those contracts. We are considering it even for one or two that are close to being mission critical, because revenue loss just through June is in the range of $30,000,000. That represents roughly a 40% drop over expected revenue for that time period. Projections for the next quarter are much, much worse, even in an optimistic "we might be slightly less restricted as a society in 2-3 months" scenario.
Given this environment, startups that do not supplant an existing service for a lower cost, have VC confidence and can "hibernate" for a time, or some other type of product that can help businesses stem losses rather than just make some activity slightly easier and more seamless... only those startups will weather this storm.
What just happened in my industry, is forcing me to go look for a job. I don't think we are going to open for summer season or even if we do its not gonna make enough to live by.
Hundreds or thousands of years ago, a few had all the wealth and then most people were poor. We even had slaves.
I can't believe that in 2020 and with all the knowledge we've acquired as humanity we've allowed a few people to acquire all the wealth.
I am gonna struggle with paying any tax coming my way this year, or even supporting my employees who they very much need the job. And on the other hand, there are corporation that don't need to pay much tax through their umbrellas and then again they pay their employees peanuts so they can have a CEO that is worth in the hundred of billions of $. Sad to see that humanity hasn't improved at all.
But it's not this way everywhere: there are countries (I'm thinking of Scandinavian) where inequality is perhaps not so bad, and there are countries where governments are making major and genuine efforts to support businesses and people who are at risk of (or who have) lost their jobs due to Covid.
There's bad leadership and bad behaviour in many places, but not everywhere all at the same time.
So I believe GP's point still stands - humanity has not learned the lesson from thousands of years of its history.
Good points about the numbers
This is the most prosperous time in human history. There are more people alive right now than ever before. They live longer healthier lives and they’re more educated than ever before.
On every continent but Africa people are richer now than was the case after WWII. In the US, the richest country that has ever existed people are just coming out of one of the longest economic expansions in history.
This will likely become a lot more difficult over the next couple months or longer.
It would be foolish of them to fold instead of getting loans. And it would be foolish of a bank to deny a good business a loan to get through the next couple years. I think much of the moaning about closing up is to encourage low-cost loans. Which is fair, because the government should be subsidizing such loans to lower the bar for a "good" business.
No you are not designed to weather this cataclysm. Especially a start up. This is the great cleanse. 2008-2020. We had a good run!
Yeaaaaaah, about that...
This is completely contrary to what common sense would tell you if you ask yourself "what corporation would best survive a depression". Pick and choose any qualities, any sector, any background and be honest with yourself.
My bet for what company I would prefer to own is something along the lines of:
- Industrial manufacturing of common goods that are necessary for people, not industries, without many external factors where you are not exceedingly (more than others) exposed to price fluctuations of other goods. This could be ketchup, medicine, toilet paper, you name it.
- A long history of sustained profit leading to cash on hand which you can use to compensate for downturns that you can be almost 100% sure are temporary.
- Infrastructure in place that you can scale down and then back up without losing massive amounts of competence or inventory quality.
Here's what I wouldn't like to have:
- Complex technical software development that is completely optional for both people and industries, completely dependent on external factors and therefore heavily hit by economical downturn.
- An unknown company with no history (startup) with zero cash on hand to compensate for a downturn that you can't even know if it's temporary or if you need to pivot completely.
- Severe penalties for scaling down as key intellectual competence disappears from the company, causing double work when resumed and possibly a lower quality product going forward, making it even harder to sell.
I'm not trying to get you down, but don't kid yourself. This is definitely not the type of climate where you would elect to be a tech start-up.
They are in no way shape or form better suited to weather an economic collapse than a traditional business. Traditional businesses know how to turn $1 into $1.01.
On the other hand my experience with slightly bigger suppliers/vendors with 5+ employees is that they run into cash flow problems all the time and do in fact seem much more vulnerable to this shock than a startup with no inventory and cash on hand.
Only exception I'm seeing are restaurants and shops with large inventory and a lot of personnel.
This saddened me, because it's a refrain that we hear over and over and over. Same exact thing happened during the .com bust (which scares me to believe that was 20 years ago already).
