Winter is coming
startuplessonslearned.com
startuplessonslearned.com
MICHAEL
How bad do you think it's gonna be?
CLEMENZA
Pretty goddamn bad. Probably all the other Families will line up against us. That's alright -- this thing's gotta happen every five years or so -- ten years -- helps to get rid of the bad blood. Been ten years since the last one.
Why are startups hot now? Not because the economy is good or because the startup ideas people are having are particularly good, but because risk seeking investors are trying to shove capital anywhere they can.
After the crash of 2008 lots of avenues (created by Wall Street post Financial Modernization Act) to invest this capital were closed, and the growth of the startup scene, particularly the NY startup scene, is a direct result of this. Couple this with a real negative interest rates and you have a nice long boom period where startups are the best thing going for investors who are getting free money (via negative interest rates) to gamble with.
Why will this continue? Exactly the same reason why Yahoo is still in business and why Microsoft is still profitable. There is tremendous room for innovation, growth, and all the improvements associated with those things.
Soon joe.sixpack@yahoo.com will wake up and start demanding more and more web innovation, and the void will be filled by startups doing clever, lucrative, disruptive things. I personally can't believe that anyone can tolerate using Yahoo for anything... and I'm stunned that people tolerate 2 hour battery life Android phones, Windows Vista, etc. The problems (areas for improvement) are far deeper than most tech-savvy people (such as on HN) can imagine, and the population (thanks mostly to Facebook) is slowly waking up to what it actually wants to do online.
To borrow the OP's metaphor, we're in the very early dawn of a beautiful, early spring day, etc. This will occur at least until the cost of borrowing increases substantially.
Also, anyone who thinks we have an information economy in 2011 will look back in a few decades and laugh.
I have talked with folks who have investment capital that is 'stuck' which is to say they have money they have allocated to the 'high risk' portion of their portfolio and yet fewer options for investing it. And while YC is a startup incubator, I also see it as a VC incubator. I would expect some of the folks who are successfully investing small amounts into a bunch of companies will begin to want to make slightly bigger bets and that will push them out of YC into a more VC like situation.
The original article's message that things go in cycles, and you need to be able to deal with that, is spot on. And in times of high volatility only the folks who have that sort of risk/reward profile that startups offer want to play (the more conservative investors are worried that their 'moderate' risk capital is at risk and so they double down on those bets taking all their high risk capital off the table). More startups chasing fewer dollars, means a more competitive environment. But that being said, startups take time to get from concept to launch, cycles take time to go from down to up. The absolute best time to start a company is just before the end of the winter.
4-5 years ago a startup (like iLike) had to spend millions up front on server and infrastructure costs. Then the ongoing opex costs for serving millions of users were huge.
This has shifted radically. $150k is TOO much money for many ideas and the opex costs have continued to plummet.
The recent announcements by both Amazon & MS on lowering (almost eliminating for many scenarios) ingress and CDN costs (http://www.talkincloud.com/amazon-web-services-cuts-cloud-tr...) are just harbingers of this.
In fact, it could be argued that any sort of economic contraction could increase the rate at which these costs decline, further enabling great ideas to get traction via startups.
Bernanke's term lasts until 2014, if he isn't re-appointed. He might change direction, but this would be going against his history and his beliefs.
You've identified that there's a big, cheap money spigot. The policies are in place to ensure that spigot sticks around for awhile. It will flow into every place it looks like it can get a return above inflation, and that includes high risk situations and various forms of carry trade.
Eventually, this will force inflation rates up enough that people can't ignore it, and as always, there will be a price to pay. But I don't think we're close to that yet.
It's like 2001 all over again, only this time it won't be houses but something else (and startups will benefit like they did between 2002-2007).
Thanks for the food for thought.
1. The bubble for already funded companies burst in the 90s but that didn't dry up funding. The truth is a wealthy person's best bet in a down economy is a small startup. Because the potential upside is so much better than any other investment. A company like Y Combinator can literally fund hundreds of startups and as long as at least one has a significant payday at the end Y Combinator still comes out on top.
2. The problem with borrowing money now, as an American, is the dollar is falling and most people expect another round of Quantitative Easing which will almost certainly exacerbate that. It usually doesn't make sense for a startup to borrow a significant amount of money in a currency whose value is dropping. Because you only get so many funding rounds and you don't want to waste them by not getting enough money to buy what you need. Which is what happens when a currency's value drops after you get the funding.
The dollar doesn't seem to have moved much since 2008. Versus the Euro, it was on a downward trend from ~2004 until mid-2008 or so, but it's been flat since then, albeit with significant volatility: http://www.google.com//finance?chdnp=1&chdd=1&chds=1... Against other currencies, it's down versus the Japanese Yen, but up versus the UK Pound.
