On the face of it, this just appears to be a possible end of the VC bubble. I highly doubt that this means much for startups that are built solely with founders' capital.
>I highly doubt that this means much for startups that are built solely with founders' capital.
You need to distinguish between startups (people starting their own business), and "startups" (VC funded technology companies of a certain model). I'm sure the former won't be nearly as affected as the latter.
That's kind of what the dotcom bubble was. Startups with only startups as their customers. All juggling fantasy money around until some investors wanted their money back.
it was not just that there were startups which were feeding off of other startups. even big-name established companies e.g. sun, csco etc. were pretty deeply involved.
Yeah, that's the part that I'm concerned about. All the companies providing development tools, SaaS, process management, education/training, staffing, etc. for tech startups are done for if investment collapses.
My favaurite part: "We're in a bit of a different bubble this time, the exuberance now has a foundation" as measured by market size and sales potential, he says.
Sure, it's always different this time for a CEO who needs to keep hopes up for investors. Sales is crashing with the deflation that is coming. And also overvaluations are followed by undervaluations when the interest rates increase.
Yes it is said every time, until the last time when the rules really are different - one early summer when there really will be no more war in Europe, one cold november night when the Berlin Wall just opens, one fall when a scrappy little upstart in a colony forces the worlds biggest empire to leave, one december when Ireland was free, etc.
Actually what people are constantly saying now is what you posted. It's to the point where if you suppose that everything is not an exact recurrence of the dot-com bust, you're seen as delusional. But everything can't be exactly the same as it was then.
In Schiller's "Irrational Exuberance," where he discusses bubble formation and deflation, he refers to it as "new era thinking;" the idea that even if the economics of the present seem crazy, it's totally going to work this time because we're in a new era. Things are different from what happened last time, really.
The punchline is that basically every bubble that ever existed was characterized by new era thinking. Looking at it like a Bayesian, the presence of new era thinking is a high-confidence indicator that you're in a bubble.
Some companies need to get washed out, but this is completely different than the .com bubble. It is not even on the same level. The 90s leading up to the crash were insane. If you could turn on a computer you could be hired as a programmer. Salaries, offices, VC money were completely off the charts for companies that had near zero revenue. Not just zero profits, but REVENUE.
So while it is fun to think every downturn is going to ruin the world and make fun of people who thinks it is different, it really is different. It does not mean all these companies will survive, but that is how capitalism works. Companies have to die to free up resources and capital for the next idea.
Yep, there were people I knew that went from bartending, to "web programming" for a year then back to bartending.
They got hired at ~100k/yr in the midwest to a company that didn't sell anything. This "bubble" is entirely different. It strikes me more as the vc bubble finally coming to the realization that not everything is worth investing in with rates as they will now be in the future.
Most startups have already priced this fundraising-drought in their previous fundraisers. Instead of raising exactly what they needed, they over-raised by double or tripple that. It's selfish in some way as it likely contributed to the negative sentiment and the high valuations.
I think this won't be an acute bubble for incumbents but for early stage startups that need funds badly to keep the short runway clear.
So while HN was still discussing whether or not there really is a bubble, startups already acted accordingly. This is an interesting disconnect to observe.
Now did they over-raise because they were afraid of a bubble or did they know there was one? A pointless debate, probably.
This is usually bad for the founders, because if it sells for less than the valuation they received during funding, they will most-likely get nothing. The VC always get paid first.
Founders either need to get out early, understand that their position will eventually be just an employee, or not take in more funding than the company is worth.
It does, however, work out in the tiny chance that the company sells for way more than it’s valued worth.
>Instead of raising exactly what they needed, they over-raised by double or tripple that
Do you have any evidence of this? On the surface, it doesn't even make sense. There are two sides to every transaction; are you claiming that the entrepreneurs could see the slide coming, and anticipated it, but the financiers didn't?
I was working for a startup in 2008, and before everything turned to crap, Sequoia gave us up front warning to start preparing for the coming apocalypse, which probably is the reason we survived and made it to an exit of some sort.
Over-raising seems like more proactive version of that (2008 still being relatively recent in investors' memory), and VCs likely suggested this to portfolio companies.
Wow, this article looks like it's pushing some agenda hard. They took one quarter that was pretty much the same for NA and Asia and much better for Europe as the comparable quarter in 2014 and use it to report "fundraising drops"?
Looks to me like someone is trying to actually bring about fundraising drops by using spurious data.
"Q4 2015 pretty much the same as Q4 2014, the sky is falling!"
Interest rates have finally gone up. Money has become 2x expensive. Everyone was predicting the bottom would fall out of tech when this happened.... and it happened.
TBH, the fed should not have gone from 0.25 to 0.5 That was really really dumb. They should have gone from 0.25 to 0.3 or something.
My guess if the bleeding keeps up, the Fed will have to do a rate cut. Should help things.
Since I got downvoted, let me show the math:
For an entity borrowing at fed funds rate, on 100B loan that is 250M to 500M annual payment after the hike. If it were 2.5% to 2.75% on 10B, that would be 250M to 275M. See the difference? Even a 50bp hike would just be 20% higher payments.
If you're surviving at the edge of these loans, then doubling your payments could easily wipe you out.
'''"The short-term volatility is not something that worries me for monetary policy; it reflects market participants trying to make sense of global developments," Williams told reporters on Friday, adding that he sees no signs of distress or a weak economy in declining asset values, and is unsurprised that stock prices .SPX would decline as the Fed raises rates.'''
That's a pretty clear signal that the Fed have knowingly and openly popped a bubble. This is going to be painful.
I think there's something to be said for spring cleaning.
If your balance sheet is such that the incredibly marginal increase in borrowing costs is anything other than a bump, than you are a dead man walking anyway.
The economy structured itself around near ZIRP rates. We were at .25 for a long time which gave whole industries (not just VC) the chance to live on the edge of their financing.
This wasn't a marginal increase. It was a very dramatic tightening. Marginal would be going from 2.5% to 2.75% or 3% .. this was doubling.
And they did not telegraph anything. If you tracked the CME fed funds probability you'd see that it waffled up until a couple of months beforehand and we were at 0.25 for a very long time.
The reason 0.25 used to work as a min step was because a) we were never at such low rates for so long before and b) things didn't have a chance to settle into a particular rate structure so it wasn't really an issue. The difference this time was everyone started building businesses based on 0.25 and had time to do so.
Agreed, you shouldn't be doing that. But heck, the economy is pretty messed up so the rules have changed.
Yes, and then they waffled and said they'd do a rate rise based on the numbers coming in rather than any strict ideology of having to raise the rates. When numbers turned south, the CME probability declined.
I'm reminded of folks who ignore evacuation orders during a hurricane, latching on to any small lull as evidence that the storms will lift before it's too late.
Of course, one tends to hear these stories after it is too late. No doubt plenty of people ignore the warnings and get by just fine, right up until they don't. And then it's someone else's fault.
You might want to look over your fed meeting minutes from over a year ago. They have indicated numerous times that they plan to do this and continue to do this in 2016. [1].
I've been following everything, watching live interviews. No worries there! The FOMC can't just raise rates based on some date. It has to raise them based on inflation/employment numbers.
You are reading this backwards. The inflation/employment numbers were taken into account and they warned that the economy has sufficiently recovered and a raise was imminent. The date has nothing to do with it. The Fed however did indicate in their comments their line of thinking that if the current trend continues, they would begin raising rates around this timeframe. They did.
When was the last time the Fed raised or lowered the federal funds rate by 5 basis points? And when was the last time they raised or lowered it by 50 or 75 basis points? If you've been following, you'd sooner expect the next increase to be 50 or 75 basis points than 15 let alone 5.
> The economy structured itself around near ZIRP rates. We were at .25 for a long time which gave whole industries (not just VC) the chance to live on the edge of their financing.
Then its time for those industries to restructure (and, if they must, fail).
Well, I disagree with your comment on policy, but yes, anybody that was on the edge is pretty toasted right now. The important question is whether VCs were there.
On the other hand, anybody whose financial situation was severely affected by a widely predicted and minimally sized increase in extremely low interest rates was pretty toasted anyway.
If you're looking at medium-term financing options -- on the scale of multi-year business loans, mortgage fixed rate periods, and the like -- in most of the Western world, you should probably be considering whether you can afford at least 2.5% interest rate rises over the next few years, not just 0.25%.
The point is, it's not a minimally sized change. You double the interest rate, you half the amount of money big institutions have available to roll around.
I happen to think it was a good decision. But why does everyone insist on calling this change "small"?
So if the rate was zero, and they increased it by 0.01%, your claim would be that it was an infinite rate increase, and big institutions would have zero money to roll around?
If the rate was zero the, incredibly small attrition banks suffer while creating money would completely determine how much money is in circulation. If not for it, yes, the amount of money would go to infinity, and would get down infinitely much by any positive rate.
My point is, this attrition turned up to be incredibly small, and still irrelevant at the US later interest levels.
You double the interest rate, you half the amount of money big institutions have available to roll around.
