><i>If you are in Silicon Valley and your customers are mostly well-paid consumers with no free time, or other venture-backed startups, well, I’d be worried.</i><p>That's the most beautifully I've heard this thought articulated. I constantly hear people in SV talk publically talk about how they're living years in the future due to getting services from startups that haven't yet hit other markets. These people are very wealthy and very short on free time; they incorrectly assume the rest of the world is as well. The reason Uber became so successful was because it became cheaper than a cab in most major markets with world class service. You have to really dig deep to justify most other on demand startups having the ability to jump the shark and it's because they don't have a plebeian offering.
What goes unspoken is how tiny the overall effect of this will be.<p>Yes, it will bring some concentrated pain to investors, CEOs, and employees of lots of companies. But how many people will be genuinely, life-alteringly affected by this? 1000? Maybe a few thousand? 1-2% of SF's population? By way of comparison Google has what, 50,000 employees?<p>I keep having to remind myself that the big companies are the elephants in the room compensation-, real estate- and traffic-wise. They employ <i>hundreds of thousands</i> of people and pay <i>billions of dollars</i> annually in wages. As much as I'd like an affordable place to live, none of this will move the needle that much for the average Bay Area resident.
On a related note, now's probably a good time to remind people of pg's famous "How Not To Die" essay, which is at least tangentially related to the topic at hand.<p><a href="http://www.paulgraham.com/die.html" rel="nofollow">http://www.paulgraham.com/die.html</a>
<i>You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time. If you don’t, you have to get money from someone else to keep going. And, as I just said, that’s going to be way harder now. I’m embarrassed writing this because it is so flipping simple, yet it is amazing to me how many entrepreneurs are still talking about their plans to the next round. What if there is no next round? Don’t you still want to survive?<p>Yes, some companies are ‘moon shots’ (DFJ has a fair number of those in our portfolio) where this is simply not possible. But for the vast majority of startups, this should be possible.</i><p>What is the point of calling them start ups anymore. Remove the high risk/high reward aspect and new companies are simply small businesses that receive small business loans from banks. A lot of the "wow" factor of the startup ecosystem was the mind boggling user growth/high valuation/massive losses phenomenon that a few companies weathered through to IPO and monetization.<p>I think I saw someone advocating for better terminology on HN recently. I vote to call any close-to-profitable <2 yr old company a small business. Likewise, any portfolio that holds mostly safe small business loans and equity should simply be called a bank.<p>Leave the unicorn/VC/startup lingo in the past, or use it to describe actual risk profiles, and things will be a lot less confusing.
> You know what kind of companies generally survive? Companies that make more money than they spend. I know, duh, right? If you make more than you spend, you get to stay alive for a long time. If you don’t, you have to get money from someone else to keep going. And, as I just said, that’s going to be way harder now. I’m embarrassed writing this because it is so flipping simple, yet it is amazing to me how many entrepreneurs are still talking about their plans to the next round. What if there is no next round? Don’t you still want to survive?<p>Sort of reminds me of the conversation with a senior developer I had the first time I joined a startup and my first company lunch at my first job.<p>Me: "So, we just spend whatever money the company makes"<p>him: "Correct"<p>Me: "what if the company is burning all the money it makes to grow as fast as possible, and they can't raise money anymore?"<p>him: "that will never happen"<p>Me: (concerned) "so the company is constantly breaking even"<p>him: "sometimes"<p>ME: (shocked) "so the company loses money some year, yet raises more money year after year so it can lose more money the following year than the last"<p>him: (annoyed) "you studied economics haven't you? you dont get it? everyone knows this is how you do startups what did they teach you in that shithole?"<p>(everyone else laughs)<p>end scene.<p>That was 4 years ago. I checked the glassdoor comments and boy I didn't think a 2.1 rating was possible on glassdoor because that would pretty much scare off anyone in the job market....and yup the company is going under <i>exactly for the reasons I asked 4 years ago but was ridiculed at my 'ignorance'</i><p>another one bites the dust for vancouver's brain drained tech scene. thank god I won't have to work here again in the near future.
What? One of the advice is to get cash flow positive with the money you already have. Isn't that basic knowledge? You can't spend more than you have and you only ask for other people's money when you don't need it. Idk, maybe this is an american thing, with all the capital you have but here (Portugal) you can't get series A funding without being at least cash flow positive, no way.
I think the startup world has become somewhat of a fork of how real companies should be built. Over the last few years companies have been investing into "scaling" and getting traction with no real revenue to substantiate any of the growth. That to me is backwards, and why those startups are fearing for their lives now.<p>Companies should be built with revenue (and profit) in mind, and in most cases those are the ones that thrive and succeed.
