Winter Is Probably Coming Soon | Hacker News Reader

Winter Is Probably Coming Soon

techcrunch.com

106 pointsdevNoise69 comments

Of course a VC does not want you wasting his money and will finger wag all day long to try to make entrepreneurs behave.

However his analysis focusing on isolated economic indicators is missing the forest for the trees (presumably willfully). Why is money cheap? Because investors have no place to put their money. The accelerating consolidation of wealth within the super rich (ie. the 0.01% funding VCs) and the pathetic amount of tax and philanthropy mean they have nowhere to put their money. It is going to be impossible to get the returns they demand because of the decimation of the middle class and on a larger scale the impossibility of sustaining 20th century level growth over the long term.

Tech is a long way from being an unattractive investment because it still provides the best avenue to scaling a business quickly. It will survive a tremendous amount of douchebag entrepreneur cash burning simply because there's no better game out there, and until society comes to term with what's actually happening economically rather than wishfully believing the juked stats the government puts out to get re-elected I don't see any better investment opportunities coming along.

Let the party continue...

You can still put money in an index fund (e.g. anything from Vanguard) and get reasonable returns (better than most investors at least).

Indeed, the risk-adjusted returns for VC as an asset class are bad compared to other options. I think there's more to the story than "the rich are running out of places to put their money."

You can, but many investors are concerned about the stock market as a whole being overpriced. "Bonds are overpriced, Commodities are overpriced, Equities are overpriced, and Real Estate is overpriced. When rates go up they will all tank."

Of course this is a first world problem.

I used to say "Invest in your own human capital" but I took a look at the cost of private schools nowadays, and they're overpriced too. :-)

I'd hate to see what those investors think of paying 10 billion for SnapChat...

"Oh sh*t we should have gotten in at 3"? :-)

The majority of funding for the VC industry does not come from the super rich, but rather endowments, pensions, and other forms of institutional capital. These institutions do have many other markets where they invest their capital, most of which are more attractive on a risk-adjusted basis when taking into consideration the illiquid nature of venture capital as well as the high fees.

You sound like you know a lot more about the VC industry than me, but if what you say is true, why is there still so much VC money flowing?

Because there is a lot of money flowing everywhere.

Total VC investment through Q2 2014 is on the order of $22.7B [1], so if this continues, the VC industry is likely to invest about $45B through the year of 2014.

At the same time, the total market cap of the S&P 500 is $17.5 trillion [2], and it's increased by about $2T so far this year [3]. Total daily volume in the S&P 500 is $1.4B [3]; in 3 weeks, more money changes hands in the S&P 500 than it does in 2 quarters for the VC industry.

[1] http://www.nvca.org/index.php?option=com_content&view=articl...

[2] https://www.google.com/search?q=s%26p+500+market+cap

[3] https://www.google.com/finance?q=INDEXSP%3A.INX&ei=2qMcVJCGG...

VC (the VC money you and I all see on TC every day) is just one asset class of many. In most funds, it usually represents < 10% (correct me if I'm wrong) of the total fund. Since the returns of a few of the funds are consistently giving high returns this 10% might increase over time. But for now, VC is largely regarded as "high risk, high return". Generally speaking, VC and hedge funds are TERRIBLE places to put your money, but funds still put money into them because it spreads their whole portfolio risk.

I feel like we've heard this before:

2008: http://techcrunch.com/2008/10/10/sequoia-capitals-56-slide-p...

2011: http://www.startuplessonslearned.com/2011/08/winter-is-comin...

And it makes me think of 2 things:

1. "the market can remain irrational longer than you can remain solvent."

2. The way large companies use layoffs not to actually cut the total number of jobs, but to cut deadwood. This seems like the VC equivalent.

You point out that we've been hearing VCs belly ache about the high prices they've been paying for many years, but I don't see how it follows that the market is irrational, but even if it is, in that case it'd make it easier to remain solvent. Which directly contradicts your second thought.

"The market can stay irrational longer than you can stay solvent" is a common saying in the financial world: it means that even if you're right that assets are overvalued, there's no guarantee that they'll come back down to earth in any reasonable length of time, and so betting against the market can often be a losing gamble even when you're right.