Maybe I'm missing something really obvious here, but in what practical sense is that true?
But why does everyone insist on calling this change "small"?
Because by law or convention 25 basis points is the smallest increase in base interest rate that most national banks will ever make, and since this change was telegraphed long ago it's literally the minimum anyone working with serious finance was expecting.
I think the Federal Reserve telegraphed the rate hike enough. They've been talking about raising rates for over a year now. If you're finances are so shaky that a quarter point rise is going to cause you financial stress then that's your problem.
Maybe some of these companies need to start making money and before they are valued at a billion dollars.
1. Not all money has become 2x more expensive. Extremely short term loans have become marginally more expensive for the borrower. Mid and long term interest rates remain largely unchanged, on downward trajectory.
2. You changed the amount of principal in your example. A company that goes under due to an expected 0.25% bump in short term interest rates was in extremely poor financial health to begin with.
2. I was under the impression that VC firms typically raise money from a pool of investors and they take a cut of the % return to those investors. How likely is it that VCs are financing a substantial (if any) portion of their investments through short term loans subject to the short term interest rate?
3. The minimum possible FFR adjustment is 25bp (historical, not a hard rule but a custom)
4. Fed does not adjust monetary policy to suit specific sectors of the economy
5. Fed has committed to getting to 2.0% core inflation by 2018 [1] and would not have risked credibility loss by raising rates if it did not intend to continue to hike (and hike fast)
This is just absurd. You're looking at just one part of the economy and whining about 25 basis points? It's just... annoying. Get out of the kitchen if you can't handle a match stick. The last time the housing market was this hot, the federal funds rate was 5.25% or 10x what it currently costs for banks to borrow.
Rents from L.A. San Francisco, Denver, Chicago, New York, are climbing at double digit rates year over year. The overwhelming majority aren't getting the kinds of salaries and wage increases to afford such increases.
The Fed had only been saying rates need to go up for 2 years before they actually did it, but did the market price this in? Not entirely, a good chunk of the market was in denial about the inevitable.
>That was really really dumb. They should have gone from 0.25 to 0.3 or something.
That's not how interest rate setting works at all. Plus, the Fed is still using a banded window that encapsulates your five basis point rise.
What company is borrowing at Fed Funds rates? If - theoretically, because we have to be quite theoretical to operate under your assumptions - a company was that exposed to interest rates and had zero hedge against interest rate vol they would not have the credit to hope to get funding anywhere near Fed Funds rates.
If you're surviving at the edge of loans (i.e - you're in a potential distressed scenario) you'll have bonds trading at a significant discount. This is exactly what began to happen during the early part of 2015, when Fed Fund futures had little chance of the Fed moving priced in.
That's the trick of it though: it doesn't take long for the bottom to fall out. Sure, it'd be great if everyone could be patient and wait 4-6 quarters, to take a broader picture and react accordingly. Unfortunately, startups are built on the idea of extremely fast growth, which means that quick changes that affect several companies could very well be the harbinger or something bad. All it takes is a couple of bad months, and the dominoes could really start to fall.
So yes, patience is surely a virtue. But it's probably worthwhile to be vigilant because it doesn't take long to fall hard from the peak.
Well, really, these startups should be able to show this quick growth without constant infusions of cash. I thought that the point of all the money was to keep ahead of the competitors who are also raising a lot, not as a baseline of operations.
That's the trap many have gotten into. They raised to keep up with the Joneses, but if you raise it now you have to spend it. Now your baseline is higher and if your growth is not utterly insane or if you can't monetize it quickly enough and have to raise again, you are now potentially toast.
It's infinitely easier to raise spending than cut it. The latter involves morale crushing things like layoffs and telegraphs an outward appearance of failure that drives off customers and future hires.
Startups that have avoided this trap or who have a model that converts into revenue more easily than "get users and pray" might be fine, but I think a lot of unicorns and want to be unicorns with bricks strapped to the accelerator are about to be turned into glue.
But unicorn glue is great. It's sparkly and can bond any surface. :)
Edit: of course the wildcard here is the question of how economically incestuous the startup world is this time. That's what made the landing so hard in 2001. We know there are some startups that mostly serve startups, but nobody knows the percentages.
It's not a stretch. We live in a serial bubble economy where central banks inflate and pop speculative bubbles to give the illusion of recovery. This has been going on for a long time: dot.com, housing, oil, ...
They do this because it's easier than tackling deeper issues like wage stagnation and demand collapse that are preventing a true robust resurgence of growth across the entire economy as existed from the 50s until the late 90s and the 2000 crash. That would take things like fair trade reform to limit wage arbitrage and possibly a rebirth of unionization or something similar. It would radically change the economy and would probably involve even more short term pain since the whole Normal has organized around cheap labor, cheap manufactured goods, cheap credit as a substitute for wages, and high asset prices. All that would invert.
As far as the mainstream economy goes, 2000 was the end of the postwar run. Leave any of the coastal bubble fueled rich cities and visit the American interior and you'll see the long term decay... or Google the stats on heroin and meth addiction. These bubbles barely touch the heartland, which is in a depression that began in 2000.
>They do this because it's easier than tackling deeper issues like wage stagnation and demand collapse that are preventing a true robust resurgence of growth across the entire economy as existed from the 50s until the late 90s and the 2000 crash. That would take things like fair trade reform to limit wage arbitrage and possibly a rebirth of unionization or something similar. It would radically change the economy and would probably involve even more short term pain since the whole Normal has organized around cheap labor, cheap manufactured goods, cheap credit as a substitute for wages, and high asset prices. All that would invert.
I don't think the central banks are doing this on-purpose. They're doing it because the people with control over fiscal policy have decided to spend all their time worshiping the Austerity Gods.
(Belts for the belt-tightening god! Cuts for the cut throne!)
You're getting downmodded, but you're right. That's one problem. The other is unfair international trade rules that allow oppressive foreign regimes to compete against workers in liberal democracies with slave labor and no environmental laws. There is no way domestic industries can compete with that. It always costs more when you have to actually pay people and comply with OSHA regulations and when you can't spew unscrubbed coal ash into the air by the megaton.
I question your assessment that the heartland was barely touched by the recent boom/bust cycles. All you have to do is take a look at Cleveland or Wichita to see how bad the economy as ran those cities into the ground. Anyone who thinks you can live reasonably in those cities w/o some sort of specialized/white-collar skill set hasn't lived in either in the last decade. Seriously, the whole nation is hurting except the people with cash in Wall Street.
I come from Kansas and this couldn't be more accurate. I have since left, but I can sense from my friends how depressed the area is and has been since I was a teenager in the late 90s. Life is scary as shit for everyone I know and love that still lives back home.
Look at Flint, Michigan. The water system is failing. In some areas of the American interior we're at the level of a full blown collapse of civilization. It's the sort of future the peak oil doomers talked about, but it doesn't have much to do with oil and obviously isn't distributed evenly. Go to New York and you can find people spending more than your average Flint resident's income on their dogs. It's industrial collapse but not for ecological reasons.
This long-term depression (since around 2000-2001) is hidden in the data because the data we look at is aggregate. The collapse in the interior is outweighed on aggregate statistics by the booms that have occurred in places like SF, NYC, LA, Seattle, etc. These are places with closer links to finance and higher tech industries. The interior of the country was always the center of bedrock industry, but all that's been replaced by China.
IMHO anyone who argues otherwise is deluded, wrong, or a liar. Just visit a place like Kansas, Michigan, Ohio, etc. and look around a bit. The collapse is viscerally real and physically tangible. Everywhere you will see failing infrastructure, desperate cities installing casinos and other vapid quick-fix ways to stimulate commerce, and people with raging heroin and meth habits and loads of alcoholism. Hard drug addiction is a clear historical indicator of deep depression and social collapse. Then talk to young people and university graduates. You will find that all the best are leaving as soon as they can and that the dream of every young person is to get out.
The Midwest is where I'm from. Last time I was there it was a little bit scary. All the gun talk, fear and hatred talk, meth mouth at gas stations and grocery stores, and the general smell of collapse and pessimism. I grew up there and I've watched this happen. It was not like this in the 1990s. There's always been a bit of a gap between places like NYC and the "flyover country" but it was never, ever this extreme. Now it feels like third vs. first world. I actually almost felt unsafe there. I could feel this edge of alarming despair that triggered some kind of hindbrain "watch your back" emotion in me. My wife said the same thing.
Automation's role has been minimal so far when compared to the massive effect of wage arbitrage, but if self-driving trucks hit the mainstream we're going to see the bottom really fall out and it's going to be ugly... like rural USSR in the late 80s and early 90s ugly. Trucking and related industries are a major employer in the interior and it's been one of the few jobs that can't be outsourced. Of course this new technology will add new jobs: on the coasts to write the software and overseas to manufacture everything.
