Are there any good data sources on how much money is actively in play for this scenario across the industry?
I hear a lot of doom and gloom "the apocalypse is upon us" headlines, but I have yet to see numbers that show that all of these overly-funded startups without sustainable businesses going poof will have a massive impact on the broader picture (or the public markets outside of a few edge cases that are already seeing corrections).
Sure some people will be out of jobs, and that really sucks, but the market is still hot and they will be scooped up into companies that are doing just fine. Are there really enough people employed by unsustainable startups to do sizable damage to the economy or the housing market should they all disappear overnight?
Serious question--I've seen lots of hearsay, but little actual data on this specific aspect of things.
Facebook and Google's combined revenue grew by $14 billion in 2015 compared to the year earlier. We are hardly in "the apocalypse". Internet properties as a whole are still growing even if many smaller ones are not, and the big gorillas still want to grow and have the money to make large acquisitions.
But, a substantial portion of their revenues come from startups paying them for advertising
Total VC funding in the US is on the order of $50 billion per year. If you assume 20% of that goes straight to advertising, which is unlikely, that's $10 billion. Facebook and Google sell about $100 billion a year worth of ads.
I would guess that Google and Facebook have less than 1% of their revenue concentrated in VC-funded startups. They simply don't have enough money to matter relative to the size of the broader economy. It is not 1999 -- Yahoo is not making headlines with money it got from startups whose valuation is driven by Yahoo making headlines.
People in the startup community think the startup community is co-extensive with the tech industry. AppAmaGooFaceSoft beg to differ.
Thanks for bringing the actual data to the table Patrick.
You wouldn't happen to have any on the more local housing and local economic impact of startup employees would you?
I'm convinced that as the rest of the world burns or stays stagnant, they are looking for a scapegoat, and the geeks who are suddenly rich and in some cases pushing them out of their homes and away from their families make a mighty easy target.
The world wants their economic collapse because God forbid this economic cycle go on for longer than the last (but I'm sure it would be just fine if they were profiting from it).
There was a good quote on Pando about who lost the most in the bubble - it wasn't tech, it was telecom by a long shot. All their income looked real - it was providing a real service - but a few levels of indirection down the line it was all broken.
I'm not doomsaying, but if there's a big movement in anything it tends to have weird action at a distance.
I think you are thinking of the last dotcom bubble where there wasn't much else on the internet. The real world full of real businesses making real things has caught on to this internet thing. Internet advertising doesn't come primarily from tech VC.
And even if you live in SV, which I do, I still don't the no it would change much. That's the other data I'd love to see...how much of the SV economy comes from startups totally reliant on VC money?
My guess is not much at all. They almost certainly don't have enough total employees to dent the housing market because there is still huge demand to live here for other demographics, and the broader economy has many other healthy businesses that wouldn't even notice if all the VC money disappeared overnight.
People think the VC ecosystem is larger, and has a greater impact than it actually does.
so go invest in one? Oh that's right, neither you nor anybody else invests in other than hot SV startups. You're voting with your dollars here. No seriously - if you're not writing checks you can't complain about what the recipients of those checks have to do to get the money. You're acting like they have a choice.
Not sure why you're getting downvotes; you're both correct and rightfully angry.
What we all can, and should, complain about is the practices of VCs themselves, which are turning the tech industry and a lot of things in its immediate wake into a complete disaster.
How exactly do you invest in a startup, and how can you see their financials? It's not like they're listed on NASDAQ. And how would you know your shares are secure, without bringing in lawyers? Investing in a startup seems complicated to me.
Well you could say the same about any privately held company, from the behemoths like Koch Industries to your local mom and pop laundromat [1]. What you describe isn't really limited to tech startups (tm).
[1] Though some laundromat empire can be staggering in scope I imagine.
For starters, you need to be an accredited investor [1]. If you don't make more than $200,000 a year or have a net worth exceeding $1 million, those are the intermediate goals to aim for.
Companies like Exxon, BRK, Johnson & Johnson etc might be surprised to hear that no one is investing in them. Even the most unicorny of the unicorns (Uber) barely cracks the top 20% of the S&P 500.
Thats to say nothing of other investment vehicles like treasuries or real estate.
SV is an important side show in the investment arena, but it is just a side show.
I won't speak to whether SV has a problem with being insular as I don't have any information one way or the other. Your comment though might be titled exhibit #1 for "lack of wider vision".
So I was specifically referring to startups. The question/issue I was answering was "Doesn't SV seem just a bit too... incestuous at this point. There's a whole wide world of people and businesses that could benefit from software."
Each of those major verticals supports software/technology companies. I'm sure Exxon has a whole ecosystem of smaller companies hanging from it that are all extremely sophisticated from a technology standpoint. There are probably any number of disrupting technological innovations waiting to happen in those industries that have virtually no SV presence.
