Start-ups hit Cash Crunch in Silicon Valley | Hacker News Reader

Start-ups hit Cash Crunch in Silicon Valley

online.wsj.com

78 pointsahsanhilal69 comments

I haven't observed web startups running into a "cash crunch."

That said, it does seem to me that the market is exuberant right now. There are business cycles that imply things will go the other way at some point.

I also want to point out that it's utterly specious to compare the 826 consumer web startups funded in the last two years against the 416 funded in 1998-2000. How much bigger is the total addressable market? ~200 million people in the late '90s vs. 2.1 billion today? And that doesn't include mobile.

Similarly with the comparison of VC fundraising. The capital requirements of an Internet business are completely different today than they were in the '90s. (Does anyone from Web 1.0 remember budgeting $150,000 for servers?)

This last wave of startups has brought an incredible number of successful ones, and innumerable number ones waiting for monetization. As you said, the audience grew to billions of people. I remember in 2000, we were still trying to convince people that Internet is here to stay,to shop and to do business.

Similarly in mobile, where worldwide subscribers have grown from ~400 million in 1999 to over 5 billion today. The smartphone segment of that is still relatively small, but it's growing 100% year over year.

Meanwhile, today's largest Internet companies have five times as many users as the entire Internet subscriber base in 1999. My point is, startups that can profitably solve a problem have HUGE markets to sell to!

If this is happening at all, it must be a very recent trend. There was no sign of valuations decreasing a month ago.

Really? I've talk to several VCs that were very active previously and they all agreed that valuations are frothy and now is not the time to invest. Naturally valuations are going to be lower since that's what the buyer's perception of that market.

Well if the valuations are lower now, wouldn't that mean that now is the best time to invest?

Not if it's trending downwards.

@perokreco just like the stock market, the best time for entrance is when the market's at rock bottom.

10 points to anyone who can reliably identify when the market is at rock bottom.

Yea I would do that too.

I'll bite, but you won't like the answer: when it gets to zero.

Unless you know someone willing to pay people to take their stock?

I'm pretty sure I've seen people here saying that they would pay for YC to take some of their stock.

I love you; you pay my rent.

"Nobody goes there anymore. It's too crowded." Unless I misunderstood what you meant by "frothy".

Isn't that possibly a selection bias though? Isn't it possible that the YC brand is still trending up while the market is starting to correct? Or do you believe there is no such thing as a YC brand and every YC startup is judged independently, thus giving you an unbiased sample of the market?

Granted, Jessica's a YC alum, but presumably the further out from YC you go, the less the YC brand matters and the more things like revenue start to influence funding.

Based on my chats with other founders, I think the seed financing market is still pretty strong. Companies that should get funded are still getting funded, and I don't see that changing anytime soon. I wouldn't get too worked up on the scary headline...

In reply to another comment I saw, this applies even to non-YC companies.

What are the chances that VCs are planting these sort of stories in order to try to scare startups into accepting deals with terms that are more advantageous to the VCs? Exactly one week ago, there was a story printed in the New York Times that read very similarly to this one.

I do not think it is VC inspired, but this article does take a strange tone. "glut of Web start-ups"?

"A fundamental mismatch is now starting to show: While scores of Web companies were founded in recent years, there isn't enough venture capital to keep all of them going indefinitely."

Duh? Hasn't this been true since the dawn of time? What on earth is this observation?

Almost as though the journalist has some sort of bone to pick? Perhaps.

I wouldn't say they are consciously planting them. But when people are interviewed by reporters they often say that something they want to happen is already happening.

If a handful of YC companies are truly asking for a $9M or 14M pre... as rumors are flying around in Silicon Valley state... Then, I could see why VC's might say that the market is overpriced and frothy. Especially, since 6 months earlier, those same startups were priced by YC at a $300k pre.

No doubt YC has a phenomenal brand, and does a great job, and has had a couple of impressive rounds raised recently by AirBnb and DropBox.

But, there's a huge segment of the startup ecosystem that doesn't really show up on HN.

MassChallenge is graduating 125 startups next month. Their last batch, last summer has raised $100M in total.

Angel List has helped over 700 startups get funded in the past 18 months.

