In Silicon Valley, Investors are Jockeying like it's 1999(online.wsj.com)
online.wsj.com
In Silicon Valley, Investors are Jockeying like it's 1999
http://online.wsj.com/article_email/SB10001424052748703806304576233050434554110-lMyQjAxMTAxMDEwODExNDgyWj.html
5 comments
And lets not forget the previous sentence:
"But a few months later, Mr. Conway ignited another drama when he quietly negotiated what some investors considered to be a sweetheart deal."
You should write to the WSJ that anyone that wants the same "sweetheart deal" can easily get it, by simply emailing the same offer to all the Y-combinator startups and putting up the cash. I think these guys are just way too used to Wall Street, where everything is closed doors negotiations, $800/hr attorneys and secret deals. They just assumed that some type of sweetheart deal must have been involved.
"But a few months later, Mr. Conway ignited another drama when he quietly negotiated what some investors considered to be a sweetheart deal."
You should write to the WSJ that anyone that wants the same "sweetheart deal" can easily get it, by simply emailing the same offer to all the Y-combinator startups and putting up the cash. I think these guys are just way too used to Wall Street, where everything is closed doors negotiations, $800/hr attorneys and secret deals. They just assumed that some type of sweetheart deal must have been involved.
Kind of makes me wonder if similar reporting styles played a large part in the late 90s boom/collapse.
Good point: the article's style reeks of artificial scarcity
http://en.wikipedia.org/wiki/Artificial_scarcity
http://en.wikipedia.org/wiki/Artificial_scarcity
Not knowing a whole lot about Silicon valley in particular and even less about economics, I still get the feeling that the US tech industry is very much in a bubble.
From the outside, these absolutely soaring valuations of everything from established players like Facebook, Twitter and LinkedIn, to new start ups (Color being a recent example), resembles a somewhat illogical and overly optimistic view of the value of those companies.
Also many new and unproven companies raise amazing amounts of money, for, at least seen from the outside, downright silly business proposals (share your credit card expenses, anyone?).
Apart from the valuations, there is the point of founders and early investors taking huge amounts of money "off the table" in subsequent funding rounds. A recent example being Groupon, where I think up to 30-40% of the raised capital went directly to "executive officers, directors or promoters". In my uninformed opinion, in a "normal" market, very few investors would accept that money invested for business growth, was used for the purpose of massive payouts to founders and C level personnel. However in the US, at the moment at least, it seems very common. Maybe this has to do with the assumed fact, that if some investors aren't up for those terms, other investors are itching to jump in.
This gives way to first founders having massive payouts. Then directors, then investors, then the next round investors etc. This, in my mind, resembles the "greater fool" theory, which was common behaviour during the recent housing bubble (buy the house, flip it 6 months later for 20% profit, next owner repeats).
Finally, there's the "gold rush" or the less flattering "herd" mentality, where it seems that there are now so many people interested in investing in tech, that again valuations goes higher and higher. We even have hollywood actors, investing heavily in mobile app companies.
As mentioned, I am not an expert in economics, bubbles or Silicon valley, so I'd be interested in hearing from anyone who can question my conclusions, and add to the discussion.
From the outside, these absolutely soaring valuations of everything from established players like Facebook, Twitter and LinkedIn, to new start ups (Color being a recent example), resembles a somewhat illogical and overly optimistic view of the value of those companies.
Also many new and unproven companies raise amazing amounts of money, for, at least seen from the outside, downright silly business proposals (share your credit card expenses, anyone?).
Apart from the valuations, there is the point of founders and early investors taking huge amounts of money "off the table" in subsequent funding rounds. A recent example being Groupon, where I think up to 30-40% of the raised capital went directly to "executive officers, directors or promoters". In my uninformed opinion, in a "normal" market, very few investors would accept that money invested for business growth, was used for the purpose of massive payouts to founders and C level personnel. However in the US, at the moment at least, it seems very common. Maybe this has to do with the assumed fact, that if some investors aren't up for those terms, other investors are itching to jump in.
This gives way to first founders having massive payouts. Then directors, then investors, then the next round investors etc. This, in my mind, resembles the "greater fool" theory, which was common behaviour during the recent housing bubble (buy the house, flip it 6 months later for 20% profit, next owner repeats).