In some senses the market is never "irrational", because a security is worth exactly what someone will pay for it, and so by definition it always has the right price. In other senses, the market is always "irrational", because its price is determined by the emotions of its participants and not any sort of rational analysis. (The whole reason markets are efficient is that they average out the misjudgments of many members, such that those who miss the mark too much drop out and cease to become participants.)

I think Owen's point is that the sky is always falling. Bubble psychology and boom/bust cycles is a natural part of the operation of markets.

But the 2008 slide deck was right. It was comically easy to hire great people for a few years after Lehman. Rents were going down in San Francisco. SOMA wasn't a ghost town, exactly, but it was pretty empty compared to now. The bust was real.

The rapid recovery in tech has more-or-less paralleled the rapid recovery in the stock market as a whole. There's no lesson to be learned from cynicism here, except that the tech industry probably never paid the full price for the last crash, because the "fix" for that was flooding the market with cheap capital, which makes risky investments look reasonable.

The question is whether the slide-deck was self-fulfilling because it came from Sequoia.

The answer is no. It was fallout from to the financial crisis.

I hope so. Currently, VC money is a horrible market distortion that encourages what is basically dumping - companies with good products and actual business models being starved of oxygen by cashed-up competitors who simply give products away for free. I'm not even sure of the economic term for it but wouldn't be surprised if it's illegal in a few years, after we've gotten more sophisticated.

A related argument had been made a lot lately about how "free" can lead to scummy business models like surveillance and manipulative black hat media tactics.

You can do free sustainably if your costs are low and if you have something a tier up you can sell. That's freemium and it can work for some things. But if your costs are high or if a paid tier does not materialize... Now you have a big problem. You own a liability, one purchased via massive investment and employing many people. You must find a way to make it pay, so you start looking at what you have a little differently. Your users... Now there's a product.

South Park parodied the grow-first-monetize-later gambit in the "underpants gnomes" episode:

1) collect underpants

2) ...?

3) profit!

Nobody knew the second step back then. Of course now companies like Facebook have shown us what step two is. It's:

2) sniff underpants

I used to think it was illegal under the anti-competitive regulations, but just based on proliferation of the strategy I'm not so sure anymore.

Dumping is usually only illegal for foreign companies to do. The government doesn't care about two domestic firms competing with each other, what they are worried about is the Chinese government using it's vast resources to subsidise the dumping of millions of almost-free tablet computers onto the US market and putting Apple out of business.

It is also illegal for a domestic company to price below cost, if that company is a monopoly. Under the anti-trust laws, this is known as abusive pricing.

However, it is legal for a non-monopoly to price below cost. The assumption is that this behavior is self-regulating, because the company will eventually go out of business if it can't make a profit.

If otherwise-viable competitors are driven out of business in the meantime, that's simply collateral damage. The current thinking about antitrust laws is that they should protect competition, not competitors. Eventually, new companies will spring from the nuclear wasteland. (Google Reader and RSS comes to mind.)

I think it's fair to say that this analysis applies better to web/app companies. There's just a fundamental problem with raising (and burning) millions trying to grow a site for inbound marketing, or an app for dating, or what have you, even though these are great ideas and things that people want:

You likely won't be able to generate real revenue on something whose value is so immediately replicable or replaceable.

There needs to be a caveat to "build something people want": there has to be some barrier so that others can't compete so easily. Customer and market understanding is one, and that's certainly helped. But again, the replication model, which will drive down profits for everyone, kicks in. Technical superiority is a possible solution, but most web/app products simply wouldn't benefit from this because their functionality is trivial.

Of course, there are exceptions. Unicorns. Things like Whatsapp, Twitter, and Salesforce come to mind. Obviously their initial products were replicable, but the winner-takes-all network effects (and eventual "platform dynamics") create that lock-in. For every one of them, 1000s of similar companies fail. The problem is when VC money is chasing those 1000s of likely-to-fail-I-might-do-it-too companies. They're more likely to fail than laundromats, but they're burning millions in an attempt to be those "winners". Easier than investing in clean energy though.

Fundamentally, as a society we need some technical advancement to create meaningful economic growth. We can't just keep advertising and selling the same stuff to each other. When a sector is running dry on innovation opportunities (i.e. webs/apps) maybe it's time to look elsewhere. Or stick around and wait for unicorns. Meh.