If this trend continues we're looking at a future not terribly unlike The Hunger Games (there's a reason these books are popular): mega-rich enclaves surrounded by "districts" that have reverted to something resembling a 19th century standard of living but with smart phones (and ubiquitous surveillance, drone attacks, etc.). Either that or there will be a backlash, possibly an over-reaction that tips completely into socialism or fascism. That's the other thing I heard the last few times I was there: depending on whether they leaned right or left people were almost ready to vote for that Hitler guy or that Lenin guy. Trump and Sanders are much, much milder cousins of these... expect far more radical and dangerous versions of both if nothing changes. Think Trump without the restraint and integrity or Sanders without any lingering belief in the American way... and both without any belief in the rule of law. You could even see a... well... "national socialist" hybrid: a warmonger Sanders or a socialist Trump.
Of course the globalists will retort that eventually wages will rise in places like China and the tide will start to balance if not actually reverse. That's the theory and...
A book about politics? I think I just threw up a little.
I do feel a potential blog post in this, but I'm waiting to see how it shakes out in the near term. Even blogging about politics makes me sick but there are things that might need to be said. Hopefully somebody else will say it first and let me off the hook.
> Of course this new technology will add new jobs: on the coasts to write the software
It's completely ridiculous that software development is concentrated in any one geographic area. Software development can be done just as effectively from anywhere. So why isn't it spread as uniformly as the world's population?
Maybe part of the solution to the problems you describe is a call for programmers (and other professionals that can work from anywhere) in the US's interior to not leave for the coasts, but start companies and hire people locally.
Preaching to the choir. I think it points to deep/immersive telepresence as a major unsolved problem. It's telling that the people who build the Internet can't use it to escape some of the highest rents in the developed world.
Solving that problem would help the interior for the reasons you explain.
I expected you to disagree with me on this, considering that you grew up in the midwest, but ZeroTier is located in California. Is there some reason you have to be there?
It's kind of circumstantial: I ended up out here for a job, lived here for a while, and then started ZeroTier. It could be located in a place like Pittsburgh that has a decent talent pool but now that it's up and running and has employees it'd be a pain to move it.
That illustrates another point: ecosystems have a draw because they draw people in, and brain drain has the opposite effect. Both effects are exponential: the more people come the more people come. That's part of why interior places that have very strong university systems or major local employers with a lot of drawing power (or government labs, etc.) have been spared the worst of it.
I wasn't implying that labor arbitrage is the only cause of this depression, just that it's probably the largest single cause.
Can't upvote this enough. Taking this thought further -- it's telling that most people in the tech industry don't even consider this as a worthwhile goal. Both company leaders and employees.
If people here can create self-driving cars, delocalizing software work doesn't seem so far fetched. I'm inclined to believe that there is a lack of will and vision rather than a lack of ability.
Been living in Overland Park, KS for 20 years and can say that the bust did not affect this area, but there was never a boom either; just steady growth. I can see how Wichita was screwed from aviation downturn.
Absolutely, Overland Park is quite well off by comparison. I was surprised when I drove through for an interview in Des Moines how it built up since I last been that way in the 90s.
I visited the US Midwest for the first time in my life a year ago on a road trip. Saw places like Kansas City and St. Louis. They were actually a bit more vibrant than I thought. There were some cool pockets with creative businesses. Good food and nice craft beer. The cost of living is so cheap there, I imagine it would be a lot easier to start a little craft businesses there compared to Brooklyn. If you could expand your customer base beyond locals you'd be doing well.
KCMO and KCKS are their in their own little bubble since they have firms that want to actually hire people to work there unlike Wichita where Beechcraft (under Goldman-Sachs prior to Textron's acquisition of the company) was outsourcing as much as they could to Mexico. Spirit Aerosystems seems to be doing okay, but they're not comparable to what Boeing was before their formation/acquisition. Other than light industrial and aerospace there's much not else in terms of job prospects. Everyone just sets up in KC or Overland Park or in Denver. A few will go to OKC, but not many.
From Kansas as well. Some parts are worse than the others. Topeka is like ground zero and I wish my family there would move. But it should be expected because the political situation has basically frozen the state employees paychecks for 10+ years and all the blue collar manufacturing jobs there have slowly dried up. KC area is better than the rest of the state. Wichita area not great but not as bad as other parts from what I can tell.
I don't think you can pin all of this on interest rate hikes and it is not all tech, or at least all Silicon Valley startups. It's a combination of globalization, a much more service oriented economy than before, and some political decisions that ate away at the middle class (especially lower middle) in favor of wealthy interests.
Yea, Wichita is a complete mess right now. I believe the current mayor of Wichita had an ad done regarding the failed sales tax hike (1%) which he described the average growth rate of Wichita from 1990 to 2000 and then 2001 to 2011. In the 90s we were growing at about 10% per year on average but the scary thing was the 1% growth per year in the 2000s. I know this is the truth too because I believe right now between Cessna and Beechcraft there's about 4k workers when in the past those two employers could easily field that much individually.
Things aren't improving either since Brownback seems to be happy enough with companies leaving the state despite the low taxes because he and his ilk refused to acknowledge that the major corps wanted well educated workers and have on many occasions worked with Wichita State University to improve their programs. It's why I left more than anything. The anti-LGBT sentiment is bad, but having no jobs in my field is worse.
Edit: I believe it wasn't an ad, but actually an Op-Ed pinned by Carl Brewer that gave the numbers I described on the growth rates.
I'm not going to defend the Fed, but I disagree that they run the business cycle to give the illusion of recovery. The economy has to walk a narrow path between inflation and deflation, and it does mean cooling things down when they get to hot and warming them up when they get to cool. The honest criticism is that they've been historically pretty bad at it. It often looks a lot like trying to smooth out the waves in the ocean with a flat iron.
USA today is not exactly a news source of note. I'm not saying there is no bubble, but I wouldn't personally put a lot of stock in their take on anything.
My interpretation: 1999-2001 was, obviously, a completely different beast. While there was a bit more investment in 2015 than 2014, it was variable by quarter over the last 2 years and just looks volatile rather than bubble-y. What I focused on, and believe is the most important thing to notice, is that the number of deals hasn't really changed. Any spike can be attributed to larger investments per company/round. The reason I see this as more important is that the reach of any "bubble" to the downstream dependents of VC cash (data analytics startup land) likely wouldn't extend as far as the end-of-the-world crowd likes to suggest.
Outlook: I think this year will be more telling than the last as to whether or not funding in 2014-15 was just volatile or if we're actually making a move towards 2002/2009 troughs. I struggle to believe it will trending upward from here. I'd like to think the VC world is slightly more cautious (which is likely why we've seen the recent volatility).
I am not a business man, but I am a developing scientist who's trained his graph reading bullshit detector. "Flat" is relative to the scale of the graph, and when you have a maximum on the graph (the 2001 bubble) that dominates, and changes that are not on the scale of the peak look like they are "flat".
To fix this, change the time period from after 2002 to remove the offending peak. Then, you see pretty much a rise from the 2009 recession onward with wiggles in the number of deals. Of course, the only issue is as a non-business man, I don't know if 300 deals per quarter over ~7 years is a significant increase or not. Also, I don't know what is considered "normal" as I assume the minimum at 2009 is probably below the norm, so for all I know, we could be hovering just above 0. Still, there is definitely an upward trend there at least for the aggregate category (if that is what we are discussing).
I've been hearing more and more of the companies feeling the Series A crunch. This will lead to many Seeds not making it into their next round. The times are changing for sure.
Sounds like things are going to get tough. I have mixed feelings about this.
On one hand, I feel sorry for all those software devs (myself included) who might be out of a job in the next few months or whose salaries will start shrinking.
On the other hand, it will be nice to watch some over-funded startups crumble to pieces and make room for more deserving (bootstrapped) newcomers.
Great, can we stop calling it a bubble now? Like if there were an actual bubble in the bay area, bad trends like this would have popped it? The thing is things aren't really see-sawing. The pendulum isn't going to swing as hard as it did in 2000 as it would have done so already.
That the technical companies in the bay area seems to be isolated from the hardships of the rest of the economy doesn't make it a bubble, it's simply a place with a different economic focus with different economic realities.
I swear people around here actually sometimes seem to wish bad things would happen, as some kind of schadenfreude.
We see these high valuation numbers being lobbed around as some kind of insult to good sense, but we're talking about just a few companies and in the grand scheme of the size of the economy in San Francisco, Palto Alto, Mountain View and San Jose these numbers are a tiny fraction of the overall system.
The reality is that software is still eating the world, and more change and value to be derived therefrom is still to come: automated vehicles, robotics, smart appliances, VR, and a myriad of far less sexier technological innovations with sound economic value creation.
"That the technical companies in the bay area seems to be isolated from the hardships of the rest of the economy doesn't make it a bubble, it's simply a place with a different economic focus with different economic realities."
"I swear people around here actually sometimes seem to wish bad things would happen, as some kind of schadenfreude."
"The reality is that software is still eating the world, and more change and value to be derived therefrom is still to come: automated vehicles, robotics, smart appliances, VR, and a myriad of far less sexier technological innovations with sound economic value creation."