Finally, there's the "gold rush" or the less flattering "herd" mentality, where it seems that there are now so many people interested in investing in tech, that again valuations goes higher and higher. We even have hollywood actors, investing heavily in mobile app companies.
As mentioned, I am not an expert in economics, bubbles or Silicon valley, so I'd be interested in hearing from anyone who can question my conclusions, and add to the discussion.
I am not an expert either, but I may be able to comment on a few things.
> Also many new and unproven companies raise amazing amounts of money, for, at least seen from the outside, downright silly business proposals (share your credit card expenses, anyone?).
Judging by the current climate in SV, I can safely say that silly businesses are not still not really getting funded. Blippy for example was forced to pivot. Investors are still looking for businesses that are either going to make lots of money now, or engage lots of people and make lots of money later. Many people outside SV scoff at the 2nd clause, but with 1B people online and 3B cellphones in the world, and instant distribution channels like the App Store, it's not so absurd. Just as a general rule, if you see something seemingly stupid get funded, they probably have something else going for them -- crazy traction, awesome customers, or past entrepreneurs as founders.
> Apart from the valuations...taking huge amounts of money "off the table" in subsequent funding rounds.
It's true that a huge amount of the raised money went to the execs, but that stock was sold, at the established price, by the "executive officers, directors or promoters" in question - one could argue, [as Andrew Mason himself does](http://www.businessinsider.com/groupon-ceo-andrew-mason-tell...), that it was an intentional way to get early liquidity. Obviously that price has now gone up; it was their choice to sell. Founders often argue that raking back is a good thing because it prevents people from needing to sell perfectly good businesses to get liquidity. Just playing devil's advocate.
> Also many new and unproven companies raise amazing amounts of money, for, at least seen from the outside, downright silly business proposals (share your credit card expenses, anyone?).
Judging by the current climate in SV, I can safely say that silly businesses are not still not really getting funded. Blippy for example was forced to pivot. Investors are still looking for businesses that are either going to make lots of money now, or engage lots of people and make lots of money later. Many people outside SV scoff at the 2nd clause, but with 1B people online and 3B cellphones in the world, and instant distribution channels like the App Store, it's not so absurd. Just as a general rule, if you see something seemingly stupid get funded, they probably have something else going for them -- crazy traction, awesome customers, or past entrepreneurs as founders.
> Apart from the valuations...taking huge amounts of money "off the table" in subsequent funding rounds.
It's true that a huge amount of the raised money went to the execs, but that stock was sold, at the established price, by the "executive officers, directors or promoters" in question - one could argue, [as Andrew Mason himself does](http://www.businessinsider.com/groupon-ceo-andrew-mason-tell...), that it was an intentional way to get early liquidity. Obviously that price has now gone up; it was their choice to sell. Founders often argue that raking back is a good thing because it prevents people from needing to sell perfectly good businesses to get liquidity. Just playing devil's advocate.
I am not an expert either.
It is one thing to argue that valuations are high and another thing to argue that silly ideas are being funded. I don't see any evidence that the bar for getting funding has been lowered. I know perfectly good teams with some traction hustling hard to get funded. In the case of Color, Bill Nguyen has sold a company for 800 M$ in 2000 and 80 M$ in 2009. I'm pretty sure he's not raising a big round to feel good about himself. Also: Sequoia Capital http://en.wikipedia.org/wiki/Sequoia_Capital
@colinyoung makes a good point about taking money off the table. Personally, I think it's a good thing that some of these companies remain independent instead of Flickr-ing off.
I would add that investors in most tech companies right now are qualified and certainly no fools. Don't worry until you see your dentist trying to invest in a startup unrelated to his field of practice.
We are in a growth cycle and hopefully, all the press about a bubble won't become a self fulfilling prophecy. I'm more concerned about journalists than angels or VCs.
It is one thing to argue that valuations are high and another thing to argue that silly ideas are being funded. I don't see any evidence that the bar for getting funding has been lowered. I know perfectly good teams with some traction hustling hard to get funded. In the case of Color, Bill Nguyen has sold a company for 800 M$ in 2000 and 80 M$ in 2009. I'm pretty sure he's not raising a big round to feel good about himself. Also: Sequoia Capital http://en.wikipedia.org/wiki/Sequoia_Capital
@colinyoung makes a good point about taking money off the table. Personally, I think it's a good thing that some of these companies remain independent instead of Flickr-ing off.