Startup Chile just seed funded 125, and opened applications open for another 100 startups today.

Then, there's 500 Startups, IO Ventures, RockHealth, AngelPad, StartX, BlockBox, TechStars, etc... And, a number of those startups have raised really impressive rounds, but they don't tend to get the local blog coverage or coverage here on HN.

Who knows... Here's hoping things slow down a bit.

Yes, you're right, I mostly know about funding rounds raised by YC startups. It could be they are just unusually fortunate-- that YC's brand and connections are so powerful that they have insulated startups we fund from a downward trend affecting everyone else. But while I'd like to believe we had that kind of power, it seems unlikely.

pg is right. If anything, companies that attack really difficult problems and aim to address them will emerge. In short, we can expect to see some unbelievable startups in the near horizon doing stuff that will be uncomfortable for many established players. They will focus on getting to profit way more than focusing on investors, WSJ, Techcrunch etc.

This is the time for giant killers.

" It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."

- Charles Dickens, A Tale of Two Cities

@davemclure: "agreed we aren't seeing any lack of capital availability. maybe slight stepback in valuation by 10-20%"

There's an interesting discussion about this on Twitter:

http://twitter.com/#!/naval

Some other choice tweets:

@naval: "Early stages of decline, IMHO. Asks high, bid low, median deal not clearing as fast"

@naval: "Top tier deals still hot. But bottom falling out. Make your own sub-prime analogy..."

My take-away from the article was that at most the stupid money is drying up, and very likely the article is wrong.

Opportunities still abound to use technology to disrupt existing markets. If that can be demonstrated to people with capital, they will invest. Even better, if that can be demonstrated to customers, you don't need people to invest.

Lot of action on Twitter about this. Recent tweet from Chris Dixon: http://twitter.com/#!/cdixon/status/124297282274340864

It would be interesting to know what these start-ups facing a cash crunch are all working on. Are they all chasing the same pie or are they a diverse bunch engaged in finding technology solutions for problems in a range of industries? I asked the question but I think I already know the answer.

Having been through the tech crash v1, I cannot stress enough: You must always have an alternative to VC financing or you are playing russian roulette with the availability of new money.

Profitability - but VCs don't give a shit about that - in fact one told me that right on the phone... Maybe things will change.

That should not be surprising: Profitability makes VCs less necessary, which gives you leverage to walk away from a term sheet.

Google was a great example of that.

How so? Google raised a bunch of cash at the beginning.

There was an angel round early, but when it came time for KP and Sequoia to enter, the dynamics were quite interesting. The company retained an enormous chunk of the ownership in part because they could (already!) walk away if they needed to.

I don't believe they had revenue at that point.

They didn't have revenue at that point. In fact, they were close to going bankrupt a couple of years later, before Adsense kicked in.

Source: In The Plex; also see Ron Conway's speech at Startup School 2010

> They didn't have revenue at that point.

Not correct.

Sources please.

Google didn't gain a competitive advantage because they were profitable early (they were profitable, but only marginally so). They had an advantage because of the traction (significant year over year growth) they had as well as their ability to scale economically.

If Google didn't raise big money, they wouldn't have went on to do as many early acquisitions. Without those acquisitions, they don't stumble onto adwords/adsense and they remain a mildly profitable company.

> If Google didn't raise big money, they wouldn't have went on to do as many early acquisitions. Without those acquisitions, they don't stumble onto adwords/adsense

Adwords was out for around 6 months before the company's very first acquisition, DejaNews.

http://www.google.com/about/corporate/company/history.html

Google quickly became insanely profitable after launching adwords. They only ever took $25MM in private funding.

http://en.wikipedia.org/wiki/History_of_Google#Financing_and...

I'm curious as to how you arrived at the assertions you made.

Fair enough, that's a valid question. I arrived at my assertion by looking at the financials. http://investor.google.com/financial/2005/tables.html

Google make the vast majority of their money through ads (no surprise). Adwords didn't take off until they acquired Applied Semantics (for semantic processing) and Sprinks (contextual aware ads). It may have existed pre-acquisitions, but it didn't look anything like the current version, and wasn't anywhere near as profitable.