Rewind to the dot-com times, and I believe you'd find people saying the exact same things.
They did; I was there for the tail-end of it. I remember Flash developers on salaries big enough to buy apartments in London for one years' pay.
I'm reminded of the Victorian railway investors: railway was the future, but that didn't mean that investment always worked. If the music stopped you would be ruined. But the railways continued to spread.
>Rewind to the dot-com times, and I believe you'd find people saying the exact same things.
Charles Stross basically wrote Accelerando by writing down the stuff people were gossiping and fantasizing about building in Silicon Valley circa the first Dot-Com Bubble, IIRC.
Basically none of it actually happened, and almost all companies at that time were basically focused on the same "Stuff my mom used to do for me -- now through a website!" premise.
Same as today, mostly. Automated vehicles, robotics, smart appliances, VR, and basically every major technological innovation are capital intensive: five guys in a rented room in a coworking space are not enough. You need a real R&D division.
Almost certainly, but that is at least three disruptions ago (a computer in every home, always on internet and a computer with internet in every pocket) - by definition after a disruption you can't use the old predictions because you no longer have the same rules. Today what you can build without engineers (other than your founders) and the cost you of hosting it are magnitudes less than what they were then, which is a change in quantity that causes a change in quality.
Look you may be right, but I would need to see much deeper evidence for it, based on current trends and predictions and not stuff people said an eon ago. I would also expect them to be able to use their theory to explain why the "the good times are over" memo didn't cause or predict a crash.
You had a lot of company saying the same things in 1999.
A central fallacy is assuming that because an idea seems inevitable the companies in that field now will be the ones doing it. Software is indeed eating the world but that doesn't mean that, say, those smart vehicles or robots will be made by a startup rather than GE or GM, or in one of the most expensive places in the world. Remember Kozmo.com? They're a fading memory but a lot of my neighbors get their stuff delivered by the same grocery chain which was there in 1995 who now has a great website, mobile apps, and a fleet of delivery drivers.
This also has an important corollary for developers: unless you have a significant chunk of equity, never forget that even if your company is one of the successes your personal success does not inevitably follow. Most C-level managers see people like us as an expense to be minimized.
Software is indeed eating the world but that doesn't mean that, say, those smart vehicles or robots will be made by a startup rather than GE or GM, or in one of the most expensive places in the world.
But is that what startups are doing? I mean, there's only one startup that has requested an Autonomous Vehicle Testing Permit in California - Cruise (YC W14) -, all the others are established companies.
It's true there's a whole bunch of startups producing IoT trinkets, but those products are usually cheap and unambitious, not stuff that require large investments in R&D.
Actually the better bet is to avoid equity as a replacement for a higher salary. Less risk, (lost value, taxes on negative value), and unless your company goes Google huge and you came in early it's not likely to be life changing.
Agreed. I was defining “significant” as founder/early investor level. Many developers self-identify at those levels but tend to be compensated at close to a wash when you compare the risk to higher compensation at a big corporate job.
That's not saying that there aren't many other reasons to prefer working at a startup but simply that you don't want fantasies about getting rich distorting the comparison.
"the technical companies in the bay area seems to be isolated from the hardships of the rest of the economy"
There's a financial book called "This Time Is Different" that outlines the similarities between asset bubbles and financial crises worldwide over the last several centuries.
As outlined by the book, be careful whenever you're attempting to justify the current bubbly situation as the new normal, the rules have changed, the old financial laws no longer apply, this is a new paradigm, et cetera. Because "no, this time is not different," as the meme goes.
"tech" is a bit broad. Programming startups are the most capable of have a very low operating budget with high growth, so the burn rates should be easier to minimize to get the most out of those investments.
The tech startups that involve actual physical products with manufacturing, distribution, shipping, retail placement, etc are another story.
It seems like we would be well served to have terms to differentiate for sake of headlines like this.
The companies that don't make it: CEO's fly away on golden parachutes sewn with the money they didn't earn, middle management goes on to other companies with an Impressive Name on Resume (+2 to hire-ability skill) added, and the engineers lose it all on the company stock they were promised could only go up and have to find a new source of income for the multi-thousand a month studio apartment they rented to get out there.
(Yes I realize this is overly simplified and bleak, that's the point.)
I've been wondering - in many startup companies, the engineers own all of the knowledge to run the company (documentation practices are discouraged by management because that's not "shipping"). Why don't we see more collective action? If the entire engineering staff walked, the company would be fucked, which gives them quite a bit of leverage. Meanwhile, the engineers can easily find other jobs since they're relatively in demand.
Don't take this the wrong way if your thinking about organising IT workers in some way you do need to understand American Industrial history at least in outline.
I would simplify that and just not work at a place that was only making money off of investors and fundraising. If my boss doesn't have a product to show me and a business plan to sell it, I'm out of there.
Actually, middle management are the ones that tend to be in trouble: Few companies hire middle managers, as they prefer to promote vs hire. This is one of the reasons you see so much company loyalty in middle management: More ICs than managers are laid off, but finding a new job as a manager is far more difficult.
Yes, the engineers shouldn't work hoping on an IPO ever happening, and focus on the cash component. To be fair, middle management is in the same boat though. Still, programmers have far better chances of finding another job quickly. Their skills are incredibly portable and easy to demonstrate.
Now, if you want less risk as an engineer, consider a smaller market: The real problem in SF is the exposure to a crazy real estate market, and it's easy to work in a place without those risks. In St Louis, for instance, a generic, unremarkable senior dev makes 110-150K. It's a lot less than the bay, but a good house in a good school district can be bought outright for 200K! You can find similar low risk environments all over the midwest, with opportunities in both big companies and small startup incubators. You won't find AirBnBs, Ubers and Stripes in there, but if you are really afraid of a downturn, it's a decent possibility.
Nobody should really be surprised by this. People all over tech have been arguing about the bubble for some time. I see this as an early stage harbinger of things to come though.
With the Fed raising rates, VC's already starting to hedge their bets, and friends of mine leaving startups to go back to stable corporate gigs, I see a shuffling of the deck, but nothing too major.
I feel like this is the normal eight year tech cycle that is just coming back around again:
All election years, all resulted in change of ruling party. Is it a tech cycle, or just the people at the economic helm buckling down for changes in policy?
This comment from Tucker Max's article on why he stopped angel investing bears repeating here:
> "But when you have a lot of money chasing all these great ideas, and you combine it with the fact that entrepreneurship has gotten sexy in the last few years and become the “in” thing for a certain crowd, what you end up with is a huge number of people starting companies who have no business at all doing that."
I've said this to tons of people privately and publicly: entrepreneurship has become the new "I'm working on a novel". Lots of people have good ideas in their heads. That doesn't mean they should be building businesses on them.
Some people are just not cut out to be entrepreneurs. And once the money dries up, these will be the first ones to go.
The rest will continue building businesses because they can't really think of doing anything else.
I think anyone who follows the advice of Tucker Max, America's biggest no-apologies frat bro, should not be taken too seriously.
You still got it wrong for who you should be investing in: People who have a vision driving them to the core, who can't imagine not seeing their change happen. People who just want to start businesses "because they can't really think of doing anything else", are people who just want the lifestyle or equate it with personal freedom or something. They don't have much of an edge.
> You still got it wrong for who you should be investing in: People who have a vision driving them to the core, who can't imagine not seeing their change happen.
This is a start, but only a start. I've run into plenty of these "types" who don't have the skills or experience to launch a successful startup. The question shouldn't just be "Do I have the passion for this?" but also "Do I have the abilities to execute this?"
Is there any reason to think that your advice is correct? Any kind of study showing a correlation between "a vision driving someone to the core" and success?
That idea, while a very good soundbite, flies in the face of the evidence - almost all startups shift their idea, sometimes quite a bit, before becoming successful.
"I've said this to tons of people privately and publicly: entrepreneurship has become the new "I'm working on a novel". "
An interesting statement to mention. In the distant past, writing a novel would be seen as a rather impressive and lofty goal. But as the barriers to writing novels decrease, so too does the actual impressiveness of a novel.
As technology makes startups easier to create, startups themselves should begin to lose their luster as well.
Ever young entrepreneur, or future entrepreneur should read this. In my youth, I made some real money because I saw opportunities, and took some big chances. I wish I could go back to these days--blindly taking chances. I just did things without hesitation. As I've aged, I've gotten too conservative.
That said, I would have made 10x the amount--if I had more experience in life, and my real deficiency at the time; a good understanding of our legal system.
Looking back on my business endeavors, I should have been with an older/more experienced partner. At the time, I thought older people didn't have anything to add. I was one of those guys who didn't trust anyone over thirty. I was so wrong.
It's not just about "jobs" it's about opportunity costs. If tons of money is invested in marginal businesses that don't pan out, then we end up with a zombie economy that is busy performing useless labor/services and we end up stuck like Japan has been for the past decade or more.