For now though, how people want to misappropriate (in my opinion) their money is their choice, as long as most of this doesn't get dumped on John Smith from The Public like it did in 2000.

Truth is, it is not their money. They are borrowing it at low rates. The most important point is that the private capital is fuelled by cheap public money. When that money dries up, so will the funding for the startup scene.

Could you explain to me the funding chain a little better? From what I understand, VCs raise money from "Limited Partners", but I never understood who those guys were and how they got their money. Pension funds and such?

You got it: Pension funds, endowments, foundations, union retirements funds, rich families, anybody who has a lot of money and wants to diversify into a high-risk, high-return fund.

They basically trust smart people, who have presumably succeeded at this in the past, to pick more net winners than losers and earn a return on their money.

> Fundamentally, as a society we need some technical advancement to create meaningful economic growth

Fundamentally, as a society we need a social+economic advancement that allows society to continue to function in the absence of growth.

Farms don't need growth to produce food. Power plants don't need growth to produce energy. Construction companies don't need growth to build houses. There is no good reason why the wheels should come off our economic system in the absence of growth.

The fact that the wheels do come off in the absence of growth is a bug. Plain and simple. We need to fix the bug rather than "working around" it by trying to produce unending growth.

Capitalism is cancer.

Capitalism, like cancer, can't be avoided. Economics is more like the laws of physics than a game of Monopoly: you can't really opt out of it because it simply describes the way things "want to" work (people competing for scarce resources).

Unlike cancer, I suspect that if we're sufficiently clever we can figure out a way to manage the symptoms in perpetuity.

So you think some "we" can be clever enough to manage economics but some "we" (perhaps same, perhaps different) can't be clever enough to manage cancer. Bummer.

Our system is highly credit driven, in order to service debt (interest) you need growth.

Winter is always coming. Gurley's analysis is spot on but it really talks about VC money not "real" money. Something not enough startups internalize has always been how "expensive" it is to use the dollars you get from investors to fund operations.

Will any of the bootcamps survive, do you think? It seems unlikely given the stories I've read here, lsc hiring a former coworker (his technical superior) out of a sandwich shop, or tptacek having to move from San Francisco to Ann Arbor because there were no jobs going in San Francisco for someone who co-founded a large ISP and had lots of security publications.

I'm sure it'll be bad enough in the US but I pity the graduates of General Assembly London or the Berlin bootcamp.

What about the bootcamps? A friend of mine is considering enrolling in one. Is it a bad idea?

It's not a bad idea for people who go through them and successfully get jobs before the crunch comes. As long as they can do the job and don't get laid off, they're way better off than they would be otherwise. (And even if they do get laid off, they're probably better off than they would be otherwise - they have tangible skills that will likely be in demand for a while.)

It could be very bad for the boot camps themselves. The reason they have a business is because the demand for software engineers is red-hot right now; much of this demand comes from the easy availability of venture/seed money. Think what happened to telecoms, ISPs, and infrastructure providers at the end of the dot-com boom. It was not unusual to go from thriving repeat business to absolutely zero customers in six months.

Yep. And even more to the point, there were a lot of people who were hired as "webmasters", and knew little more than some HTML. Those people were cut almost immediately when the crash came. It's not even a metaphor -- almost the exact same scenario played itself out in the late 90s. We know how it ends.

It amazes me how resistant we are to learning from experience.

Based on seeing the last crash-

It's not really skill level that determines whether you keep a job. Having a good network and being able to hustle for opportunities are far bigger determinants.

The quiet, 50th percentile engineer who hasn't had to look for a job in 10 years, doesn't know a lot of people, low-ish EQ, works for a company that's not well-known: most at risk of struggling to find a job if laid off or company goes under.

Someone who knows little more than HTML but is a young, hustler type, big network, sociable, puts more energy into finding gigs - likely to get at least some contract work to sustain him through the

*downturn

It amazes me how resistant we are to learning from experience

Its been going on for a long time now, it doesn't phase me anymore.Its not just in technology, but in every other sector in the economy. A fine example is Wall Street.

Translation: "Waaaaaah! I'm a VC; I'm not the only game in town anymore; and I have to pay money. Waaaaah!"