DFJ has had some great exits over the years. But looking at their current active portfolio, they're a little exposed.... and certainly not investing in any early rounds.<p>It's not surprising to hear they plan to slow down investing. But that's not necessarily a reflection of the overall market.<p><a href="http://dfjgrowth.com/portfolio" rel="nofollow">http://dfjgrowth.com/portfolio</a>
So the above is obviously written through a VC lens. Through an entrepreneur's lens - who also survived the dot-com bust (at etoys.com) and has since run several failed and now successful businesses - I'd add the following:<p>The most valuable advice in this post reminds me of Marc A's awesome blog entry. Quote:<p>"Companies that have a retention problem usually have a winning problem. Or rather, a "not winning" problem."<p><a href="http://pmarchive.com/guide_to_big_companies_part2.html" rel="nofollow">http://pmarchive.com/guide_to_big_companies_part2.html</a><p>In my opinion winning is, ultimately, measured by how much cash you can generate. We stopped thinking about an exit a long time ago while in the deepest darkest part of the valley of the shadow of startup death. We were forced to do it because we ran out of money and no one cared about us. Then we started focusing completely on our customers and our income statement. As soon as we did that, amazing things started happening.<p>Cash, in this case and in this climate, is king. Or net income to be specific. If you're able to generate large amounts of cash and keep a lot of it, not a heck of a lot else matters. From my perspective the only problems that really remain is giving your team a great quality of life and serving your customers.<p>Cash takes away issues like the board bugging you, investors breathing down your neck or (worst case) wanting to play CEO, hiring problems, retention problems, funding, what business are we in problems, product problems (you're obviously killing it, so do more of that!), exec hires, issues with rebellious execs (you're killing it, so you're implicitly right) etc.<p>When you "go for growth" (numbers growth, not revenue) you give up all of the above and put yourself as a CEO or exec in a precarious position. Your arguments are no longer that defendable because growth means jack shit unless it generates cash or will very clearly ultimately generate cash.<p>Think about the CEO of Giphy who just raised something like $50M at something like a $300M valuation. It's like my wife and co-founder says: Doing that you turn a cash problem into a much bigger cash problem. I'd add that you also now have less equity and less influence. For the investors it's awesome - the biz will likely bulk up on talent and worst case will exit as a talent acquisition at $2M per engineer and the investors (who get paid first) will recover perhaps everything that way with little left over.<p>If I was early stage in this environment I'd do the following:<p>Stop dreaming about a Deus ex Machina that will reach down and save your sorry ass. Stop fantasizing about acquisitions. If you don't you're going to inadvertently turn acquirers into your target market instead of your real customers. And humans aren't good at focusing on two goals at once.<p>Then do absolutely everything you can to generate sustainable cash. Usually this means (if you're early stage) discovering who your customers are and what business you're in or (if you're later stage) serving the heck out of your customers and making sure that what you provide is worth more than each dollar they spend to acquire it. Then do more of that. If you're successful doing this, rather than raising money, you'll notice that the really big scary problems simply go away.
<i>When a market like this turns, in order to survive, it is critical to redefine what success is going to look like for you – and your employees, and your investors, and your other stakeholders. Holding on to ‘old’ ideas about IPO dates, large exits and massive new up rounds can ultimately be demotivating to your team.<p>.<p>.<p>Stop worrying about morale: Yes, you heard me right. I can’t tell you how many board meetings I’ve been in where the CEO is anguished over the impacts on morale that cost cutting or layoffs will bring about.</i><p>With these prospects, I wonder how will these CEOs keep all those underpaid and highly skilled young laborers working for him/her now?
The whole bit about "don't worry about morale"... Some engineers are replaceable, not all. If things get bad and you lose early/key people, there is a non-negligible hit. But, I think Ben and Mark at A2Z outlined a strategy harkening back to the last big hit -- build up the reserves in the bunker. If you think things will be bumpy for X-months out and you aren't cash flow positive, get the requisite amount in the bank ASAP.
"The sky is falling ..." No, it isn't. All there is, is that there seems to be less appetite for endlessly unprofitable ventures that get away with dismissing the idea that they should be bringing in more cash than they spend within a reasonable time frame. Furthermore, is the entire VC scene actually needed? Lots of startups do not make use of their services and are doing absolutely fine ...
During late nineties, my startup was providing technology consulting/development service to other dot-com startups. Demand for our consulting service was so high that our company resort to auction kind of process to select customers. Then dot-com bust happened, 97% of our customers had gone out of business, quickly, very quickly. Obviously, our company fortunes dwindled and never recovered from that.
I think people are ignoring the huge cash reserves that Google and Apple, among others, have. I fully expect more acquisitions if VC funding drops out.
Based on the rest of the comments here deriding the growth over revenue strategy I think it's very important to bring up that risk is proportional to reward, and by definition any business that can be cash flow positive early on is unlikely to be very risky - and thereby not really what VCs are in this business for.
This is very similar to the infamous "RIP Good Times" presentation Sequoia shared in 2008<p><a href="http://www.slideshare.net/eldon/sequoia-capital-on-startups-and-the-economic-downturn-presentation?type=powerpoint" rel="nofollow">http://www.slideshare.net/eldon/sequoia-capital-on-startups-...</a>
This is based on the "Techcrunch" concept that being successful and continuing business for a startup depends heavily on external funds.<p>That couldn't be farther from the truth, for a real startup with a real business. Maybe growth will not be as fast without VC funds, but I don't think real businesses will notice shrinking investments.<p>Correct me if I'm wrong.
<i>>If you are in Silicon Valley and your customers are mostly well-paid consumers with no free time, or other venture-backed startups, well, I’d be worried.</i><p>This is the most shallow statement I have read this year. The needs of the rich today would be needs of less rich tomorrow. The author clearly missed out on the whole American dream concept. I'm sure some people felt the same way about refrigerator and cars.<p>You'd almost never create a market segment starting with the bottom end. Almost every product you touch, including the very screen you're staring at, was once made for the 1%.<p>And almost always the version for the 1% is expensive, won't see a version 2, and is a one time sale. It doesn't matter if your initial rich/busy customers are going out of business. If you found a need you're fulfilling, you will with a fairly high probability will continue to find customers through the generation.<p>Dot com bust did not kill Network Solutions/Verisign. Very, very important.
A VC taking the valuations down and encouraging the companies to become profitable sooner, to get a fatter slice of a tastier pie when founders come begging for money. News at 11.
Found the problem! "It is going to be hard (or impossible) for many of today’s startups to raise funds." You don't need to take on millions in debt to start a company.