When people talk about the insular nature of SV they are usually referring to the echo chamber it creates. To those of us on the outside looking in, it seems like SV is more interested in "a social network for X" or "Uber for Y" than branching out to those other major industries.
I don't like the example of exxon, but I'll do my best. So let's say, I don't know, some startup figures out cheaper solar (so in the energy sector, like exxon in a broad sense). They're not going to raise money easily or at all in my personal opinion and experience, and would do very well to get government assistance for their innovations, this being their only source of viable funding. Anybody who doesn't want to fund alternatives to the SV "social network for X" or "Uber for Y" is not just metaphorically "part of the problem" but in fact the definition of the 'problem': the 'problem' is that nobody wants to invest in these startups in these other sectors.
Not in some metaphorical way. You, xyzzy4, and all 8 of my downvoters across my couple of comments here would consider investing in a silicon valley social network but would never consider investing in the above. Just won't happen.
if you want this to change you have to take out your pocketbook and start writing checks. that simple. it's like complaining that mcdonald's doesn't sell vegan hamburgers while buying 7 big macs a week. they don't sell vegan hamburgers because people buy big macs but they don't not buy vegan big macs and then complain to mcdonald's then they can't - and anybody that tried to open a vegan fast food hamburger joint competing with BK, McDonald's, and Wendie's would find that people do not show up, do not take out their cash, and buy a vegan big mac.
It is what it is! Fast food restaurants don't sell vegan hamburgers because people don't buy vegan hamburgers, and startups don't operate outside "social network for X" or "Uber for Y" echo chamber because investors - specifically you, whatever reader you are - don't invest in these things. if you want this to change, take out your pocketbook and write a check.
I understand your concern, but depending on what product(s) you are selling, startups (and by startups I am referring to the PG definition of startups) are actually great customers for a couple of different reasons:
- Willing to try new products that help them focus their (limited) resources on their core product.
- No legacy integration issues.
- Generally high quality employees that provide strong product feedback.
- Willing to move quickly.
The downside is of course that they may not have a lot of money and in total, usually represent only a very small part of the market, so you have to use the initial feedback / momentum you got from your work with startups to move into more traditional customer segments, but they are still a great way to get started. The risk is of course that you end up building a product that only works for startups, but as long as you understand that risk and validated that the problem you are solving is not exclusive to the startup community, in my experience you should not avoid working with (reasonable) startups.
On hand they say if everyone is digging for gold, start selling shovels. Everyone is doing start-ups, maybe sell them dashboards, log aggregation services, api testing tools, virtual whiteboards and such.
On the other hand, if you sell to just a few, now your own volatile future is coupled with theirs. You might run out of cash, hire bad people, make bad decisions -- the company fails, and that chance is now multiplied by the chance that other company make bad decisions, bad investors, burn through all the cash etc.
So it seems the answer is to just sell to a lot of startups, to spread your risk. That might end up like the sub-prime mortgage crisis. The risks everyone thought were decoupled from each other, weren't actually. So when start-ups start imploding and investors start looking at ... I don't know solar, hyperloop, or robots, the panic spreads etc.
I think where the shovel/pickaxe analogy breaks down with startups is that they often think their tech is part of their secret sauce when really they're just doing standard things in an interesting vertical, but still insist on reinventing the implementation to justify using up their funding to match the target runway/projections.
I don't think that any startup wants to sell to other startups forever. However, in general startups are early adopters, so it makes sense to start there in a vertical-by-vertical approach. No startup can sell a future "billion dollar" vision to investors with a market constrained to just other startups. A startup is differentiated from other businesses by growth prospects and potential, and a startup must grow outside of the startup market to survive. A landing page may not signal long-term vision, but the plan to disrupt a broader market exists in most of the companies.
Some degree of a "House of Cards" certainly exists. Look at Y Combinator - part of its value is being able to sell within the network to other YC startup companies. At demo day, many of the logos on the "current customers" / "traction" slides are other YC companies. When a company doubles in size every year, almost everything breaks - from HR to communication to hiring - so, of course it make sense to start sales with customers whose pains are so dire that the sales cycle is days instead of months. The customers may be startups, but revenue is still revenue. A startup is defined by growth, though, and at some point leads in the startup market get exhausted and a company must search for prospects beyond other startups to continue growth.
Breaking out of a single vertical, whether it's selling to other startups, a market outside of San Francisco, or even a product that doesn't cater to just high-end consumers is the key to making it huge. Uber started in a niche market - high-end on-demand chauffeur services to people who could afford their own car, but Uber managed to go beyond that vertical. Shyp just shut down Miami - that's a far bigger signal than the health of their SF market. Can Mattermark find a market outside of tech investors? That's the key to justifying their valuation. Many startups will not develop a repeatable growth strategy outside of other startups, but alas many startups do not succeed.