Yeah, guess what? Nobody likes VC's. They screwed everybody over in the 1999-2000 bust, so those people have stayed away ever since. And, now, the stupid 20-somethings are starting figure the same thing out, are buckling down on very small amounts of money and cashing out to Yagglesoftazon ASAP since there is very little barrier to entry on something which is solely software.

I'm always amazed by stories of startups that generate almost no profit and yet burn millions of VC dollars. Yes, I know that VC count on that 1 out of 100 invested in companies to generate profit larger than all the other combined, but still it's a bit ridiculous and in my opinion not healthy for the industry. It's a different story if you've a bootstrapped, profitable company and want to boost the growth - you can negotiate better terms with the VC, because a) you've paying customers and have a proven business model and b) you don't need the VC money to survive, unlike a fresh company without any profits.

Some types of companies are harder to bootstrap in a way that is profitable from day 1, also the risk for a small bootstrapped company is they just prove the market for a VC backed juggernaut to come in and eat them alive.

Yes, some types of companies need time to provide value, but in my opinion the vast majority of VC funded companies could easily be bootstrapped. I don't deny that the vision of receiving a fat check and being able to rent a beautiful office, buy the best equipment and hire a big team is tempting, but it's something for something - the main goal of VCs is to grow like crazy, without a sentiment. A bootstrapped company will grow slowly, but steadily, and I don't believe a VC backed competitor is a real threat in the long term. Sure, they can offer a similar product for free, but not forever - once the VC money is gone, they will need to get profitable. Fast. Without the VC money such company can dissapear the next month. Not to mention the interference of VCs how to run your company, which is of course expected - after all it's their money that keeps your company alive.

Sure, but by the time they have folded you're already out of business!

I don't think there is an overall tech bubble like 1999, but there may indeed be smaller scale bubbles in overheated or overhyped sectors.

There are two areas of worry from what I see. One is free apps and services with high burn and no good path to revenue. Another is what looks to me like a mini-bubble in startups that cater to other startups. Scene-centric inbreeding like that is probably more worrisome than the overvalued pic sharing services.

I somehow hope it's gonna happen sooner than later, just because that way it could hurt a little less. What's not clear here is that the impact on global economy will be not that big. Anyway, if they're called venture capitalists, shouldn't they be able to look forward a little better than the market? That way they know what will happen if they keep going on like this. A quick deflation of the bubble, with some notable victims, would be better than a complete burst. Especially for VCs

Any evidence the party is coming to an end?

Actually for me it is getting a bit ridiculous when an app like Yo can get like a million dollars when it goes viral without anyone actually figuring out what's so great about it.

It does seem like growth is triumphing over other metrics, like revenue, or common sense. Of course if we go by that measure, companies like facebook will never survive at all, not sure how this is gonna play out.

Can somebody explain to me why every startup company(or at least every one that articles are written about) feels the need to raise as much VC as possible ASAP? There are so many options for developing scalable systems relatively easily and the cost of running an entirely web/software based company(read: 90% of the hot startups) today is comically low, especially with pay what you use PaaS/IaaS systems like those offered by Google and Amazon. If your product crashes and burns, you will be out a couple thousand dollars MAX + whatever time and effort you put in. If your product is successful, by the time running it on one of these platforms gets too expensive to pay for out of pocket(meaning you have a lot of users running up bandwidth/infrastructure costs), I'd guess that VC firms would be coming to you rather than you to them, and you would basically have more authority to dictate investment terms, and wouldn't have to slog around pitching to firm after firm - most of who will probably reject early stage investment in anything that isn't some rehashed social media dreck made by the white boys from Stanford. I've never pitched to a VC firm, but I don't believe that any pitch is better than "Hey my thing has 10,000 fucking users and we get a metric shitton of new signups every day". I don't think they would care if you were a hobo clown from Latvia who dropped out of elementary school if your product had users and pull, they'd throw money at you since they all want to jump in on the next big thing.