In terms of domestic prices, inflation has been running around 1-2%, and futures/bond markets are pricing in an expectation of no inflation, or even possibly deflation, through 2020 or so (with particularly strong consensus in the 5-year window through 2016).
You're certainly right about the bond markets.
It usually doesn't make sense for a startup to borrow a significant amount of money in a currency whose value is dropping.
I disagree with this though. Depreciating currency is awesome if you've got debt financing, because all of the value of your debt drops, but you only lose the value of the money you haven't spent yet. OTOH, it might be bad because uncertainty about depreciation will cause financiers to be reluctant to give you good terms.
Now, it certainly is a bad thing when you're getting equity financing, but that really isn't "borrowing".
For example, say you budget for a year of operation and assume you need $1.5 million and get funded at that. Then the value of the currency falls. This means your revenue falls and the value of your cash on hand falls. Suddenly you're out of money and its hard to go back for another round so soon after the first.
That's where I see the problem. If you can survive long enough to pay the debt back in full a down currency works for you but it could be the death of you.
I understand that Y Combinator only does token investment in terms of money, and gets a good share of the startup in exchange for its brand and the experience and connections of its founders within the VC world. Since the actual money outlay is low, it can afford to fund hundreds of startups.
I doubt that's something that the average "wealthy person" can do.
Sounds like a good time to spend your money on a new company with actual profit potential.
Great food for thought.
Of course it's possible but it introduces a level of indirectness. Once you have indirectness, it becomes harder to measure your impact. Fields where one's impact is hard to measure tend to attract BS artists who use the ambiguity to their advantage, to claim that they are worth more than they really are.
The algorithm you are thinking of will fail unless it has some way to empirically measure impact, in which case the algorithm would be trivial.
Personally, I got into this because it's the only way I know how to live. I'm not happy unless I'm building, it just so happens that makes me an entrepreneur.
Seemingly, the fundamental problem that exists in the United States is that the debt level has been never ending. The spending mentality of the U.S. government since Regean, Bush, Clinton [not so much], Bush and now even Obama [in my view - cleaning up the mess] was never one of fiscal or monetary conservatism. I'm an Aussie - our country doesn't have hardly any debt [queue smart-ass arrogance smirk]. Good fiscal and monetary policy ? Not really - as much as our politicians love to think so - it's just not over promising and over spending for political gains. "I'll give you tax-cuts of 5%" - "I'll do 10%" - "I've just discovered I can do 15%!" and so on it seems in the US - then the whole country argues about whether tax-cuts are better or worse or giving the wealthier socioeconomic bracket more money is better or worse. I don't premise to understand the entire US Financial or Political system - I'm merely an international observer. What you can observe - large socioeconomic cuts to fundamental social welfare results in those scenes unfortunately unfolding in London. You rip apart societies most vulnerable social fabric and it's not going to respond happily.
To suggest we are heading for another "dot-com" boom - at least in my opinion - is totally unfounded. The internet is in another era juxtaposed against the 2000's with widebroadband adoption and reliance. IPO's are not finished when they are based on real fundamental revenues and profits underlined with good talent. Any rational investment is unpinned by this - Facebook would still raise a huge IPO - because large financial institutions still have huge funds available to them and see the rationality of the investment. Similar to other business' that have real revenue and real values.
Solid business basics win as per Warren Buffet "Be fearful when others are greedy, and greedy when others are fearful". Convince investors to be greedy in the current climate and nothing matters. You'll win.
The result was deficit spending making up for a precipitous dropoff in GDP:
The idea was to prevent a shock and/or collapse and buy time to work out the underlying problems, and they succeeded at the former but may have run out of time on the latter.
But much of that ammo is now used up. It's doubtful the GOP in Congress would allow another massive stimulus, leaving only the Fed's ability to keep rates low and possibly try another QE3.
So, my point is, don't take for granted that nothing much happened after 2008. It only played out that way because of massive intervention, but much of the underlying problems still haven't been solved, and a shock or collapse are unfortunately still possible.
(I'm excluding TARP which is more complicated; it isn't quite $700 billion in spending if ends up getting partly repaid, however, aside from the part that doesn't get paid back, there was also an opportunity cost)
So I don't think it's as simple as you make it out to be. Starting a business now is basically a bet that either the problems which caused the 2008 crisis have been corrected (doubtful) or there will be another massive stimulus when another crisis arises (highly uncertain, but certainly possible.)
Given Australia's much smaller population, this works out to $7,889 per capita.
Compare to USA $46,780 per capita.
Country's headed in the wrong direction, mate. Same direction as the USA, I'm afraid.