No startup can continue the growth prospects that define them as a startup by just selling in a narrow market, whether it's startups, San Francisco, or on-demand black cars. There's low-hanging fruit in any approach, and the ability to continue growth beyond that defines success.
"By 1998, Yahoo was the beneficiary of a de facto Ponzi scheme. Investors were excited about the Internet. One reason they were excited was Yahoo's revenue growth. So they invested in new Internet startups. The startups then used the money to buy ads on Yahoo to get traffic. Which caused yet more revenue growth for Yahoo, and further convinced investors the Internet was worth investing in."
Interesting to see the author list AWS and Twilio as money saving services.
Do executatives actually believe AWS and Twilio are saving them money? That seems like the least sensible reason to use the services.
I thought the AWS/Twilio value was based on the fact that most companies don't have the know-how or time to recruit or manage or build their own infrastructure, and it's better to spend more so you can focus on your core competency.
Paying $1k for a service is cheaper than paying $70k for a person. That seems pretty sensible to me. They don't care about how it gets done, just how much it costs to get it done.
aah that would explain why many code based startups have horrible design-by-accretion architecture. Just throw more servers at it. I bet the multiplier effect will start to exhibit in all sorts of interesting ways quite early on.
Early growth is typically more important than scaleability. What's to scale if you don't have any customers? It will probably cost more in the long run to achieve the same goal, but that assumes you make it to the long run from both starting positions.
Regardless, I don't think the causality exists to the extent you're describing. It's no different than any open source dependency. Sure, I know how the functions in underscore work. That doesn't mean I need to take the time to roll a deep clone. Saving time and money doesn't imply cheap and broken.
Yeah I'm feeling a bit jaded from seeing stuff that was decade old technical debt that's never been maintained, yet critical to the code's operation. At some point early on when you do have customers you want the reengineering crew in otherwise you will end up with a monster which requires far more bodies and stress to maintain than otherwise necessary. but I see a lot of places where they don't seem to care about stress and bodies piling up.
Other startups seem like a natural starting point to sell B2B software to. At least if you take the Crossing the Chasm point of view (which can be argued against for B2B I suppose).
I'd say Innovators or Early Adopters in the B2B domain are very likely to be other startups a fact that is somewhat ignored in the post.
At least it might be a bit dangerous to assume that you can simply sell to more established companies instead.
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[ 3.3 ms ] story [ 106 ms ] threadI hear a lot of doom and gloom "the apocalypse is upon us" headlines, but I have yet to see numbers that show that all of these overly-funded startups without sustainable businesses going poof will have a massive impact on the broader picture (or the public markets outside of a few edge cases that are already seeing corrections).
Sure some people will be out of jobs, and that really sucks, but the market is still hot and they will be scooped up into companies that are doing just fine. Are there really enough people employed by unsustainable startups to do sizable damage to the economy or the housing market should they all disappear overnight?
Serious question--I've seen lots of hearsay, but little actual data on this specific aspect of things.
Total VC funding in the US is on the order of $50 billion per year. If you assume 20% of that goes straight to advertising, which is unlikely, that's $10 billion. Facebook and Google sell about $100 billion a year worth of ads.
I would guess that Google and Facebook have less than 1% of their revenue concentrated in VC-funded startups. They simply don't have enough money to matter relative to the size of the broader economy. It is not 1999 -- Yahoo is not making headlines with money it got from startups whose valuation is driven by Yahoo making headlines.
People in the startup community think the startup community is co-extensive with the tech industry. AppAmaGooFaceSoft beg to differ.
It's about #theCapitalCycle of an entire ecosystem...#theUnicornEconomy
https://medium.com/@alexanderbcampbell/more-than-500bn-of-we...
You wouldn't happen to have any on the more local housing and local economic impact of startup employees would you?
I'm convinced that as the rest of the world burns or stays stagnant, they are looking for a scapegoat, and the geeks who are suddenly rich and in some cases pushing them out of their homes and away from their families make a mighty easy target.
The world wants their economic collapse because God forbid this economic cycle go on for longer than the last (but I'm sure it would be just fine if they were profiting from it).
I'm not doomsaying, but if there's a big movement in anything it tends to have weird action at a distance.
My guess is not much at all. They almost certainly don't have enough total employees to dent the housing market because there is still huge demand to live here for other demographics, and the broader economy has many other healthy businesses that wouldn't even notice if all the VC money disappeared overnight.
People think the VC ecosystem is larger, and has a greater impact than it actually does.
There's a whole wide world of people and businesses that could benefit from software.