This confuses me as it would seem to be a counter trend to what I'd expect based on what stuff was like a few years ago, when infrastructure costs were much higher, there were much less options, and development was more difficult. Google and Facebook - both of which are practically the model now for successful web companies - were fairly bootstrapped(run out of garages and dorm rooms by a few friends who had scraped together money from friends and family) before getting VC funding, which they got after their products had received somewhat widespread hype/adoption. I don't even think it would have been difficult to raise money or make VC connections before the product even launched for these people, they were practically the definition of the white boys from Stanford - but they didn't. The founders of both of those companies still retain massive shares and control in them compared to what you would expect from almost any other type of company of their calibre. Neither of them had to resort to advertising before their companies got big. The excuse that seems to be given is that by getting VC you don't have to worry about profits and paying costs for a while and you can just focus purely on the product, but as I said before, the costs are minimal - if you had even a small amount of savings or hit a family member up for a loan, you could run for quite a while on Google App Engine and such and not really have to worry about cost. If your founders are even remotely technical, I don't see how you would need more staff members in your early stages, successful web/software companies love to brag about how early on their team consisted of 3 people who worked a million hours a week on the product subsisting on nothing but cocaine and melon rinds because they were so dedicated to the company. As a person who I guess would be considered technical(though if you ask me I'm just a monkey who doesn't have a clue what they are doing and just bangs rocks together and hacks at stuff till something working comes out), I simply don't see the appeal of begging a bunch of of suits - most of whom probably don't know a shit about computers - for venture funding, and having to sell large stakes of your company to get it when you don't absolutely need it at the time.

The only reason I would postulate for this trend is an increasing amount of non-technical founders who need to pay for developers to make and maintain their product, but don't want to give these developers significant equity in the company. Almost all of the cofounders of Google and Facebook were highly technical and very driven and intelligent from what I can see, so I could easily believe that they were able to chug along on their own for a while without hiring more technical staff. I've put a couple of fairly popular and highly trafficked web projects(nothing huge, current one pushes about 2TB of bandwidth a day from 30k visitors, and costs about $100 a month to run on a dedicated server) together with some friends and am currently learning iOS dev, and I don't believe its a stretch at all to think that me and a buddy could build something like Snapchat or Instagram in a couple of weeks and throw it up on App Engine.

I know almost nothing about finance and haven't ever managed or worked at a for really reals startup, so let me know if I'm way off here. I would just like to get some people's perspectives on this. Sorry for the rant.

Sure you can throw together another Snapchat in a weekend. But very soon - if you have real significant user base - you will need to build and maintain apps on all platforms. You will need someone to fix bugs, add new features and scale things better everywhere. You will need people who can create and conduct marketing campaigns (FYI - Techcrunch isn't writing about for you without getting paid and Snapchat didn't become popular without playing tons of marketing tricks). You will need guys who can do business development, accounting & taxes, create partner relationships and so on. You will also need customer support, social media management, metrics measurement, all kind of dashboards and so on. Before you know, you will end up with significant staff, needing office space, doing moral events and likes.

Per head aggregate cost of an engineer these days is upwards of $230K when you add up all health insurance, 401K, signing bonuses, office space and so on. Even if you hire just 50 employees, you can easily expect $1 million burn rate per month. For things like Snapchat, you can't anticipate much income during initial growth period. So this means you need VC for getting ~$10-20M of funding per year until you get sold, IPOed or have ad based income flowing in.

In support of your thesis, there was actually one guy who did plantyoffish.com and managed it through out everything all by himself for many years. But finally things have caught up to him. Now he has more than dozen employees. This is of course outlier case and not a typical scenario where competition will eat you alive if you don't defend your castle aggressively every day by one-uping them. And for that you need employees and bandwidth to work on lot of things at the same time, many of which likely won't work out.

Correct me if I'm wrong, but I remember reading that Snapchat was originally pretty slow to acquire users, and conducted almost no marketing campaigns. According to the founders, they focused on building a great product, and this paid of in the long run as the product gained traction through word of mouth.

Actually using them as an example was a mistake on my part, I remember reading in that same article that Snapchat actually only got VC funding when the server costs were about to become too much to pay. Spiegel, who is the founder and CEO isn't a technical person, but it looks like his cofounder is.

Here is a link: http://techcrunch.com/2012/05/12/snapchat-not-sexting/

Most startups outside the US grow without VC capital. But in the US, with all the money trees around, you would be crazy to pass up the opportunity for free money.

