Isn't it just a maturation of the process? First we throw everything at a dart board, then we take notes on what sticks, and finally we repeat the steps that made them stick as best we can while wasting fewer darts.
Many of us here are founders and we'd love it if funding was effortless, but at the same time we can't allow hubris or denial to turn us into doomsayers. Things don't last forever.
Denver has not felt like it has slowed down at all, though it has seen a -45% drop. I guess these numbers are somewhat divorced from the 'feeling' of an area then. It'll be interesting to watch.
I will be interested to see a study one day that shows the exact moment silicon valley investors decided enough was enough, and stopped investing in ventures that failed to generate returns.
People eventually stopped joking about how stupid "eyeballs" are as a metric and forgot all about the late 90s. Now they make the same mistake because, well, take your pick:
You're making an assumption that less investment in SV and SF means less investment overall. It could be, and very likely is, the case that investors will simply look outside of hubs once they get too expensive, especially if the founders you need can't afford to come to you.
I've seen Detroit mentioned as a potential tech city due to low costs, was not expecting to see that much funding there already. What companies/categories is that $66m going into?
This may be a case where the companies largely follow the funding as opposed to the companies following specific industries. The money is largely coming from public funding, and from Dan Gilbert (and similar investors) who are dedicated to growing the area. As far as I can tell, surprisingly few of the startups are automotive related.
But how do you make sure the city govt actually takes cares of the city? That's the big problem from what I've been told at length by a friend who's born/raised there. I can't see how Detroit proper can ever become a bustling city again. Not without ousting most of the bureaucrats and politicians involved in the management of the city (probably down to the street sweeper's boss).
Here's the problem: most VC firms understand that 9/10 investments will fizzle out or make modest returns. 1/10 is the unicorn, the 100x. Everything depends on finding the unicorn and growing it like a weed, so every investment has to be treated like a unicorn - grow fast grow large NOW NOW NOW - whether it's actually beneficial for the company or not.
There's so much money sloshing around in the valley that when stupid apps that make no money like Yo or Yik Yak get enough attention, there is inevitably ONE investor who will think "what the hell, if I throw in 10k it could end up becoming the next Instagram or snapchat." As long as people keep joining, more investors will pile in, then the VCs, then Titans like Google will hopefully have their eyes on a shiny new acquisition.
The focus on huge fast returns when they seem to be happening all around you inevitably crowds out investments in companies that can create modest growth from real profit, and it makes investing in "slow" companies downright unfashionable.
To inverse the old Wall Street expression: "Nobody ever got rich from buying Big Blue."
Ok so my numbers aren't exact but you are right, the aggregate return of VC investments tend to be positive. Same with the stock market.
However, VCs are in more of a position to influence the growth of their investments. There is nonstop hype for companies that make zero profit because of the hope that it will enable bigger funding rounds, a buyout, or an IPO.
The only difference between overhyped no-profit startups and a Ponzi scheme is that the latter knows the investment is a bust, while the former isn't sure.
Actually, there are quite a few other differences, including the fact that Ponzi schemes are intentionally fraudulent, and the fact that the many of the "overhyped" startups actually do have a chance at succeeding, which is proved by the fact that some do succeed.
Anecdotally, I would say 30% positive, 30% total loss, and 30-40% somewhere in between. Fund returns will definitely be biased towards the top 1-10%, like in any lottery system.
Which usually isn't good enough for high-risk investors in VC firms. Marginal returns on 30% of investments is likely worse than marginal returns on an index fund.
What about the number of startups asking for money vs the number of startups that received funding. I don't think you can compare dollar amounts here making the assumption that there are a constant or growing number of companies requesting money.
Here is a theory, Software as a Culture and Info vehicle is pretty much mature, the social, the news, etc. An average 20 year old is not well equipped with deep domain knowledge, a good example is flexport, I do not know much about founders but its a business, you need to have a deeper understanding where a 30+ would usually have. So, you will see start-up coming from much older people at the helm and not the younger people. May be this is my bias, but Software fed a cultural need, a communication and information need, we are moving into different realms. Realms which are distributed across the country and world and over all need DEPTH(in Domain) rather than horizontal trends.
I think you'll get periodic waves of re-invention as culture changes. AOL (1991) begat Yahoo (1995, with peak culture around 1998) begat Facebook (2004) begat WhatsApp (2009) & Instagram/SnapChat (2011). In the meantime there were plenty of niche subcultures as well: UseNet, Geocities, Xanga, EZBoard, LiveJournal, Second Life, Secret, etc. The center of gravity might be moving overseas now as the Chinese middle-class develops: Asian mobile messengers are often bigger than their U.S. counterparts.
It's all part of every generation's prerogative to say that their predecessors are old-fogies who don't get it. If you're lucky enough to catch the next wave (which I'm guessing will be in 2018, based on past patterns), there's probably another billion-dollar business in there.
The research tends to back this up. The valley tends to be quite youth-obsessed but in reality successful founders of companies tend to be a little older than 25:
Other things that older people have more experience with: Management. You will have seen plenty of bad management, and hopefully a little good management along the way. Management is hard, understanding that different people work differently and how to motivate them is also hard. Having (hopefully) learned how to do it on someone else's dime is pretty damned valuable I'd say.