You can work really hard at a startup, put in a ton of energy, but at the end of the day, never forget it's just a business. It's a team, not a family, and in a team sometimes team members get cut. I've also found that the best folks in business tend to have rich, fulfilling lives outside of business as well.
Totally agree, but I’ve been burned multiple times by startups that see any kind of multifaceted lifestyle as “not fully committed” to the team or company, which is ridiculous. I’ve been so disappointed how frequently this happens in tech.
I think you probably already know this but for those that need to read this - the chances of you becoming a millionaire at a start up are zero. Better to go buy a lotto ticket. That said, much like owning a home in Southern California there are many good reasons to join a startup- money is not one of them.
There is of course the caveat that of course some people win the lotto but planning your financial life around winning the lotto is idiotic.
Other than sports, what other industry than VC-backed startups lures in talented-but-naive young people, promises them riches, then chews up and spits most of them out, having burned them out? OK maybe music and fashion as well.
Meanwhile the owners get richer and richer.
If they “cared” about their employees and weren’t looking for a large exit, they would be creating a “lifestyle” business and not seek VC funding.
I’m not making a moral judgement either way. Everyone should go into any employment situation with their eyes wide open.
I already refused investment as I didn't think my goals aligned fully with the investors, but I am lucky as I don't have to pay rent (family flat) and I did some contracting that allowed me to save some money. Most of my developer friends will be fucked if their companies fire them as atm no-one will really hire them in the next few months for sure.
Assuming you’re trying to start a lifestyle software business, your startup costs should be cheap thanks to cloud providers or just using something like VMs.
What I meant was, a lifestyle sw business, while low cost to run, means either someone having savings or a small family/friends angel investment/loan. That is why I mentioned some folks take funding because a lifestyle business is beyond their reach as they are working 40+ hours just to break even.
The model where companies spend investor funds indefinitely looks pretty dead at this point.
Of course you can alternatively say to everyone the company will be dead in 3 months, but I’m not sure that’s better.
Shareholders and investors are just a proxy for the business. If you want to use them as an excuse for lay offs - go for it - but realize that 99% of the time the decision comes down to "do I save half by firing the other half, or do we all go down with the ship?".
Surely this must be satire. The tech industry has only capitalist ideals, to ultimately seek rent from society like any other big industry, and big payouts for staff are essentially a lottery ticket.
I can't wait to see a pull back to solid fundamentals. I don't see why a daily vacation rental company honestly needs 240 highly paid employees. One company cited in the article (WanderJaunt) laid off 56 out of its 240 total employees, but honestly I bet they could do just well with 20 total employees.
Let's put the Lean back in Lean Startup and provide real value instead of playing the magical, mysterious game of VC musical chairs.
https://en.wikipedia.org/wiki/Austrian_business_cycle_theory
Rather we're seeing a Black Swan event causing macroeconomic pull back, and it's pulling back the covers on companies that really had no fundamental underlying value or support. The only real exit for these companies was acquisition or public markets. But with both exits now drying up, there's nothing but overvalued, overfunded companies with revenue streams (if they have any) drying up faster than the glaciers are melting.
The fundamentals were never there, and it was only the fat-times of VC investment keeping them afloat. There might be a role to play with ABCT with regards to VC investment as a whole, but this downturn is more than just a normal business cycle.
First, assume the market is made up of rational actors. Second, assume that sustained irrational investment choices have been made by the rational actors.
It's many of the other economic theories that are built on the pinnacle of "rationality".
Sometimes it seems a little crazy to me too, but I'm not, like, excited to need to live with 5 roommates 90 minutes away from work again like you seem to be.
You know, people filling low productivity jobs means that our skills aren't valued enough.
That is just human nature, once the company starts going big and has the funds, the managers start empire building.
From your mouth to god's ear. The ridiculous cost of living is what made me reconsider the Bay Area (South Bay) after 5 years there.
My wife and I are very financially conservative. We pay cash to own assets - car, house etc. That just wasn't possible out there. And I couldn't imagine shelling out >$1M (not that I have it) in cash to own a mediocre house that would be worth 5 times less almost anywhere else.
The idea that the options are "get paid usurious amounts of money" or "live 90 minutes from work with a bunch of roommates" is a false dichotomy.