If the same money is invested in good ideas that pay off, we end up with everyone being better both financially and we have better tech and services. Part of the reason why these marginal businesses can get along is because borrowing has been cheap and there has been a shortage of good ideas to invest in, so it's a catch-22.
Very true. With the low Canadian dollar, investment dollar will go way, way farther. Like probably 50% farther, given lower wages compounded by the lower dollar.
Pretty accurate. Most of the so-called unicorns are overvalued by a factor of four or so through accounting tricks.
The article is correct that it is not silly as the late 1990s. Many startups now actually have working products, revenues, and sometimes profits. Many 1990s companies lacked those.
20 years ago, if you wanted to ship software, or run a web server on the Internet, you needed some amount of capital. I worked at one of the cheaper local Internet Service Providers in 1996, and with a 3-year contract we gave you 1 gig of traffic a month on your colocated box at 10 MB port speeds for $540 a month - you provide your own box.
Now for $10 a month, Linode provides me with the VPS box, I get 2 TB transfer, 125MB port speed, and the plan is not yearly or monthly or even daily, but hourly.
There are two app stores I can put apps out with, with a variety of monetization schemes. I know for Android that over 1 billion people use their Android device at least once a month. There is also the web.
There has been an explosion of open source software, and improvements on existing software - Linux, Apache, and MySQL. Or Nginx and MongoDB. Plus free Java application servers, or Python, PHP or Javascript web frameworks. There is Paypal and Stripe.
Companies have gone from renting offices to subleasing to co-working to virtual offices.
If you can program (or can install software with minimal programming skill and have some creative ideas and will hustle), there has never been a time when fundraising has been less important, because you do not need money to get your product to market. This being the case, worrying about getting a job and layoffs makes less sense. Because nowadays you don't need an office, a shrink-wrapped software deal with computer stores, a handful of leased colo'd servers and IT team to support them. You can start with much less, get to where you're making a minimal living, and then go from there. After that you can take a job, or take seed/VC money if you want, but you don't have to. I have seen this come to pass, and I have heard many luminaries in Silicon Valley say the same thing. Of course, in good times it is less work and easier to get a job making low 6 figures programming, than it is to make $30k a year on your own bootstrapped business, never mind pushing that up to where it grows to $100k. It is a lot of work, as many have said. It is doable like never before though.
Yep. 1996 T1 line, web server alone was something like $7500 (in '96 dollars) CSU/DSU, router, server software was Netscape (paid for that), rent, then you had to actually spend a great deal of time acquiring customers (traditional newspaper advertising..)
""Companies will still raise funding, but at lower valuations," says Arianna Simpson, a Silicon Valley-based investor."
I wonder if this means companies have gotten wise to the bad deals they were signing just to get a high valuation and are agreeing to lower valuations but not giving up preferred stock that is so powerful. I know a few smaller companies that have done this and prefer to not make headlines with sky high valuations that everyone knows are meaningless.
Less VC money means less demand for engineers. Less demand for engineers means dropping wages. Higher levels of outsourcing and H1Bs also means dropping wages. American engineers though "scarce" will see a significant drop in wages, salaries in this field are going to collapse. They were being propped up by the government printing money, thus pushing up tech companies stock and pushing up VC money. With all that money no longer circulating, we will see wages go down.
As you say, this entire situation has been supported by massive infusions of printed money intended to support the economy dating back from the last collapse.
And the massive bailout followed by quantitative easing/money-printing was already touted by Bernanke in his helicopter speech.
Which is to say that one can't imagine any response to the present embryonic crisis other than even more money being thrown at the problem.
And it seems like this money restore the status quo even as the 2007+ money didn't restore the previous quo. Rather the primary trends - printed money concentrating into the hands of the already wealthy, seems likely to simply accelerate.
How long can the circus keep going? It might collapse at any moment yet I don't think anyone knows for sure.
Even though the vast majority of monetary transactions are done electrically, it is still at heart a paper-based system built upon the constraints and assumptions of the paper/print medium that has dominated for the past ~500 years.
"It is part of the age-old habit of using new means for old purposes instead of discovering what are the new goals contained in the new means."[1]
I'd imagine the house of cards won't come tumbling down until a viable electric alternative outcompetes the legacy system.
The old goals of the Federal Reserve system are primarily:
1. Maximize employment
2. Stable prices
3. Low interest rates
These goals are no longer applicable in the new electic age of automation and ephemeralization.
Retail transactions may be "at heart paper" with those constraints and they may be numerically the majority of transactions however broadly financial transactions involve a greater large amount of funds and so the Fed's policy of money creation has in no way been limited by retail monetary transactions' dependence on paper.
Have you heard of the "helicopter money speech"?[1] It seems required reading for anyone trying to understand modern monetary policy (though it's naturally only the start).
>a decrease in the general price level of goods and services
In the Gutenberg era of paper based processes and hierarchies, as stated in your cited speech, a reduction in the price of goods and services is seen as a bad thing. This is no longer the case. The assumption of scarcity of renewable physiological resources (level 1 of Maslow's hierarchy) is no longer valid:
>In technology's "invisible" world, inventors continually increase the quantity and quality of performed work per each volume or pound of material, erg of energy, and unit of worker and "overhead" time invested in each given increment of attained functional performance. This complex process we call progressive ephemeralization. In 1970, the sum total of increases in overall technological know-how and their comprehensive integration took humanity across the epochal but invisible threshold into a state of technically realizable and economically feasible universal success for all humanity.
-Buckminster Fuller
In the era of electric automation, deflation flips into ephemeralization because everything is increasingly/exponentially produced better, faster, and cheaper. A reduction in the general price level of goods and services is the purpose of automation.
This is why goal #2 of maintaining stable prices is now obsolete and self-defeating. It completely ignores automation and renewable resources.
How long can the circus keep going? It might collapse at any moment yet I don't think anyone knows for sure.
This statement is fundamental. It is very very hard to time the market. In fact there is a famous saying by John M Keynes "The market can stay irrational longer than you can stay solvent".
I think you're vastly overestimating the role of VC money in tech overall. One of the things that is probably different this time around--assuming a bubble pops--is that "every" startup doesn't have Sun servers, EMC storage, Cisco networking gear, etc. like they did in 2000. Yes, you could well see a de-frothing of the startup scene and overheated real estate market in the Bay area but the collateral damage will hopefully be limited. No more 6 figure starting salaries going toward $4K/month rents maybe, but that wasn't sustainable anyway.
Right, but startups do employ large numbers of competent engineers. VC money drying up means those engineers start competing for the same jobs. Quantitative easing has caused stock prices to rise, mainly tech stocks. This means tech companies can offer absurd salaries via stock to compete for talent. This drives up salary across the industry. If their stock goes down, as it will with rising interest rates and market downward forces, they will pay less for top engineers. This will have industry wide effects.
21 year SF resident here. I was here for the dot com bubble, and the smaller "multimedia" boom in the early/mid 90s.
I think what is unfolding is a shift away from consumer businesses and back to boring business to business services. The latter tend to have more predictable cash flow (which ironically is a handicap when VC money is flowing to "viral" consumer businesses that can paper up their growth).
B2B services whose customers are not linked to the local tech economy should do just fine. It might be harder to raise money for a while, but that's good too, it'll weed out the weaker companies. OTOH, consumer companies that already have ten years of rapid growth priced into their valuation are pretty screwed. Hard to see where they avoid some really painful and damaging adjustments.
And a word of advice for workers. If you are at all unhappy with your job, or suspect that your company is vulnerable to a downturn, now is a good time to start looking around for something you'll be ok with for a couple years. Once companies start laying people off in larger numbers, it will get ugly (maybe not 2000 ugly, but it won't be fun).
As a subset of the 2nd category, I think ad-supported mobile apps are going to suffer, i.e. games, since most of them seem to be advertising for each other.
I would actually disagree. eCPMs on mobile have steadily been going up, but not because game companies have been spending unsustainably. eCPMs have increased because brands have slowly been moving in, there is better adtech/targeting, and because game companies have a higher LTV, hence can spend more. Many US-based mobile game companies have basically given up fundraising from VCs as a significant part of their strategy, because it became too difficult to do so post-Zynga's crash.
Point is: If you're a ad-supported mobile app, can purchase users at an ROI+ rate, and know how to iterate productively, it sounds like you have weathered the storm. Mobile ad-supported companies will stay around (though they may trim workforces to ensure long-term viability).
Yes, that's exactly their problem - they're consumer tech, yet businesses make up the vast majority of their (supposedly meager given their insanely high valuation) revenue.
It's rather hard to make a B2B business without the target industry exposure and goodwill. And those are hard to get because many of us, high-tech developers, are not good at listening to the low-tech user, or even each other. That includes me, of course.
165 comments
[ 4.0 ms ] story [ 201 ms ] threadOverdue, if true. If not, I guess we'll keep waiting for the next hangover to catch up to us.
You need to distinguish between startups (people starting their own business), and "startups" (VC funded technology companies of a certain model). I'm sure the former won't be nearly as affected as the latter.
it was not just that there were startups which were feeding off of other startups. even big-name established companies e.g. sun, csco etc. were pretty deeply involved.