I would add that investors in most tech companies right now are qualified and certainly no fools. Don't worry until you see your dentist trying to invest in a startup unrelated to his field of practice.
We are in a growth cycle and hopefully, all the press about a bubble won't become a self fulfilling prophecy. I'm more concerned about journalists than angels or VCs.
A question someone like me has, is how do you get the attention of these investors? I have a few ideas for products, a couple of which I've done preliminary coding for on the side. But the problem I have is
a) I have no connections
b) I work full time, so I have very little time other than late nights to work on the things I'm really interested in. I feel like I'm missing huge opportunities because I can't work on the things that I find really interesting because I'm doing someone else's work.
a) I have no connections
b) I work full time, so I have very little time other than late nights to work on the things I'm really interested in. I feel like I'm missing huge opportunities because I can't work on the things that I find really interesting because I'm doing someone else's work.
Joshua Schachter started Delicious on the side while working full time. At a trading firm no less. It seems like the keys were (a) to work on something where there was no big initial step to get over-- something that was interesting to a small number of people almost immediately, and (b) to make constant incremental progress.
Getting traction for something you build excuses any number of weaknesses. One customer paying you actual money for a product which actually exists puts you far ahead of the curve. Lots of customers paying money, for any value of "lots", makes you a stupidly attractive investment target.
Thanks for the replies, @pg and @patio11. In an interesting way, being told that I'm already doing the things I should be doing is reassuring. Lots of late nights and weekends ahead!
It's a close knit community, and as such there's little to no chance of getting a good investor's attention without proving yourself within the community first. Without any prior connections, I am in a spot where I am quite certain I can get funding when I start my own thing. The best advice I can give is to get out to the Bay Area and work for a startup. If you're good, you'll get noticed by people that can hook you up down the road.
The good news is that it's pretty easy to get a job with a VC-funded startup right now. Good engineers are hard to come by. The hardest part is making the jump!
The good news is that it's pretty easy to get a job with a VC-funded startup right now. Good engineers are hard to come by. The hardest part is making the jump!
You definitely have time to work on a prototype, little by little. Product, product, product. Then work on your connections / traction / freaking out / loosing sleep.
"The momentum is driving a wave of deal envy and trash talking—complete with power plays, personal feuds and turf wars among Wall Street bankers, billionaire speculators and venture-capital veterans."
Sounds like a bubble to me. Anybody remember the pets.com sock puppet?
Sounds like a bubble to me. Anybody remember the pets.com sock puppet?
Actually in this case at least it's just an artifact of the press getting involved. I remember talking to this reporter when she came to Demo Day. I started trying to tell her about the changes that were happening in the startup world, and she basically said she didn't have time to deal with ideas, and just to tell her who was fighting with who.
Any chance you're willing to make some more-public comments regarding this?
How do you mean?
I'm not media-savvy at all, so: is it worth publicly addressing articles (or reporters) like this one, in the form of a counter-interview or something, or is it better to just ignore it and keep on doing what you do?
I'd think that on the one hand, too many articles like this could begin to have a negative impact on the startup industry. Or, that reporters might handle their reporting a little more honestly if they got slapped for going in with a strong, conscious bias to begin with. On the other hand, it might just stir up more trouble and negative attention.
I'd think that on the one hand, too many articles like this could begin to have a negative impact on the startup industry. Or, that reporters might handle their reporting a little more honestly if they got slapped for going in with a strong, conscious bias to begin with. On the other hand, it might just stir up more trouble and negative attention.
"When you're young, you look at television and think, There's a conspiracy. The networks have conspired to dumb us down. But when you get a little older, you realize that's not true. The networks are in business to give people exactly what they want. That's a far more depressing thought. Conspiracy is optimistic! You can shoot the bastards! We can have a revolution! But the networks are really in business to give people what they want. It's the truth."
- Steve Jobs
http://www.wired.com/wired/archive/4.02/jobs_pr.html
The depressing reality in this case is that someone figured out that what sells newspapers to a mainstream audience isn't stories about cool new technology, but stories about conflict. It's why newspapers separate the technology section out from the main news section.
Conflict is what made "The Social Network" such a great movie. The story isn't about social networking, it's about manipulation, ruthless ambition and betrayal. Themes that are as old as humanity itself.