There are definitely IT jobs “native” to the Midwest, but they’re overwhelmingly seen as cost centers to be deskilled/automated/offshored rather than value-creating R&D.
Any company that truly believes all the talent is on the coasts isn't the kind of small-minded company I would want to work for anyway, so it's kind of moot for me.
But I think there will be a lot more understanding of what jobs work well in a remote setting due to quarantine, and plenty of software companies will realize they can save a ton of money by not retaining an expensive office space, while gathering talent from a wider pool of diverse perspectives.
The SF/NYC vs. back of beyond dichotomy is pretty silly.
And when the industry / economy in contraction, the first jobs to go is the "excess fat" of those 80% non-productive that accounts for 80% of wages. The remaining 20% are the high value contributors, which honestly represents what the true employment should have been.
VC economics are not the same as general market economics.
My point is the same as it was in my gp; your attitude is grim and you're misplacing your negativity onto real people. This is the wrong time to do that. In this situation, there is only one explanation for schadenfreude and that explanation is that the person feeling it is an asshole. I'm glad I've only head the pleasure of speaking to you on the internet.
Then you are a fool.
The tech economy crashes on 5-7 year cycles. See: Dot bomb. 2008 Financial Crash. Covid-19 in 2020. I can go backwards in time, too. 3D graphics card startup crash. Microprocessor startup crash. AI winter. etc.
Too much money flows into the sector and then eventually the VC funds want it back. Roughly on 5-7 year timescales. Funny how that aligns with crashes, no?
This time VC's changed tack--they won't put money into anything which produces a product so they can simply keep the shell game going. Presumably that's why this crash is a little late.
If you aren't ready for this kind of cycling, you shouldn't be in a startup.
Feeling schadenfreude when a business fails is tantamount to being happy that someone loses their job. That’s fucked up- and I can’t believe anyone would be stoked about this. Seek help.
This is part of why I think we need a much stronger economic safety net with UBI and universal healthcare. Too often, we protect objectively bad institutions and companies because of the very real need to preserve the jobs they provide. If involuntary job loss became a less disastrous event, we might be more keen to cut out waste and inefficiency in the system because we're no longer potentially destroying people's lives in the process.
2020-2008 is 12 years. Your second piece of evidence contradicts your main claim. Try again
You can keep the shell game going infinitely with social crap built by 20-somethings to flog to the FAANG's because you can keep skimming until you hit your 100x.
Now that the unicorns are finally busted, we'll see what the landscape actually looks like.
And I would hope you would see the problem with telling people not to work at local businesses. Ultimately the only companies built to weather something like this is the larger multinational corporations and in times like these, it kills both startups and local businesses alike.
Companies providing essential services (supermarkets, healthcare) will probably be fine. Otherwise having lots of cash on hand or no liabilities (rent, debt, etc).
I understand that this is not center to the point you're making but I am curious! What makes you hate the Bay area? I lived there for ~4 years and recently moved to Pittsburgh. I can't wait to move back. In fact, the mere mention of these places evokes a strong sense of homesickness in me for some reason.
The few things I liked about the Bay Area: lots of economic opportunity (esp. as a software dev), nearby greenery, and lots of food options. Oh, and the ability to find others who would like to play board games. I can't find anyone to play board games with out in the middle of nowhere (my family is not interested in any).
Even the townsfolk would complain about some mental hospital closing down forcing mentally ill people to live on the streets and you could see them everywhere.
That said, I didn't have a guide, I'd just walk with friends for an hour or two aimlessly starting from the pier. On the other hand, this is how I'm used to do it and I've been to 20+ countries.
I don't even want to know how it would affect a person to see that every day and think it's normal.
$300k/yr is nowhere near big leagues to buy a home and raise a family in the Bay area, just fyi. It's more like a comfortable single income where you aren't worried about paying rent or going out to dinner.
You try and raise a family on a mere $300k in SF/SV, you're one layoff or recession away from being completely screwed.
The majority of housing stock listed for sale in SV is being pulled off the market in a panic. I'm not sure what exactly it means, but if I had to guess, I think it's due to a huge reduction in demand.