Sure, it's always different this time for a CEO who needs to keep hopes up for investors. Sales is crashing with the deflation that is coming. And also overvaluations are followed by undervaluations when the interest rates increase.
Said every time.
Of course the details of the crashing waves are different, but the tide is the same every time.
Predictions about the future are hard.
The punchline is that basically every bubble that ever existed was characterized by new era thinking. Looking at it like a Bayesian, the presence of new era thinking is a high-confidence indicator that you're in a bubble.
So while it is fun to think every downturn is going to ruin the world and make fun of people who thinks it is different, it really is different. It does not mean all these companies will survive, but that is how capitalism works. Companies have to die to free up resources and capital for the next idea.
They got hired at ~100k/yr in the midwest to a company that didn't sell anything. This "bubble" is entirely different. It strikes me more as the vc bubble finally coming to the realization that not everything is worth investing in with rates as they will now be in the future.
I think this won't be an acute bubble for incumbents but for early stage startups that need funds badly to keep the short runway clear.
Now did they over-raise because they were afraid of a bubble or did they know there was one? A pointless debate, probably.
Founders either need to get out early, understand that their position will eventually be just an employee, or not take in more funding than the company is worth.
It does, however, work out in the tiny chance that the company sells for way more than it’s valued worth.
Do you have any evidence of this? On the surface, it doesn't even make sense. There are two sides to every transaction; are you claiming that the entrepreneurs could see the slide coming, and anticipated it, but the financiers didn't?
Over-raising seems like more proactive version of that (2008 still being relatively recent in investors' memory), and VCs likely suggested this to portfolio companies.
"Q4 2015 pretty much the same as Q4 2014, the sky is falling!"
TBH, the fed should not have gone from 0.25 to 0.5 That was really really dumb. They should have gone from 0.25 to 0.3 or something.
My guess if the bleeding keeps up, the Fed will have to do a rate cut. Should help things.
Since I got downvoted, let me show the math:
For an entity borrowing at fed funds rate, on 100B loan that is 250M to 500M annual payment after the hike. If it were 2.5% to 2.75% on 10B, that would be 250M to 275M. See the difference? Even a 50bp hike would just be 20% higher payments.
If you're surviving at the edge of these loans, then doubling your payments could easily wipe you out.
'''"The short-term volatility is not something that worries me for monetary policy; it reflects market participants trying to make sense of global developments," Williams told reporters on Friday, adding that he sees no signs of distress or a weak economy in declining asset values, and is unsurprised that stock prices .SPX would decline as the Fed raises rates.'''
That's a pretty clear signal that the Fed have knowingly and openly popped a bubble. This is going to be painful.
If your balance sheet is such that the incredibly marginal increase in borrowing costs is anything other than a bump, than you are a dead man walking anyway.
This wasn't a marginal increase. It was a very dramatic tightening. Marginal would be going from 2.5% to 2.75% or 3% .. this was doubling.
And they did not telegraph anything. If you tracked the CME fed funds probability you'd see that it waffled up until a couple of months beforehand and we were at 0.25 for a very long time.
The reason 0.25 used to work as a min step was because a) we were never at such low rates for so long before and b) things didn't have a chance to settle into a particular rate structure so it wasn't really an issue. The difference this time was everyone started building businesses based on 0.25 and had time to do so.
Agreed, you shouldn't be doing that. But heck, the economy is pretty messed up so the rules have changed.
Of course, one tends to hear these stories after it is too late. No doubt plenty of people ignore the warnings and get by just fine, right up until they don't. And then it's someone else's fault.
[1] http://www.wsj.com/articles/fed-chief-janet-yellen-rate-incr...
Living on the edge is always a risk, and those who do should be prepared for the risks associated with it.
Then its time for those industries to restructure (and, if they must, fail).
Well, I disagree with your comment on policy, but yes, anybody that was on the edge is pretty toasted right now. The important question is whether VCs were there.
If you're looking at medium-term financing options -- on the scale of multi-year business loans, mortgage fixed rate periods, and the like -- in most of the Western world, you should probably be considering whether you can afford at least 2.5% interest rate rises over the next few years, not just 0.25%.
I happen to think it was a good decision. But why does everyone insist on calling this change "small"?
My point is, this attrition turned up to be incredibly small, and still irrelevant at the US later interest levels.
Maybe I'm missing something really obvious here, but in what practical sense is that true?
But why does everyone insist on calling this change "small"?
Because by law or convention 25 basis points is the smallest increase in base interest rate that most national banks will ever make, and since this change was telegraphed long ago it's literally the minimum anyone working with serious finance was expecting.
Maybe some of these companies need to start making money and before they are valued at a billion dollars.
2. You changed the amount of principal in your example. A company that goes under due to an expected 0.25% bump in short term interest rates was in extremely poor financial health to begin with.
2. I was under the impression that VC firms typically raise money from a pool of investors and they take a cut of the % return to those investors. How likely is it that VCs are financing a substantial (if any) portion of their investments through short term loans subject to the short term interest rate?
3. The minimum possible FFR adjustment is 25bp (historical, not a hard rule but a custom)
4. Fed does not adjust monetary policy to suit specific sectors of the economy
5. Fed has committed to getting to 2.0% core inflation by 2018 [1] and would not have risked credibility loss by raising rates if it did not intend to continue to hike (and hike fast)
[1] http://www.federalreserve.gov/monetarypolicy/fomcprojtabl201...
As others noted it wouldn't double your payments as tech doesn't have access to overnight rates with zero spread.
Rents from L.A. San Francisco, Denver, Chicago, New York, are climbing at double digit rates year over year. The overwhelming majority aren't getting the kinds of salaries and wage increases to afford such increases.
The Fed had only been saying rates need to go up for 2 years before they actually did it, but did the market price this in? Not entirely, a good chunk of the market was in denial about the inevitable.
That's not how interest rate setting works at all. Plus, the Fed is still using a banded window that encapsulates your five basis point rise.
What company is borrowing at Fed Funds rates? If - theoretically, because we have to be quite theoretical to operate under your assumptions - a company was that exposed to interest rates and had zero hedge against interest rate vol they would not have the credit to hope to get funding anywhere near Fed Funds rates.
If you're surviving at the edge of loans (i.e - you're in a potential distressed scenario) you'll have bonds trading at a significant discount. This is exactly what began to happen during the early part of 2015, when Fed Fund futures had little chance of the Fed moving priced in.
So yes, patience is surely a virtue. But it's probably worthwhile to be vigilant because it doesn't take long to fall hard from the peak.
It's infinitely easier to raise spending than cut it. The latter involves morale crushing things like layoffs and telegraphs an outward appearance of failure that drives off customers and future hires.
Startups that have avoided this trap or who have a model that converts into revenue more easily than "get users and pray" might be fine, but I think a lot of unicorns and want to be unicorns with bricks strapped to the accelerator are about to be turned into glue.
But unicorn glue is great. It's sparkly and can bond any surface. :)
Edit: of course the wildcard here is the question of how economically incestuous the startup world is this time. That's what made the landing so hard in 2001. We know there are some startups that mostly serve startups, but nobody knows the percentages.
They do this because it's easier than tackling deeper issues like wage stagnation and demand collapse that are preventing a true robust resurgence of growth across the entire economy as existed from the 50s until the late 90s and the 2000 crash. That would take things like fair trade reform to limit wage arbitrage and possibly a rebirth of unionization or something similar. It would radically change the economy and would probably involve even more short term pain since the whole Normal has organized around cheap labor, cheap manufactured goods, cheap credit as a substitute for wages, and high asset prices. All that would invert.
As far as the mainstream economy goes, 2000 was the end of the postwar run. Leave any of the coastal bubble fueled rich cities and visit the American interior and you'll see the long term decay... or Google the stats on heroin and meth addiction. These bubbles barely touch the heartland, which is in a depression that began in 2000.
I don't think the central banks are doing this on-purpose. They're doing it because the people with control over fiscal policy have decided to spend all their time worshiping the Austerity Gods.
(Belts for the belt-tightening god! Cuts for the cut throne!)
Most of the country has been in a depression of varying intensity since 2000. I don't care what Pravda says.
This long-term depression (since around 2000-2001) is hidden in the data because the data we look at is aggregate. The collapse in the interior is outweighed on aggregate statistics by the booms that have occurred in places like SF, NYC, LA, Seattle, etc. These are places with closer links to finance and higher tech industries. The interior of the country was always the center of bedrock industry, but all that's been replaced by China.
IMHO anyone who argues otherwise is deluded, wrong, or a liar. Just visit a place like Kansas, Michigan, Ohio, etc. and look around a bit. The collapse is viscerally real and physically tangible. Everywhere you will see failing infrastructure, desperate cities installing casinos and other vapid quick-fix ways to stimulate commerce, and people with raging heroin and meth habits and loads of alcoholism. Hard drug addiction is a clear historical indicator of deep depression and social collapse. Then talk to young people and university graduates. You will find that all the best are leaving as soon as they can and that the dream of every young person is to get out.