But it isn't free, free implies that they don't demand anything in return. You sell investors an ownership stake in your company, so it is the same as any other transaction. That means that they get a portion of whatever profit you make, and depending on how large of a stake they own, a say in decision making and executive matters. Forgive me if this is a bleak outlook on businesspeople, but the last thing I would want to do immediately after founding a company is sell a portion of it to some suit with a $400 haircut(smart technical investors like Paul Graham seem to be few and far between) who probably doesn't know or care about the product or technology outside of the possible return on their investment from the profit made from it, and let these people tell me how to run it, or even worse conspire against me and oust me from my own company(see: Steve Jobs).

I'm not denouncing VC as a whole, and I'm sure it is very beneficial when your company is becoming too much to run with your initial resources, and can be a big part of what accelerates big things to huge things. I'm just curious as to why the trend today seems to be to acquire as much early stage VC as possible, some companies even trying to get it before launching their product, through means like accelerators and such. $100k investment for 10% of my company? HELL NO. As I said before, if my web/software company is becoming too much for me to run with my initial group of founders, that probably means it is somewhat successful, and at that point I have more authority to dictate terms to investors. This means that I can get a larger investment from them and give them as small a piece of the company as they will accept for their investment, rather than being completely at their mercy because I haven't even launched my product and have 0 pull. Larry and Sergey as well as Zuckerberg were pretty smart about this. When their companies had users and pull they could afford to be picky about who they accepted funding from, and for good reason - they were control freaks(I mean this in the best way possible), and didn't want anything put out by their company to be not to their specifications. Obviously this worked well for them. This is my very basic understanding of how this stuff works, so once again correct me if I'm wrong.

P.S. here is a fascinating article on Page that was posted here a few months ago if you haven't read it - it brings up some of the points I made about him: http://www.businessinsider.com/larry-page-the-untold-story-2...

>Can somebody explain to me why every startup company(or at least every one that articles are written about) feels the need to raise as much VC as possible ASAP?

>The only reason I would postulate for this trend is an increasing amount of non-technical founders who need to pay for developers to make and maintain their product, but don't want to give these developers significant equity in the company.

I think this is the best explanation. It's not just tougher to find engineers period, but you have to incentivize them away from the big co's who are paying like 120k/engineer. Equity helps, vision helps, but more than anything so does cash. However it is telling if companies need to rely primarily on cash to incentivize rather than the first two.

Maybe this could be a good litmus test for you as a founder: can you get your early engineers to work at half, or less, their market rate? If so, it implies you're putting something together worth working on (or you're really damn good at recruiting). But if not, if you have to pay close to their big co salary, then I think there's a problem.

I think there are a couple of reasons why cash is a major motivator for start ups:

1) People understand the true value of equity which is to say in most cases, really not that much. As someone who was a non-vested dollar millionaire back in 1999 (and if you were working then who wasn't...), this time round I'm just far cannier about what that might be worth.

2) Big companies are getting wise to the vision thing. Maybe not the "put a dent in the universe" stuff, but the vision of what a company should be like and how it should work which is the stuff that impacts you day to day. Casual dress, flexible working, social activities... These aren't the exception any more, you can get them at large multinationals, you don't need to go to a start up for a nice working environment.

Unfortunately, you can't pay your rent or student loans with underwater stock options or "cool company vision". Most companies have something interesting or unique about their vision or product, so that's rarely a differentiator. And, the equity portion of a job offer usually ends up being close to worthless unless you're employee #1-10. So, at the end of the day, cash is king.

If you want the really good engineers from those companies, they're often making more than $120k - they can be making up to $160k.

Speaking as an engineer who has already been pitched at by others working on startups due to my formidable scalable productivity in my domain (while only being in the Bay area for 4 months), I prefer the security of a good salary and a good amount of stock. It would be very hard to convince me to leave without offering some level of immediate financial security.

Note: I work at a startup that raised a Series A round - I was offered $140k + signing bonus & generous stock options. I believe the company has been very happy with my results so far.

So you didn't accept it for the vision, because it was something worth working on, but for the money? Or maybe a combination?