No one is buying, so sellers don't want their homes to be listed as unsold for a lengthy period of time. Eventually, people will need to sell, and then we'll see a race to the new bottom for the market, which might still be incredibly unaffordable for most.
$300k will take you further then, but the issue will be whether companies will keep paying engineers that much when housing prices no longer warrant it.
There’s plenty of 3BR houses in the east bay for less than a million, which puts your mortgage+property taxes at around $60k, which is totally doable at even half the salary you’re talking about.
Half that salary? That's $150k, or after taxes, about ~$8k/mo. or $3k/mo for everything else after your alloted $5k/mo. Yes, people can survive on a lot less, but why in the world would you want to live in the Bay area just to eek by on such a paltry net outcome without nearly enough to set aside for the rainy day that's coming soon.
And more importantly, that I think the vast majority of SF/SV kids seem to forget is, what happens when your cushy job disappears? How long can you survive dropping $5k/mo for a house that you could be paying $700/mo in a small town.
The MID is also worth much less because of the higher standard deduction and the SALT cap.
I've collected some pictures from my hikes in the Bay area here: https://madaan.github.io/hiking
Cañada Road
Sierras are amazing, but far away (both Rockies in Denver and Cascades in PNW are much closer and the traffic is not so bad), and the ocean is very cold, you have to be really psyched to surf or do anything like that in the Bay Area.
I mean sure it's better than most places East of the continental divide, but not particularly great. Especially with all the people :)
On the hikes, I'd recommend Windy hill and Russian ridge if you haven't tried them. The former especially really takes you deep into the woods.
I am interested in how this situation affects larger companies. My guess is since they're so much larger this time around than back in 08-09, and since tech didn't really change all that much in the past ten years or so, there might be greater structural pressure for startups in terms of hiring talent and market direction, because the big guys have so much liquidity and are entrenched in many different verticals. It'll be interesting to see how it all plays out.
Assuming you've decided to take VC, good ones won't invest small amounts of money. And this is separate from valuation; this applies even at the A stage. The reason is they want 18%+ ownership, ideally 22%. If they get less ownership, even if they have a big enough fund to fully exercise their pro-rata rights, they don't get a big enough return in a success. Hence someone who would be willing to put in $4m for 20% will be unwilling to put in $1m for 5%, or even $500k for 5%. The upside just isn't there.
A simpler explanation is that it's all driven by fund size. We all have the same 24 hours/day, 7 days/week and all investments require analysis and oversight. If I'm a VC with 600-800 million to deploy (typical large fund size), I can do, 30-40 deals/year, maybe, only if the diligence checks out, a partner is willing to commit 5-7 years to being on their board, and various other things work out.
That narrows you right away down to $20-30 million checks, maybe less if you keep reserves around for pro rata rights, but still, nobody's getting $500K out of this fund. Ownership is whatever it needs to be to generate the right returns for the fund. Also keep in mind, syndication is very common in VC so one $20 million check might be part of an overall round size of $50 million or more. Don't even bother with that if you can't show line of sight to nine, or ideally ten figures, of enterprise value.
I think we just need better infrastructure for startups to bootstrap with debt. It's not impossible or unheard of but it's more difficult for fledgling startups to get decent small business loans.
VCs remember that there are some very successful companies that came out of the 2008 recession, and many are doing a lot more than usual to help the more promising parts of their portfolio weather this storm.
This article fails to highlight how any of these startups (on that note, how is AirBnB a startup) are worse positioned than their larger competitors. Not one of the ways that workers are impacted that are mentioned in the article is unique to any size of public or private company.
The 2008 recession sort of bypassed tech.
So I'm guessing it will either stay flat or go negative. It depends on how quickly things recover once the shelter in place is lifted and how many people actually leave the area.
The housing prices are driven by lack of supply, so even if demand softens a bit, it won't have that big of an effect, I think.
Even as late as 2010 this was happening. I looked at a place on Russian Hill around that time, and it was offering rent incentives.
In my recollection, the market didn't pick up again until around 2012, corresponding with the rise in startup investment.