> (they were profitable, but only marginally so)

That is the point.

It is why Larry and Sergey retained such a percentage of the company in the A round; They had an alternative.

Interesting twitter thread on this between @davemclure, @pkedrosky, @msuster, and others, part of which is here:

http://twitter.com/#!/pkedrosky/status/124323109032574976

(how do you capture a series of related tweets, btw?)

Summary seems to be: the cash crunch is not happening (yet). McClure calls it "poor reporting".

Looks like TechCrunch has captured a bunch of the related tweets: http://techcrunch.com/2011/10/12/web-start-ups-hit-cash-crun...

I like watching the discussions articles like this generate. It reminds me of both the dotcom and property bubbles and before it was obvious these were unraveling how people defended their positions. The biggest thing I get reminded of is those who bought property on credit at high values with the intention to flip them quickly at a profit. This reminds me of those who raise a lot of money for a company in order to flip it to the next guy. These are the people who will attack any perceived coming decline the hardest. They will tell you that this time it's different because 1% of China is now online. That technology is here to stay and will always grow and so will the market, with mobiles etc. This is true, but so was it true during the dotcom bubble. We got the timing wrong, and we got the business models wrong for sure.

In reality, like after the dotcom bubble, there are startups that formed over the recent years that will survive all this and be as well known as the giants we have today that formed during the dotcom era. It's just that we'll have a decline of appetite to throw money at me-too ideas with unrealistic business plans apart from flipping the company to the next sucker.

What is so interesting to me is how everyone was worried about a start-up bubble earlier this year to now where start-up financing is drying up. The whole notion of media speculation by noting short-term trends makes for some great gossip columns, but in reality do not provide real news to the reader. Because in the end this is not news just speculation more fitting for the Sun rather than WSJ.

I'm not suggesting it will play out this way, but financing drying up can be a step in the bubble bursting.

I can understand why startups need funding to get them off the ground, but I think this indicates that the focus might change away from "investing in tech that might turn into something" towards "only investing if there is a credible business model".

There's a fundamental difference between funding great people with innovative ideas, and investing in proven business models.

I'm not saying both can't happen to coincide in the same start-up, but there is some great start-ups with really promising technology, who haven't yet reached the stage where the business model should matter, and this would be like cutting them off at the knees.

I guess this is a consequence of bad economic times, moreso than the enthusiasm fading away. At least I hope it is.

Indinero should consider pivoting.

Compete.com only shows them at 800 or so uniques per month. But more importantly it will be extremely challenging for indinero to pick up enough small business accounts to make this idea work. While it's possible that this company could be an acquisition for Intuit that's not going to happen with anything like the user base they have. And getting time strapped small business owners to see value in this service in my opinion (with many years selling to small business and owning several) doesn't seem likely at all.

Citing Compete is dangerous territory indeed.

I don't have access to Indinero's data, but for my own startup, Compete's data is no more accurate than a random number generator. Both the absolute numbers and the shape of the graph have essentially zero resemblance to the real data.

If the sample is small then the data will be way off. That's the point. There is low traffic so there is nominal data.

That being said comparing compete data to hundreds of parked domains that get enough traffic to have a decent data sample yes I would agree the data is off. But not anywhere near enough to make any difference in the point I was making.

Those numbers being off just by a factor of "only" 10-50X (which I think is reasonable given Compete's record) would make a big difference for a B2B site. Even more important from the perspective of a startup would be the presence of an upward trend - and with Compete, I've seen their estimate for our traffic fall by over 50% in months where we grew by around 40%.

I'm pretty sure for a "decent sample" - at least, accurate enough for the data to be useful for anything - you need to be at least a top 100 site, and even then I've heard stuff from a couple webmasters of those sites that Compete data is off by an order of magnitude or so.

What would Intuit want with them, though? Intuit already has Mint and their own service for syncing with all the banks. Indinero seems like a business branded Mint, which Intuit would be able to do themselves. It doesn't seem like there'd be much value in Indinero's brand or accounts either at this stage.

Plus, Intuit's also using Fonzie to shill reverse mortgages to seniors these days: http://www.youtube.com/watch?v=CogQBgAFwI4

As a startup, I might want to steer clear of that particular borg unless prospects were truly dire.