The Midwest is where I'm from. Last time I was there it was a little bit scary. All the gun talk, fear and hatred talk, meth mouth at gas stations and grocery stores, and the general smell of collapse and pessimism. I grew up there and I've watched this happen. It was not like this in the 1990s. There's always been a bit of a gap between places like NYC and the "flyover country" but it was never, ever this extreme. Now it feels like third vs. first world. I actually almost felt unsafe there. I could feel this edge of alarming despair that triggered some kind of hindbrain "watch your back" emotion in me. My wife said the same thing.
Automation's role has been minimal so far when compared to the massive effect of wage arbitrage, but if self-driving trucks hit the mainstream we're going to see the bottom really fall out and it's going to be ugly... like rural USSR in the late 80s and early 90s ugly. Trucking and related industries are a major employer in the interior and it's been one of the few jobs that can't be outsourced. Of course this new technology will add new jobs: on the coasts to write the software and overseas to manufacture everything.
If this trend continues we're looking at a future not terribly unlike The Hunger Games (there's a reason these books are popular): mega-rich enclaves surrounded by "districts" that have reverted to something resembling a 19th century standard of living but with smart phones (and ubiquitous surveillance, drone attacks, etc.). Either that or there will be a backlash, possibly an over-reaction that tips completely into socialism or fascism. That's the other thing I heard the last few times I was there: depending on whether they leaned right or left people were almost ready to vote for that Hitler guy or that Lenin guy. Trump and Sanders are much, much milder cousins of these... expect far more radical and dangerous versions of both if nothing changes. Think Trump without the restraint and integrity or Sanders without any lingering belief in the American way... and both without any belief in the rule of law. You could even see a... well... "national socialist" hybrid: a warmonger Sanders or a socialist Trump.
Of course the globalists will retort that eventually wages will rise in places like China and the tide will start to balance if not actually reverse. That's the theory and...
I do feel a potential blog post in this, but I'm waiting to see how it shakes out in the near term. Even blogging about politics makes me sick but there are things that might need to be said. Hopefully somebody else will say it first and let me off the hook.
It's completely ridiculous that software development is concentrated in any one geographic area. Software development can be done just as effectively from anywhere. So why isn't it spread as uniformly as the world's population?
Maybe part of the solution to the problems you describe is a call for programmers (and other professionals that can work from anywhere) in the US's interior to not leave for the coasts, but start companies and hire people locally.
Solving that problem would help the interior for the reasons you explain.
That illustrates another point: ecosystems have a draw because they draw people in, and brain drain has the opposite effect. Both effects are exponential: the more people come the more people come. That's part of why interior places that have very strong university systems or major local employers with a lot of drawing power (or government labs, etc.) have been spared the worst of it.
I wasn't implying that labor arbitrage is the only cause of this depression, just that it's probably the largest single cause.
If people here can create self-driving cars, delocalizing software work doesn't seem so far fetched. I'm inclined to believe that there is a lack of will and vision rather than a lack of ability.
I don't think you can pin all of this on interest rate hikes and it is not all tech, or at least all Silicon Valley startups. It's a combination of globalization, a much more service oriented economy than before, and some political decisions that ate away at the middle class (especially lower middle) in favor of wealthy interests.
Things aren't improving either since Brownback seems to be happy enough with companies leaving the state despite the low taxes because he and his ilk refused to acknowledge that the major corps wanted well educated workers and have on many occasions worked with Wichita State University to improve their programs. It's why I left more than anything. The anti-LGBT sentiment is bad, but having no jobs in my field is worse.
Edit: I believe it wasn't an ad, but actually an Op-Ed pinned by Carl Brewer that gave the numbers I described on the growth rates.
https://www.pwcmoneytree.com/HistoricTrends/CustomQueryHisto...
My interpretation: 1999-2001 was, obviously, a completely different beast. While there was a bit more investment in 2015 than 2014, it was variable by quarter over the last 2 years and just looks volatile rather than bubble-y. What I focused on, and believe is the most important thing to notice, is that the number of deals hasn't really changed. Any spike can be attributed to larger investments per company/round. The reason I see this as more important is that the reach of any "bubble" to the downstream dependents of VC cash (data analytics startup land) likely wouldn't extend as far as the end-of-the-world crowd likes to suggest.
Outlook: I think this year will be more telling than the last as to whether or not funding in 2014-15 was just volatile or if we're actually making a move towards 2002/2009 troughs. I struggle to believe it will trending upward from here. I'd like to think the VC world is slightly more cautious (which is likely why we've seen the recent volatility).
To fix this, change the time period from after 2002 to remove the offending peak. Then, you see pretty much a rise from the 2009 recession onward with wiggles in the number of deals. Of course, the only issue is as a non-business man, I don't know if 300 deals per quarter over ~7 years is a significant increase or not. Also, I don't know what is considered "normal" as I assume the minimum at 2009 is probably below the norm, so for all I know, we could be hovering just above 0. Still, there is definitely an upward trend there at least for the aggregate category (if that is what we are discussing).
EDIT: 2016-2009 = 7, I can't count
While this might be happening, do we have a method to track it with real data?
On one hand, I feel sorry for all those software devs (myself included) who might be out of a job in the next few months or whose salaries will start shrinking.
On the other hand, it will be nice to watch some over-funded startups crumble to pieces and make room for more deserving (bootstrapped) newcomers.
That the technical companies in the bay area seems to be isolated from the hardships of the rest of the economy doesn't make it a bubble, it's simply a place with a different economic focus with different economic realities.
I swear people around here actually sometimes seem to wish bad things would happen, as some kind of schadenfreude.
We see these high valuation numbers being lobbed around as some kind of insult to good sense, but we're talking about just a few companies and in the grand scheme of the size of the economy in San Francisco, Palto Alto, Mountain View and San Jose these numbers are a tiny fraction of the overall system.
The reality is that software is still eating the world, and more change and value to be derived therefrom is still to come: automated vehicles, robotics, smart appliances, VR, and a myriad of far less sexier technological innovations with sound economic value creation.
"I swear people around here actually sometimes seem to wish bad things would happen, as some kind of schadenfreude."
"The reality is that software is still eating the world, and more change and value to be derived therefrom is still to come: automated vehicles, robotics, smart appliances, VR, and a myriad of far less sexier technological innovations with sound economic value creation."
Rewind to the dot-com times, and I believe you'd find people saying the exact same things.
I'm reminded of the Victorian railway investors: railway was the future, but that didn't mean that investment always worked. If the music stopped you would be ruined. But the railways continued to spread.
Charles Stross basically wrote Accelerando by writing down the stuff people were gossiping and fantasizing about building in Silicon Valley circa the first Dot-Com Bubble, IIRC.
Basically none of it actually happened, and almost all companies at that time were basically focused on the same "Stuff my mom used to do for me -- now through a website!" premise.
Same as today, mostly. Automated vehicles, robotics, smart appliances, VR, and basically every major technological innovation are capital intensive: five guys in a rented room in a coworking space are not enough. You need a real R&D division.
Look you may be right, but I would need to see much deeper evidence for it, based on current trends and predictions and not stuff people said an eon ago. I would also expect them to be able to use their theory to explain why the "the good times are over" memo didn't cause or predict a crash.
A central fallacy is assuming that because an idea seems inevitable the companies in that field now will be the ones doing it. Software is indeed eating the world but that doesn't mean that, say, those smart vehicles or robots will be made by a startup rather than GE or GM, or in one of the most expensive places in the world. Remember Kozmo.com? They're a fading memory but a lot of my neighbors get their stuff delivered by the same grocery chain which was there in 1995 who now has a great website, mobile apps, and a fleet of delivery drivers.
This also has an important corollary for developers: unless you have a significant chunk of equity, never forget that even if your company is one of the successes your personal success does not inevitably follow. Most C-level managers see people like us as an expense to be minimized.
But is that what startups are doing? I mean, there's only one startup that has requested an Autonomous Vehicle Testing Permit in California - Cruise (YC W14) -, all the others are established companies.
It's true there's a whole bunch of startups producing IoT trinkets, but those products are usually cheap and unambitious, not stuff that require large investments in R&D.
Actually the better bet is to avoid equity as a replacement for a higher salary. Less risk, (lost value, taxes on negative value), and unless your company goes Google huge and you came in early it's not likely to be life changing.
That's not saying that there aren't many other reasons to prefer working at a startup but simply that you don't want fantasies about getting rich distorting the comparison.
It doesn't seem like a useful comparison though.
Adjusting for inflation, current investment levels (2014 at least) are less than half what they were in 2000.
There are also, what, 8+ times as many people online, spending upwards of $350bn (2014 figures I think), compared to $50bn in 2000.
Some people like to be a step ahead of the curve, because that's where the money's made.
There's a financial book called "This Time Is Different" that outlines the similarities between asset bubbles and financial crises worldwide over the last several centuries.