I was basing it on my own experience pricing the rental unit I've managed in Berkeley for the last 21 years. Each year I do a rent survey for the East Bay, and that was based on my experience there, but the East Bay is a little less price sensitive in both directions compared to SF, so that's probably the difference.
[0] https://medium.com/@mccannatron/1979-to-2015-average-rent-in...
It might be good for those high renters to simply move elsewhere in couple of months when/if there will be many free places on the market. This is experience from elsewhere, from +-2008, so it might not work out exactly like this of course, but generally I would expect so.
And unlike 2008, many of these companies are more mature and much more exposed to the broader economy. Cloud computing, Ads, GSuite, etc... There are a handful tech companies that will probably thrive (Netflix, Zoom, etc...), but most of them are probably going to see big drops in revenue.
And considering that most of these companies have plenty of fat to trim (how many Alphabet moonshots are bringing in meaningful revenue, let alone profits?), I don't see how declining revenues won't result in some belt tightening. And when that starts happening, how many of the top 30% are going to be buying $2M-3M homes. The mortgages on those things are like ~$15k a month, and CA unemployment maxes out at ~$2k.
It is certainly possible that Bay area real estate weathers the storm just fine. But I really don't see a compelling case for it. Salaries can, and likely will go down. And bay area real estate is at all-time highs relative to incomes.
You have no way of knowing what the price might be when you are able to exercise your options. You also don't have to exercise them, it's your choice. Equity compensation is always a gamble.
If that’s true, well, I guess I am not in the top 30% of employees of big tech firms.
Supply is also dropping as tons of homeowners are refinancing, which balances out any drop in demand.
The biggest hit is usually on the lower end of the market where you’ll see foreclosures as middle class people lose their jobs.
If there isn't a bounceback in three months or so, the entire tech sector will deflate like a balloon.
FAANG will probably survive in some form because of cash reserves, but there will absolutely be cancelled projects and mass lay-offs. And those will have an effect on the the property and rental markets, on startup funding, and on everyone's cash flow.
Business is a herd phenomenon, and as soon as panic spreads through the herd it reverses direction - until some new excuse for optimism appears.
FAANG will lay off their armies of contractors before down sizing FTEs. Google has 125k FTEs but over 300k temps. Will it get to the point where FTEs are laid off? I’m not sure, but it seems pretty unlikely unless things don’t improve over the next few years or so
My takeaway so far is that the tech job search is going to be way more competitive for a while. Since this started, we have had about twice as many people pass phone screens. Smart people who were taking time off who suddenly want a stable income, and smart people who were laid off from less secure startups. Some very talented people that we would have hired two months ago, might not get hired when they interview next week, and it's not because we are hiring less.
$15 per month for Netflix might be one of the cheapest forms of entertainment in a recession. Classpass, not quite so much.
Facebook is struggling to keep up with site demand; more people are using it to communicate while shut in during this period of uncertainty.
Apple has enough cash on hand to not sell a single product for months - maybe years - and still keep paying everyone. But they have plenty of subscription-based revenue coming in anyway.
Amazon can barely keep up with demand to the extent that they are hiring 100,000 people and denying shipments of nonessential goods. (disclaimer: I work for AWS but have no inside information here; I read the same news stories everyone else does.)
Netflix is entertaining more people than ever who are stuck at home.
Google is, well, Google, and like Apple, awash in cash.
It’s not the FAANG companies we need to worry about; it’s the startups that were based on great ideas but needed the space and investment to incubate them but are now rapidly being depleted of oxygen.
Can you explain this? How does refinancing affect housing supply?
All three of those apply at this moment so record numbers of people have been getting refi’s this month. When fed rates eventually go up perhaps next year people will shift back to selling, or simply holding while they wait for their perceived home value to recover. Either way you have less people selling homes.
Not an expert - this is just what has been explained to me so take it with a grain of salt. Also this falls apart if the market is flooded with foreclosures.
Can we finally admit that SoftBank's model of so-called VC funding success is really just a colossal failure? The throw-everything-into-it approach of making Unicorns a reality just doesn't work.
As of now I am getting some business stuff ironed out and only making bug fixes/small updates while I get a better feeling of what type of workload difference the growth is making
Say Team X is the best team at Objective Y, they can filter that down and watch tournament footage of their strategies on that objective only instead of scrubbing through footage manually.