Anyway, Feel free to browse this document - http://www.treasury.gov.au/documents/1496/PDF/01_Debt.pdf
"A government’s balance sheet comprises both assets and liabilities. This article has demonstrated that only considering gross debt can result in an incomplete picture of public finances. By taking into account assets the public sector owns, a more accurate view of a government’s ability to respond to economic conditions can be determined.
This article has shown that Australia has undergone several periods of debt accumulation, followed by periods of fiscal consolidation. Periods of strong economic growth following episodes of debt accumulation have helped support relatively quick improvements in the public sector’s net debt position. Australia has a low level of net debt both historically and when compared with G-7 economies."
Firstly, what exactly is it measuring? For a start, it appears to include private debt.
Australian government debt is under 5% of GDP. As recently as 2008 it was debt free.
http://www.treasury.gov.au/documents/1496/PDF/01_Debt.pdf is a good link (from another comment here)
I think we should stop the macro outlook and worrying. It's pointless. Focus on what you're doing right now, and producing something of value. In most cases, what you have control over day-to-day, whether it's developing a quality product, speaking with customers, improving business processes, hiring, etc will affect your success much more than whether the country's economy is going down the tubes.. You have no control over it, so stop worrying about it. Worry about getting customers. Worry about developing.
I want you to be right, but didn't something come of it? Didn't we have a huge recession whose impact is still being felt by all of us? Don't we have a nearly 10% unemployment rate, nearer to 16% if you include people who've just given up?
No matter what happens, America (and the world) will still have a lot of very wealthy people and institutions. Those people need to put their money somewhere. The stock market is scary, bonds and banks don't pay anything. If you had $100 million tomorrow to invest what would you do with it? I'd start looking for startups.
10% unemployment seems bad to us, relative to our more historical 5%, but Europe has dealt with that for decades. People still buy iPhones and sign up for Netflix. Even if the market for new services is reduced by a few %, the quality of new services will more than make up for it.
Rich people will still want to make money and startups will still be an appealing way to do it.
The peculiar sense in which gold is "safe" is that it tends to go down just as much as it goes up; that is, it isn't subject to secular inflation or deflation.
I totally agree with this sentiment, and totally think that it's only a matter of time until we need to start dealing with the consequences of not being prepared for the "Winter". I'm also interested in seeing which players end up being "part of the NightWatch" and keep going because it's what they love and pledged their dedication to, and which players are only in it to play the "Game" and see whom can get the most money, popularity, recognition, etc. Also, as a fan of the books I loved the analogy between the Ice and Fire saga and entrepreneurship this days.
The Doors - Summer's Almost Gone "Summer's almost gone. Where will we be, when the summer's gone?"
The Doors - Wintertime Love "Wintertime winds blow cold this season. Fallen in love, I'm hoping to be."
Make good things. Money will follow no matter what the season is.
One bubble/bust cycle does not a trend make.
- Stock Market Drops. VCs Hold Partner Meetings. What Happens Next?
"I (Mark Suster) told him (entrepreneur), 'close your round by August 2nd. After that, all bets are off.'" - http://news.ycombinator.com/item?id=2864031
- For Some, Rude End to IPO Dreams
"The sound you just heard was the IPO window slamming shut," wrote Geoff Yang, a partner at venture capital firm Redpoint Ventures in Menlo Park, Calif" - http://news.ycombinator.com/item?id=2866438
- We're in the second dip of the global economic depression
And at any rate, most VCs go on vacation during August, so if you don't close your round by August 2, all bets are off...until September 1. This happens every year.
A good counterpoint to this sky-is-falling is Dave McClure's quote in the Wall Street Journal, in which he says that the market dip will change his investment velocity not a whit.
http://blogs.wsj.com/venturecapital/2011/08/08/early-stage-i...
I am not sure why you feel there's a need to make an unrelated assumption when, if you actually read the well-written techcrunch article, there's a reason why Mark said that - it's related to funding certainty and economics.
This is what you get when Republicans are in charge (and they still are; look at Congress): short, puny expansions and punishing, horrible recessions.
It's easy to be all roses in the summer time, but only the tough get to make it through winter.
Should be fun!
Lhude sing Goddamm.
VCs stop and angels drop,
Like aggregate demand....
Sing: Goddamm.
Downcast brow and skittish DOW
Show profit on the lam
Suster shivers, Techcrunch quivers
Damn you, sing: Goddamm.
Goddamm, Goddamm, (and Groupon's canned), Goddamm,
Watch Pincus do facepalm.
Sing goddamm, damm, sing Goddamm.
Sing goddamm, sing goddamm, DAMM.