I'm a decent engineer; not top 10% necessarily, but maybe in the top 25% and certainly well above the median. I earn almost $160k doing pretty basic/routine software work at a non-software/tech company in the Bay Area. I'm underpaid (as an hourly contractor)--that is, I know for a fact that the hourly rate I'm currently working for is 20%-30% less than what I could get doing something else. Your salary, if you are as good as you claim, is less than what it should be by a good 10%-20% (factoring in benefits and bonuses).

On the other hand a good litmus test for the worth of the company is whether it can afford to pay market rate (or more), and offer appropriate equity along with that "something worth working on."

This whole industry has a serious problem with compensation and startups are particularly egregious offenders. People are expected to work "for their passion" rather than for fair compensation for giving up quite literally a portion of their lifespan (time). It's absurd.

> Can somebody explain to me why every startup company(or at least every one that articles are written about) feels the need to raise as much VC as possible ASAP?

1. It pays the bills.

2. Raising money is a strong signal of success both from a personal entrepreneur perspective and for the success of the team (whether you disagree with that notion or not, it's simply true). Whether that translate to success is a different story.

3. Raising money means your business exists. Many people (especially B2B) don't want to do business with vendors who aren't going to be around in 6 months.

4. The speed at which tech startups are created, also exists in reverse. Startups close down all of the time.

> Neither of them had to resort to advertising before their companies got big.

> I don't believe its a stretch at all to think that me and a buddy could build something like Snapchat or Instagram in a couple of weeks and throw it up on App Engine.

Heh, if it's that easy then, ummm, go build it? Chucking millions of dollars at these startups isn't necessarily about building the product, it's about supporting their growth to get network effects ASAP. Achieving "the network effect" means you've got a nice big moat around your business, which VCs and entrepreneurs love. You're right, they didn't have to do advertising, but they did have to pay for shit-hot SRE people to make sure 1bil tweets could be sent every week (or whatever).

>Heh, if it's that easy then, ummm, go build it?

I did not mean to say that I could build a product like these to demean or belittle them in any way. The vision, ideas and UX execution behind them were clearly thought up by inspired and talented people. What I mean to say is that from a purely technical standpoint, they would be trivially easy to build, so I don't see why you would need to raise millions to pay for "software engineers" to build and maintain your initial product. They are just simple CRUD apps, a class of system of which there are a deluge of accessible and easy to pick up resources and frameworks available to learn how to work with, and a huge pool of cheap developers available. The technical problems that they solve are not novel in any way. While some of the Silicon Valley brogrammer types like to paint themselves as these renegade code wizards hacking on these super hard to solve problems(probably because it helps them get a paycheck), the truth is the problems imposed by CRUD apps are some of the most already solved around. I don't mean to say that there aren't plenty of code wizards hacking on hard to solve problems, but I bet they sure aren't CRUD related. Hell, I don't think its unreasonable at all that 1 or 2 completely non-technical cofounders could team up and learn Ruby on Rails or Django in a couple of months and put a viable product together. If you use an IaaS/PaaS system, Google or Amazon or whoever handles scalability problems for you - its literally as easy as moving a slider and paying more money. Why pay $230k a year for a "scalability/reliability engineer", when I could pay exponentially less to Google or AWS and not have to worry about anything? Even if those didn't exist, have you ever heard of a user facing web company failing because their tech stack wasn't efficient, because it was built by someone just average at coding who chose an easy to work with system with a fast dev cycle and not a "Full stack Javascript distributed scalability Guru"? No, because by the point where the efficiency of their tech stack became a problem, they would have enough capital to hire 10 engineers to rewrite the whole system in Scala or whatever flavor of the month stack tech bloggers happened to be writing about if they so chose.

If your company required some kind of technology that only someone with specialized skills could work with, I would understand. Robotics software? Sure. Biotech? Sure. Life-critical systems? Sure. But I won't be told that photo sharing and social media apps in this day and age require that much capital to build.

And networking? It seems to be that tech, is one of the fields in which this matters less than others to build a successful company, which is why it attracts so many of the engineer types who hate dealing with bullshit. They don't want to deal with bureaucracies and market analysis, they just want to build awesome stuff. I'm certainly not saying it doesn't matter at all, but I find it hard to believe that people would sell away stakes in their companies just for "networking opportunities".