- Forget funding. The window is closed.
- Big customers are battening down the hatches. Cash is king. Lots of asks for payment terms.
- Little customers are failing.
If you run a startup or work at one, implement Plan B now. Cut.
If you're running a startup and thinking that now you can get cheap senior engineers, you might want to consider that it might be true for those who aren't careful with their finances. However, the talent you attract with this method is going to leave as soon as they find a better offer.
I don't think most management teams are like this one but I'm amazed by the short term thinking. Professionally, I can't really call them on this behavior but I'm glad to have been saving for financial independence (now is the time to go back to working on my own things and yes, I do have a multi-year runway).
The longer term impact is going to be the lack of funding in the coming couple of years and lack of customers for the services/products coming out of startups.
How will VC funds fair in this? Are there enough LPs out there willing to put their money into this risk pool?
Probably not well. https://news.ycombinator.com/item?id=20985687
That isn't true at all. These companies were startups almost a decade ago, but since then they already matured and strayed very far from the classification. This is like calling a 40yo man a teenager just because he was one in the distant past.
A startup has a small number of employees to start with and a 2 - 3 year window to go big, fizzle out, or pivot into a small - medium sized business. You're not a "startup" forever, nor does eventually marketing yourself as one, actually make you one.
"I'm working at a startup".
"Oh? Where?"
"Google."
So I think it's fair to ask whether Airbnb, a profitable company with 12,000 employees and annual revenues of $3B+ for the last few years, can really be called a "startup" now. They were a startup. But now? Eh...
They use the word "startup" when it serves their interests. Yet, we don't call 10 year olds babies. Too bad
As a former techie, I strongly agree with that usage.
Chick-fil-a, the chicken sandwich 40 year old startup.
Outside of the valley, startup means a company that doesn't know how to make money.
I personally think reliance on VC money is a more reliable indicator, though.
Otherwise it's just a small business, until it becomes medium, big, public, etc.
Most of these companies will now fold. The number of employees or, even, revenue is irrelevant.
I still think the company is a dumpster fire but the big investments that Musk is making are, in part, driven by actual revenue.
...now that isn't wholly true. Musk seems to be able to keep raising debt without hitting equity. Over and over, he just finds utter idiots to keep bailing him out. The deal with the Chinese govt was incredible. Eventually, this will run out of road but the bankruptcy will show that Telsa did create some value.
The fact of the matter is, there’s too many people in America invested in a cynical notion that we should expect the government to “fail,” which makes it easier to keep everything underfunded, which almost guarantees failure (random acts of heroism not withstanding). THAT, more than any single person, is what’s killing America. And that’s a bipartisan cancer.
Denmark - shutdown everything march 14th, same week that the US started shutting down, not sure what we could emulate there except more trust in government? I live in a large very liberal city that has voted blue for the last 40 years and we still have our mayor pleading daily with ppl to follow SIP orders.
Norway - See Denmark. They have a slightly stronger federal government then the US and thus were able to use that power in ways that our Fed could not.
Singapore - Whatever they were trying before it all failed and they are now doing a lock down that's actually stricter than ours, also the stuff they implemented initially was draconian and would never fly here, and didn't work there in any case.
New Zealand - An island the size of New Jersey with almost half as many people (5 million), they still have 1000 cases. Not a lot the US could emulate from there. Only reason NJ has so many cases now is because of its proximity to NY and a certain demographic that still refuses to listen to SIP orders (See Bnei Brak for another ex., I'm pretty ashamed).
Taiwan - If you looked at what they were doing to contain this you would know why it's not practical here. 1) they have a national citizen db. 2) That db can be cross referenced with their national healthcare system, 3) which is also cross referenced with everyone at every point of entry. 4) They also used cell phone data to track people's whereabouts. Not a single one of those things is remotely possible in the US. Some are outright unconstitutional others would require bills to be passed and 3-5 years of preparation. If you think the patriot act is wrong... well the fed being able to unilaterally cross-ref different db's and track law-abiding citizens wouldn't pass muster either.