What we all can, and should, complain about is the practices of VCs themselves, which are turning the tech industry and a lot of things in its immediate wake into a complete disaster.
[0]: https://fundersclub.com/ [1]: https://angel.co/
[1] Though some laundromat empire can be staggering in scope I imagine.
[1] http://www.investopedia.com/terms/a/accreditedinvestor.asp
Thats to say nothing of other investment vehicles like treasuries or real estate.
SV is an important side show in the investment arena, but it is just a side show.
I won't speak to whether SV has a problem with being insular as I don't have any information one way or the other. Your comment though might be titled exhibit #1 for "lack of wider vision".
When people talk about the insular nature of SV they are usually referring to the echo chamber it creates. To those of us on the outside looking in, it seems like SV is more interested in "a social network for X" or "Uber for Y" than branching out to those other major industries.
Not in some metaphorical way. You, xyzzy4, and all 8 of my downvoters across my couple of comments here would consider investing in a silicon valley social network but would never consider investing in the above. Just won't happen.
if you want this to change you have to take out your pocketbook and start writing checks. that simple. it's like complaining that mcdonald's doesn't sell vegan hamburgers while buying 7 big macs a week. they don't sell vegan hamburgers because people buy big macs but they don't not buy vegan big macs and then complain to mcdonald's then they can't - and anybody that tried to open a vegan fast food hamburger joint competing with BK, McDonald's, and Wendie's would find that people do not show up, do not take out their cash, and buy a vegan big mac.
It is what it is! Fast food restaurants don't sell vegan hamburgers because people don't buy vegan hamburgers, and startups don't operate outside "social network for X" or "Uber for Y" echo chamber because investors - specifically you, whatever reader you are - don't invest in these things. if you want this to change, take out your pocketbook and write a check.
- Willing to try new products that help them focus their (limited) resources on their core product.
- No legacy integration issues.
- Generally high quality employees that provide strong product feedback.
- Willing to move quickly.
The downside is of course that they may not have a lot of money and in total, usually represent only a very small part of the market, so you have to use the initial feedback / momentum you got from your work with startups to move into more traditional customer segments, but they are still a great way to get started. The risk is of course that you end up building a product that only works for startups, but as long as you understand that risk and validated that the problem you are solving is not exclusive to the startup community, in my experience you should not avoid working with (reasonable) startups.
On the other hand, if you sell to just a few, now your own volatile future is coupled with theirs. You might run out of cash, hire bad people, make bad decisions -- the company fails, and that chance is now multiplied by the chance that other company make bad decisions, bad investors, burn through all the cash etc.
So it seems the answer is to just sell to a lot of startups, to spread your risk. That might end up like the sub-prime mortgage crisis. The risks everyone thought were decoupled from each other, weren't actually. So when start-ups start imploding and investors start looking at ... I don't know solar, hyperloop, or robots, the panic spreads etc.
Some degree of a "House of Cards" certainly exists. Look at Y Combinator - part of its value is being able to sell within the network to other YC startup companies. At demo day, many of the logos on the "current customers" / "traction" slides are other YC companies. When a company doubles in size every year, almost everything breaks - from HR to communication to hiring - so, of course it make sense to start sales with customers whose pains are so dire that the sales cycle is days instead of months. The customers may be startups, but revenue is still revenue. A startup is defined by growth, though, and at some point leads in the startup market get exhausted and a company must search for prospects beyond other startups to continue growth.
Breaking out of a single vertical, whether it's selling to other startups, a market outside of San Francisco, or even a product that doesn't cater to just high-end consumers is the key to making it huge. Uber started in a niche market - high-end on-demand chauffeur services to people who could afford their own car, but Uber managed to go beyond that vertical. Shyp just shut down Miami - that's a far bigger signal than the health of their SF market. Can Mattermark find a market outside of tech investors? That's the key to justifying their valuation. Many startups will not develop a repeatable growth strategy outside of other startups, but alas many startups do not succeed.
No startup can continue the growth prospects that define them as a startup by just selling in a narrow market, whether it's startups, San Francisco, or on-demand black cars. There's low-hanging fruit in any approach, and the ability to continue growth beyond that defines success.
http://www.paulgraham.com/yahoo.html
Do executatives actually believe AWS and Twilio are saving them money? That seems like the least sensible reason to use the services.
I thought the AWS/Twilio value was based on the fact that most companies don't have the know-how or time to recruit or manage or build their own infrastructure, and it's better to spend more so you can focus on your core competency.
Regardless, I don't think the causality exists to the extent you're describing. It's no different than any open source dependency. Sure, I know how the functions in underscore work. That doesn't mean I need to take the time to roll a deep clone. Saving time and money doesn't imply cheap and broken.