As outlined by the book, be careful whenever you're attempting to justify the current bubbly situation as the new normal, the rules have changed, the old financial laws no longer apply, this is a new paradigm, et cetera. Because "no, this time is not different," as the meme goes.
The tech startups that involve actual physical products with manufacturing, distribution, shipping, retail placement, etc are another story.
It seems like we would be well served to have terms to differentiate for sake of headlines like this.
(Yes I realize this is overly simplified and bleak, that's the point.)
Maybe we could call it a workers unified organization? A unity?
Yes, the engineers shouldn't work hoping on an IPO ever happening, and focus on the cash component. To be fair, middle management is in the same boat though. Still, programmers have far better chances of finding another job quickly. Their skills are incredibly portable and easy to demonstrate.
Now, if you want less risk as an engineer, consider a smaller market: The real problem in SF is the exposure to a crazy real estate market, and it's easy to work in a place without those risks. In St Louis, for instance, a generic, unremarkable senior dev makes 110-150K. It's a lot less than the bay, but a good house in a good school district can be bought outright for 200K! You can find similar low risk environments all over the midwest, with opportunities in both big companies and small startup incubators. You won't find AirBnBs, Ubers and Stripes in there, but if you are really afraid of a downturn, it's a decent possibility.
With the Fed raising rates, VC's already starting to hedge their bets, and friends of mine leaving startups to go back to stable corporate gigs, I see a shuffling of the deck, but nothing too major.
I feel like this is the normal eight year tech cycle that is just coming back around again:
- 1992 recession and crash
- 2000 recession and crash
- 2008 recession and crash
> "But when you have a lot of money chasing all these great ideas, and you combine it with the fact that entrepreneurship has gotten sexy in the last few years and become the “in” thing for a certain crowd, what you end up with is a huge number of people starting companies who have no business at all doing that."
http://observer.com/2015/08/why-i-stopped-angel-investing-an...
I've said this to tons of people privately and publicly: entrepreneurship has become the new "I'm working on a novel". Lots of people have good ideas in their heads. That doesn't mean they should be building businesses on them.
Some people are just not cut out to be entrepreneurs. And once the money dries up, these will be the first ones to go.
The rest will continue building businesses because they can't really think of doing anything else.
You still got it wrong for who you should be investing in: People who have a vision driving them to the core, who can't imagine not seeing their change happen. People who just want to start businesses "because they can't really think of doing anything else", are people who just want the lifestyle or equate it with personal freedom or something. They don't have much of an edge.
This is a start, but only a start. I've run into plenty of these "types" who don't have the skills or experience to launch a successful startup. The question shouldn't just be "Do I have the passion for this?" but also "Do I have the abilities to execute this?"
That idea, while a very good soundbite, flies in the face of the evidence - almost all startups shift their idea, sometimes quite a bit, before becoming successful.
An interesting statement to mention. In the distant past, writing a novel would be seen as a rather impressive and lofty goal. But as the barriers to writing novels decrease, so too does the actual impressiveness of a novel.
As technology makes startups easier to create, startups themselves should begin to lose their luster as well.
But why care? Some make it some don't, everyone who wants to should try.
You take chances. Sometimes they pan out, most of the time not, but it's all part of life.
We're all going to die anyways.
If the same money is invested in good ideas that pay off, we end up with everyone being better both financially and we have better tech and services. Part of the reason why these marginal businesses can get along is because borrowing has been cheap and there has been a shortage of good ideas to invest in, so it's a catch-22.
The article is correct that it is not silly as the late 1990s. Many startups now actually have working products, revenues, and sometimes profits. Many 1990s companies lacked those.
Now for $10 a month, Linode provides me with the VPS box, I get 2 TB transfer, 125MB port speed, and the plan is not yearly or monthly or even daily, but hourly.
There are two app stores I can put apps out with, with a variety of monetization schemes. I know for Android that over 1 billion people use their Android device at least once a month. There is also the web.
There has been an explosion of open source software, and improvements on existing software - Linux, Apache, and MySQL. Or Nginx and MongoDB. Plus free Java application servers, or Python, PHP or Javascript web frameworks. There is Paypal and Stripe.
Companies have gone from renting offices to subleasing to co-working to virtual offices.
If you can program (or can install software with minimal programming skill and have some creative ideas and will hustle), there has never been a time when fundraising has been less important, because you do not need money to get your product to market. This being the case, worrying about getting a job and layoffs makes less sense. Because nowadays you don't need an office, a shrink-wrapped software deal with computer stores, a handful of leased colo'd servers and IT team to support them. You can start with much less, get to where you're making a minimal living, and then go from there. After that you can take a job, or take seed/VC money if you want, but you don't have to. I have seen this come to pass, and I have heard many luminaries in Silicon Valley say the same thing. Of course, in good times it is less work and easier to get a job making low 6 figures programming, than it is to make $30k a year on your own bootstrapped business, never mind pushing that up to where it grows to $100k. It is a lot of work, as many have said. It is doable like never before though.
http://www.businessinsider.com/secret-may-be-pivoting-to-a-s...
http://www.businessinsider.com/venrock-partner-bryan-roberts...
I wonder if this means companies have gotten wise to the bad deals they were signing just to get a high valuation and are agreeing to lower valuations but not giving up preferred stock that is so powerful. I know a few smaller companies that have done this and prefer to not make headlines with sky high valuations that everyone knows are meaningless.
This is a good thing.
And the massive bailout followed by quantitative easing/money-printing was already touted by Bernanke in his helicopter speech.
Which is to say that one can't imagine any response to the present embryonic crisis other than even more money being thrown at the problem.
And it seems like this money restore the status quo even as the 2007+ money didn't restore the previous quo. Rather the primary trends - printed money concentrating into the hands of the already wealthy, seems likely to simply accelerate.
How long can the circus keep going? It might collapse at any moment yet I don't think anyone knows for sure.
"It is part of the age-old habit of using new means for old purposes instead of discovering what are the new goals contained in the new means."[1]
I'd imagine the house of cards won't come tumbling down until a viable electric alternative outcompetes the legacy system.
The old goals of the Federal Reserve system are primarily:
1. Maximize employment
2. Stable prices
3. Low interest rates
These goals are no longer applicable in the new electic age of automation and ephemeralization.
[1] Marshall McLuhan, The Medium is the Massage
Have you heard of the "helicopter money speech"?[1] It seems required reading for anyone trying to understand modern monetary policy (though it's naturally only the start).
[1] http://www.federalreserve.gov/boarddocs/Speeches/2002/200211...
>a decrease in the general price level of goods and services
In the Gutenberg era of paper based processes and hierarchies, as stated in your cited speech, a reduction in the price of goods and services is seen as a bad thing. This is no longer the case. The assumption of scarcity of renewable physiological resources (level 1 of Maslow's hierarchy) is no longer valid:
>In technology's "invisible" world, inventors continually increase the quantity and quality of performed work per each volume or pound of material, erg of energy, and unit of worker and "overhead" time invested in each given increment of attained functional performance. This complex process we call progressive ephemeralization. In 1970, the sum total of increases in overall technological know-how and their comprehensive integration took humanity across the epochal but invisible threshold into a state of technically realizable and economically feasible universal success for all humanity.
-Buckminster Fuller
In the era of electric automation, deflation flips into ephemeralization because everything is increasingly/exponentially produced better, faster, and cheaper. A reduction in the general price level of goods and services is the purpose of automation.
This is why goal #2 of maintaining stable prices is now obsolete and self-defeating. It completely ignores automation and renewable resources.
This statement is fundamental. It is very very hard to time the market. In fact there is a famous saying by John M Keynes "The market can stay irrational longer than you can stay solvent".
I think what is unfolding is a shift away from consumer businesses and back to boring business to business services. The latter tend to have more predictable cash flow (which ironically is a handicap when VC money is flowing to "viral" consumer businesses that can paper up their growth).
B2B services whose customers are not linked to the local tech economy should do just fine. It might be harder to raise money for a while, but that's good too, it'll weed out the weaker companies. OTOH, consumer companies that already have ten years of rapid growth priced into their valuation are pretty screwed. Hard to see where they avoid some really painful and damaging adjustments.
And a word of advice for workers. If you are at all unhappy with your job, or suspect that your company is vulnerable to a downturn, now is a good time to start looking around for something you'll be ok with for a couple years. Once companies start laying people off in larger numbers, it will get ugly (maybe not 2000 ugly, but it won't be fun).
- Consumer tech startups that have only produced revenue-free growth (ex: Dropbox and Evernote)
- Startups selling to startups (ex: Mixpanel and Stripe, maybe Zenefits)
On the other hand, a company like Airbnb may benefit from a downturn, as people look to save money on travel.
Point is: If you're a ad-supported mobile app, can purchase users at an ROI+ rate, and know how to iterate productively, it sounds like you have weathered the storm. Mobile ad-supported companies will stay around (though they may trim workforces to ensure long-term viability).