This pandemic is a world-wide A/B test on the difference between competence and incompetence, and we here in NYC now have to suffer because of votes we did not cast. Indeed, in spite of millions of votes we cast, that simply did not count.
The callous, purposeless, senseless disease came to us first, the lack of coordinated federal response harms us the most, but the contagion marches exponentially along — indifferently laying waste to grand life projects, solid small businesses, and urban vibrancy — and soon, it will come for us all.
I have a different idea of what the federal government should be doing than you. I want the government to be as limited as possible and focus on fundamental issues like national defense. The federal government continually fails - see Hurricane Katrina, Iraq / Afghanistan (Obama made the situation worse!), the Great Recession - these are caused because a centralized all-knowing all-powerful actor can’t fix every problem. It’s my philosophical belief.
How will the pandemic be solved? The individual actions of millions people making their own localized choices. That’s how everything ultimately gets solved.
You can dream of a perfect president who could wave his hands and make everything better. But it’s simply not possible.
Taking control and centralizing all testing? Still barely happening. Isolating infected people? We've got thousands of non-critical COVID-19 patients and we are sending them home to infect their families. Anyone thought to use the hundreds of thousands of vacant hotel rooms for something? But there's no self-starters here. The option of least resistance is to just tell everyone "stay home it will be fine" and hope for the best.
I expected some failures in leadership but this is far beyond what I could've imagined. It's not Republican or Democrat, it's failures all down the line. No one is bringing anything to the table.
So we need to stay at home until we're able to test on a much larger scale.
Well, maybe, but also (some) states have delayed the income tax deadline to June along with the Feds, which is also a problem for cashflow.
We are looking at an economic collapse that rivals late 80's Japan. People are viewing the "economy" as money. They need to rethink their smugness. Japanese salarymen work harder and longer hours than any American yet their salaries and purchasing power are half that of equivalent positions in America. The Nikkei has still not recovered from the crash 30 years ago.
That is our future if we just keep staying locked in houses. Also this "remote work" revolution people are cheering on should be rethought pretty damn fast. If this truly is the new normal, people are not going to hire Americans for $25/hr with benefits if we never meet them. Managers will just hire Indonesians for $4/hr since it's all the same to them.
At some point we need to let businesses reopen and ues temperature tracking + mandatory face occlusion. This isn't perfect, or even that good, but widespread testing won't happen anytime soon (it's not cheap and our government agencies are completely incompetent at large project design), so we just need to accept some risk.
But since no one thinks in a probabilistic way - since we are afraid to - it's gonna be shelter in place for a few months while the governors just cover their asses instead of actually searching for an 80% good solution, and blame Trump for not figuring it out either.
There is no leadership in our government, you are right. State, federal, local. Embarrassing.
Because it is the state governments' responsibility.
Nobody thinks this, they just disagree with you about what constitutes competence.
I mean, it's not like people are never going to travel again or eat out at restaurants. But I certainly wouldn't want to be a travel startup or restaurant startup (at least of the dine-in variety) today.
But the current situation is not the norm, people will eventually get back to travelling a lot, and when they do there will be plenty of economic activity to support large companies in the travel business.
I've had the same thoughts about the restaurant industry. Will lockdowns create a generation of home cooks, or will be so tired of staying in that the restaurant industry booms after this is over?
The startup I worked for until last Thursday is going through this. Despite most other startups in the space folding and the sales team finally getting traction with lots of buyers giving a path to becoming a viable business, those companies that were eager to sign contracts a month ago are having to rethink their cashflow and deciding if changing anything in their existing business is worth the risk.
Every [1] startup has been thinking for the past couple years about their plan for when the recession would come. Probably hundreds of articles written in mainstream and economic/financial press over the last 2-3 years about "the coming recession" [1]. Trade war? Debt bubble popping? Auto loan credit crisis? Nope, turns out it's pandemic. Nobody saw that coming until January [3].
[1] No evidence but my guess. If they haven't it seems negligent.
[2] here's an example from 2018 from the NYT contemplating what will be the cause of the next recession (note, not whether or if it will happen, just what will cause it) https://www.nytimes.com/2018/08/02/upshot/next-recession-thr...