As an aside, I doubt pg will get into a pissing contest with some journalist, as that wouldn't help himself, his reputation or YC. There is nothing to be gained by going to "war".
EDIT: Grammar
- Steve Jobs
http://www.wired.com/wired/archive/4.02/jobs_pr.html
The depressing reality in this case is that someone figured out that what sells newspapers to a mainstream audience isn't stories about cool new technology, but stories about conflict. It's why newspapers separate the technology section out from the main news section.
Conflict is what made "The Social Network" such a great movie. The story isn't about social networking, it's about manipulation, ruthless ambition and betrayal. Themes that are as old as humanity itself.
As an aside, I doubt pg will get into a pissing contest with some journalist, as that wouldn't help himself, his reputation or YC. There is nothing to be gained by going to "war".
EDIT: Grammar
Well said re:getting anyone into pissing contest. Charlie Munger once marked - "Don't wrestle with a pig, you'll both get dirty but the pig will like it.", I think that still holds true.
If you do this you will get much better results by prominently mentioning the reporter's name rather than (say) the Wall Street Journal.
The Journal is an institution, the reporter is just a person. Criticize the Journal and they will all have her back. Criticize her politely, calmly, but from a prominent platform... and her fellow reporters will wonder whether she might be screwing up the Journal's reputation, and internal pressure will be applied. Funny how that works.
Reporters self google more than anyone else alive and have remarkably thin skins given how much they dish out.
The Journal might retaliate by sending a sleazeball reporter like Pui Wing Tam (who went to the extent of stalking Benioff) to write a hit piece, so be prepared to go to war if you do this.
The Journal is an institution, the reporter is just a person. Criticize the Journal and they will all have her back. Criticize her politely, calmly, but from a prominent platform... and her fellow reporters will wonder whether she might be screwing up the Journal's reputation, and internal pressure will be applied. Funny how that works.
Reporters self google more than anyone else alive and have remarkably thin skins given how much they dish out.
The Journal might retaliate by sending a sleazeball reporter like Pui Wing Tam (who went to the extent of stalking Benioff) to write a hit piece, so be prepared to go to war if you do this.
A letter to the editor?
Not quite. People simply aren't spending like they did before, and you're at least expected to have some reasonable revenue model. Having worked in the startup world for 7 years now, I've heard plenty of stories of the excess of the late 90's, and it certainly seems we're still quite a ways away from that.
So today Apple announced that Macbook Pro sales were up 47% year to year.
http://www.appleinsider.com/articles/11/04/18/new_macbook_pr...
Having a huge tech company producing hedge-fund like growth numbers is a new phenomenon (at least since Windows 3.0), and it's carrying over into the broader tech field. If you're a wealthy investor with the choice of putting money into some financial vehicle in an increasingly crowded space, or into something that actually ships product, and still makes huge bank, the choice is a no-brainer.
Tech is the current momentum play, because all the financial vehicles are in the tank.
http://www.appleinsider.com/articles/11/04/18/new_macbook_pr...
Having a huge tech company producing hedge-fund like growth numbers is a new phenomenon (at least since Windows 3.0), and it's carrying over into the broader tech field. If you're a wealthy investor with the choice of putting money into some financial vehicle in an increasingly crowded space, or into something that actually ships product, and still makes huge bank, the choice is a no-brainer.
Tech is the current momentum play, because all the financial vehicles are in the tank.
No they didn't. Apple didn't announce anything of the sort.
You're linking to a rumors site which is citing speculative analysis.
You're linking to a rumors site which is citing speculative analysis.
> ...all the financial vehicles are in the tank.
Assuming that's true (I don't follow the markets well enough to have an opinion), wouldn't that present a fairly spooky economic future? I can't imagine a single market would outlast all the others tanking for long.
Assuming that's true (I don't follow the markets well enough to have an opinion), wouldn't that present a fairly spooky economic future? I can't imagine a single market would outlast all the others tanking for long.
I do think there is a bubble of people hyping startups. Facebook got a stupid valuation and everyone started reporting that the 1999-2001 bubble was back. But that was just Goldman Sachs bullshitting everyone. It doesn't mean every startup has a stupid valuation now.
This is completely false. We didn't sign any deal with Ron and Yuri. They simply offered 150k apiece to all the startups in the winter 2011 batch. Anyone else could have done the same thing.
Reporters often get the facts wrong, but this is one of the more extreme examples I've seen.