The video you linked to is by Quicken Loans, which is in no way affiliated with Intuit.

Quicken Loans was very briefly owned by Intuit (from 99-02), but the only thing they share now is the Quicken trademark.

http://en.wikipedia.org/wiki/Quicken_Loans

Interesting - I saw the "Quicken Loans is an Intuit Trademark" scroll at the bottom of the screen during a commercial a few nights back and assumed there was an association past trademark. Wonder if other consumers jump to the same conclusion...

I own a popular blog, and Google Analytics shows 3x-4x the unique visitors Compete does. So, while I would say that yes, their stats tend to be inaccurate, that's still an alarming trend for InDinero.

(Update: I also compared to my startup's site, and GA shows 10x the visitors that Compete does. But still, even if off by a factor of 10, that's not great traffic for such a high-profile startup.)

Using Compete as a sole-source gauging a site's success is a problem. As a data point, their estimate of a site I run is 500x off.

Which of your sites are you referring to? For heytell.com compete is showing 8,265 uniques. Certainly you aren't saying that that site is getting 4,000,000 uniques are you?

Not at liberty to say. It does appear that Compete currently has a hole when it comes to divining mobile traffic.

bingo. the small biz segment is crazy expensive from a cust. acquisition standpoint. you have to raise a fair amount of dough to get a sales beach-head established. aside from intuit and the credit card cartels there aren't a lot of folks who have succeeded in getting scale there..

square may have a good run in that space, but they really are just an optimization play on the cc processing flow..nttawwt....

Or you have to just stay lean and execute well.

If a startup idea is really solid and has a potential for revenues, lets say in the short term ( < 1 year), do these market conditions affect funding such a startup idea. I mean, why would a VC or an angel not be convinced to invest in such an idea regardless of market conditions. Just trying to understand.

It's disturbing to read XXXXX "has been burning through its $1.1 million quickly" and all they could think of is raising more money. Why about revenue? Did the idea of making money just drop off the face of the Silicon Valley?

That's just to show that inexperience entrepreneurs like Jessica ( not saying she's not a smart person ) has hype caught up with reality. It's not surprising that these entrepreneurs will fight a long and tough battle ahead.

George Santayana?

Go read Jessica's blog post from August - she advocated raising as much money as you could, etc. I asked the same question as you did on her blog but never got a response. What's wrong with you know making money to grow instead of trying to just grab vc cash.

The only time it make senses to grab as much money as you can is when you're building to flip. I've always viewed raising as little as you can if you are serious about building a sustainable business.

No. It makes sense to raise as little money as possible as you can when you are building to flip. Think about it. I'll explain the math if you can't figure it out.

Not all new companies are startups. Startups are companies that are in search of a business model. They are building something that is at least somewhat capital intensive before they can get revenue.

There is a lot to be said about bootstrapping, and if you can do it then that is awesome. But there are lots of ideas that require some cash to get off the ground.

You are right about the math and I respect that you did that with delicious but not many entrepreneurs are like you.

No matter how it much it "make sense" to not raise more, most entrepreneurs will do the opposite and not take the risk of running out of cash before the exit. It's like the blue and red pill.

I'm not sure how you define startups but that's subjective and I think all new companies are startups. I would say most new companies have a clear revenue model in the beginning and it's all about making it happen or pivot till you got it right. There are some that don't have one at the early stage and it's also rare to see one that had gotten successful versus most that just got bought without even breaking even or mmde a single dime.

I wouldn't take what I did at Delicious as an example of anything. I was green.

Whether the trend is real or not, I note two highly encouraging, closely related things:

1) A hell of a lot less money overall is being poured into "Dot Com II". Even if Dot Bomb II happens, it won't be as bad.

2) A lot more companies are being funded, logically with a lot less money each.

There might have been some "excesses" recently, but for once, people did learn.

Moreover, using valuations as a proxy for this analysis is kind of misleading. If you put a million dollars in a company and the company goes bust, you're out the million, whether it "bought" you 5% of worthless shares or 50%. It only matters if the company actually does well.

Reply on news.ycombinator.com