[3] I mean the specific timing of this pandemic. As we've all learned now many in and out of government had warned the public.
Or put into making the company profitable, or at least not losing money. That might very well include R&D (to develop new products or more efficient ways to produce and distribute those products) or expanding operations (to leverage better economies of scale and have a better bargaining position with vendors).
So continuing to invest in improved infra might be a good area to put your cash/resources since that will pay off really well in high growth and probably still have savings in a slower period.
i have an economist friend that says "economists have predicted 10 of the last 9 recessions"
No one blogged about it in 2019, no one took a "how to navigate a pandemic-induced depression" class at business school.
That's not to say there isn't opportunity. Software engineer market comp WILL go down, as many point out, on account of shrinking RSU value. The talent war is over. It will soon be a great time to start a software company, if is not already.
It is true that at least in the USA that democrats and republicans in Congress and the president are working overtime to shore-up their constituents (i.e., large corporations) so they will be fine. I think the help given to the mega corporations will be at least an order of magnitude greater than what is given to help individuals and regular businesses - I base this on what has been just been given to the financial industry in the last month.
Frugal small businesses that we own ourselves are probably the most stable unless you are in the billionaire class.
Most businesses will certainly be allowed to open long before then, though.
Source: I don't work at Big Tech, but personally know many folks who do. For the most part, they are not really thinking very far into the future, because they think (with some justification) that their jobs are much safer than startups and smallish companies.
1 The usual reasons of less people spending money on stuff holds, of course. If your customer is now unemployed, they will eventually cancel your software subscription too.
2 Most employees working at these companies have stock options which will plummet once people start pulling money out of the stock market because they actually need the cash to survive.
3 There will be the usual letting go of people because the manager doesn't like them. In a big company, ironically, this is much easier because no single employee is indispensable.
4 The actual problems are not going to start at Big Tech till about a year from today. This is one of the main problems. Most predictions of economic recovery are way too optimistic. Unless something extraordinary happens (e.g. a combination of off-the-shelf medicines, all in large supply, which miraculously just negates the virus, and we learn about it tomorrow). There is an excellent chance that the layoffs will hit Big Tech precisely when most of their employees think they are safe.
5 The biggest problem, in my view, is how much these employees are used to the cash cushion. There will always be a few prudent folks who save a large chunk, but generally the lifestyles have already been elevated to match the income. The folks who never raised their lifestyle to that level will not really have much to worry about, but that is a small minority.
One can imagine these folks - who are basically going to be the last to be laid off, having to compete with much more hungrier folks while simultaneously having to significantly downsize their lifestyle. And suppose they also bring an "attitude" with them (not that everyone does, but some do), who will want to hire them?
Some folks will point out the large cash holdings of these companies and easy access to credit. But how far can that runway last, realistically, under these types of circumstances?
The developers wanted to revamp the site to take advantage of all the tech money and provide upgraded experiences etc...
While they were in the middle of building it - the bust happened.
Then, one of the largest buildings that was ~65% complete or so caught fire. It was HUGE - I think it was an 11 alarm fire....
There was a crap ton of speculation as to how this happened - and the prevailing theory among many I knew at the time (I lived right down the street and actually stood across the street watching the thing burn down for a few hours) - was that it was insurance fraud to recoup some of the investment in the multi million dollar development due to the fact that its demographic was now largely out of work.
Obviously they did fine eventually, but lots thought it was an opportunistic attempt to take advantage of the situation.
As an aside, not too long after that, I had a pool aprtty at my place for all the tech people in our circle. 65 people showed up and out of that, only 2 were still employed.
The tech industry is a hell of a lot more resiliant this time - as actually many of the service provided are actually of great value to those stuck at home or unemployed. So this collapse will be nothing like the dot com bust.
However - the wealth transfer this time will be far greater than the 2008 collapse.
The next Black Swan [0]:
Translation: We are SoB's and we DGaF about you to the full extent to not even look you in the face when giving you the finger.
Ctrl+F "CMBS"
Ctrl+F "Reits"
Ctrl+F "Repo"
Oh, wow.
You guys are totes not ready for the next stuff.