Google was unlike these companies, in that the product was unique in both idea and technical implementation. The idea was original - organizing search results by relevancy, and the algorithm behind the PageRank implementation required a bit of high level math. The actual engine was implemented in C++, not exactly the easiest language to work with. But like I said, Google was pretty much bootstrapped until they really did need the money. They didn't immediately raise millions prelaunch and headhunt the best engineers in the valley. The founders were bright CS people who built their thing, ran out of a garage, and solved problems on their own for as long as they could. When they received their first investment they hadn't even incorporated yet - they had to go file the papers and wait a week before depositing the money in an account. It would seem that the average founder has gone from being the type who is a tinkerer primarily interested in tech and doing stuff that hasn't been done before(think Sergey and Larry, Bill Gates, Wozniak, Paul Graham, Zuckerberg)- but with a side interest in business, now to the type who is primarily interested in business and sees tech only as a means to an end, and raising as much capital as possible and throwing it at developers and marketing people as a means to achieve that end. I don't mean this to sound condescending or whatever, I'm just trying to come up with reasons here.

So, I think it's very reasonable that 1 or 2 completely non-technical cofounders can team up and learn RoR or Django and put a product together on Heroku or AppEngine.

The problem is that they're competing with all the other completely non-technical cofounders who can do the same thing.

Most of the viable large-scale CRUD apps have already been picked clean. Much of what remains is niche software (eg. lifestyle SaaS businesses) or very non-obvious (eg. Facebook - it was technically trivial when it started, but it also wasn't obvious that there was a viable business in social networking until Zuckerburg went and built it). My prediction is that a lot of the startups that succeed over the next few years will involve some key technology that requires technical skill and domain knowledge to produce.

> Why pay $230k a year for a "scalability/reliability engineer", when I could pay exponentially less to Google or AWS and not have to worry about anything?

I think you're massively undervaluing the complexity of systems at scale. Let me give you a more concrete example. In Facebook and LinkedIn there is a feature that says "You may know this person". It's a small box in the upper right corner and looks like the smallest feature ever. But the underlying complexity of building such a feature is easily millions of dollars worth of man hours. Just that small feature has probably single-handedly grown those companies by > 1x factor. You don't get that simply by "throwing it at AWS".

I appreciate your enthusiasm for this topic, but I think the lens at which you see the startup world is being blurred by media and survivor bias. There is so much under the tip of the iceberg that 99% of the people here will never see.

I have to disagree with you here. Elasticsearch has a "more like this" feature built into it, which would give you pretty much the desired functionality you're describing that Facebook and LinkedIn have. It's a free and open source technology that I've installed and maintained on my servers. All you have to do is feed it some JSON, which you can modify as you choose to bias it to your exact specifications. Google and AWS offer cloud search and database features which already have this type of functionality implemented for you - all you have to do is wire it to your app. I'm not saying that these problems were trivial to solve in the first place, but THEY HAVE ALREADY BEEN SOLVED BY GOOGLE AND AMAZON AND FACEBOOK AND A MILLION OTHER COMPANIES' ENGINEERS, and made available to you in a nice and easy to use package with a bow on top.

See here: https://cloud.google.com/products/bigquery/ https://cloud.google.com/products/cloud-datastore/ http://aws.amazon.com/cloudsearch/

There is a whole world of businesses out there, many of them online, that don't raise VC money and don't necessarily get written about on Hacker News and the like. Check out (for example) the Startups for the Rest of Us podcast.

Because the founders often don't really believe in their startup's offering/services in terms of profitability. They want to hand over all the risk to investors and coast on other people's capital while they take a paycheck, boost their credentials and hey, maybe we'll get acquired?

I'm guessing it's in 18-24 months. Companies are still getting acquired left and right and BigCo still has cash to spend (especially Yahoo, Google, Facebook and Twitter). As long as BigCo is acquiring, VCs will continue pumping.

Nice link baity title. I thought this was about the new Game of Thrones book being released soon.

Heh, I can see where the confusion would stem.

Somehow though, maybe because this came a day or two after Suster's response to the Gurley interivew, I had a good idea going into it that the post had something to do with the impending VC crunch.

Stupidity and greed are year round.

Reply on news.ycombinator.com