Also against conventional wisdom: families. Plenty of these guys are married and have kids. That teaches you about compromise, talking to humans that don't see the world the way you do and can make your life miserable or awesome. I know that my PhD advisor became a notably better manager after having his first child.
I think the point you are trying to make is that complex traditional businesses supported by modern tech will continue to grow. Flexport is not a tech company. It's a traditional freight forwarder/customs brokerage masquerading as a tech startup because they have a nice web ui.
"To be sure, the numbers outside the Bay Area are still relatively small. More capital was invested in Bay Area startups in the first three months of the year—$1.7 billion—than Boston and New York combined."
Have we seen anything to confirm that this statistic will change in the next 5-10 years? Boom and busts are quite normal but maybe the real-estate market will make this slowdown permanent? Is that with precedent?
This is non-sensical: "The biggest winners, by contrast, are much smaller, less coastal, and low-cost cities just starting to incubate their own ecosystem"
Since when was Boston, which experienced a 45% increase in VC investment and which still ranks #2 in total Venture investment a NON-Coastal, low-cost city? And the top growth location is San Diego (coastal, high cost). I think the key is to look at which sectors are experiencing growth and shrinkage in VC investment and see how that correlates to the locations in which those investments are happening.
That Austin drop is staggering. And interesting to note that Dallas (?!) has 2x the venture investment that Austin does. Detroit had slightly more in Q1. Crazy.
I was surprised when the tech scene took off in Austin in the first place, given that the Dallas/Ft. Worth/Richardson area has a much higher concentration of tech companies and tech workers.
exactly. And while the fly-over country (as they say) might indeed be non-coastal and lower-cost the quantities are sufficiently small to indicate that the conclusion is incorrect. It's not that being non-coastal or low-cost is an indication of where the money is going (Portland, San Diego, and Boston are clear counter-examples), it's that the ones that are non-coastal and showing growth in VC funding are being driven by a small number of large investments that are outliers.
So, when it says the "biggest winners"... they really don't mean the biggest winners. They mean that there are some winners that are interesting non-coastal low-cost living locations, but these are interesting winners, not the biggest ones. And of course the big winners are still coastal and high cost of living cities. There's nothing contraindicating in the research that VC patterns have shifted. EXCEPT in the case of Austin, which interestingly is the opposite of what they claim about the biggest winners. Austin was a big loser in Q1.
Surprise for me at the end of the article; I went to college with the Chicago guy who sold his startup to IBM. I should be happy for the guy but all I can muster is feeling intensely bad about my own startup failures.
Oddly, it felt good to confess that to strangers on HackerNews. Thanks for reading
I had no idea that the Seattle VC market was that much smaller than San Francisco's (less than 10% the size), and I never would have guessed that San Diego's is nearly 70% larger.
42 comments
[ 3.1 ms ] story [ 102 ms ] threadMany of us here are founders and we'd love it if funding was effortless, but at the same time we can't allow hubris or denial to turn us into doomsayers. Things don't last forever.
[0] http://techcrunch.com/2014/07/18/yo-raises-1-5m-in-funding-a...
People eventually stopped joking about how stupid "eyeballs" are as a metric and forgot all about the late 90s. Now they make the same mistake because, well, take your pick:
-Mobile phones aren't desktops
-Big data
-This time it's different(TM)
Think city/country club membership You might be doing well, but if you aren't in the club, you're nothing.
For all the talk of "techies" ruling the world, it's still the VC's that anoint people to the club.
There's so much money sloshing around in the valley that when stupid apps that make no money like Yo or Yik Yak get enough attention, there is inevitably ONE investor who will think "what the hell, if I throw in 10k it could end up becoming the next Instagram or snapchat." As long as people keep joining, more investors will pile in, then the VCs, then Titans like Google will hopefully have their eyes on a shiny new acquisition.
The focus on huge fast returns when they seem to be happening all around you inevitably crowds out investments in companies that can create modest growth from real profit, and it makes investing in "slow" companies downright unfashionable.
To inverse the old Wall Street expression: "Nobody ever got rich from buying Big Blue."
However, VCs are in more of a position to influence the growth of their investments. There is nonstop hype for companies that make zero profit because of the hope that it will enable bigger funding rounds, a buyout, or an IPO.
The only difference between overhyped no-profit startups and a Ponzi scheme is that the latter knows the investment is a bust, while the former isn't sure.
https://hbr.org/2014/04/how-old-are-silicon-valleys-top-foun...
It's all part of every generation's prerogative to say that their predecessors are old-fogies who don't get it. If you're lucky enough to catch the next wave (which I'm guessing will be in 2018, based on past patterns), there's probably another billion-dollar business in there.
http://www.kauffman.org/what-we-do/research/2010/05/the-anat...
Other things that older people have more experience with: Management. You will have seen plenty of bad management, and hopefully a little good management along the way. Management is hard, understanding that different people work differently and how to motivate them is also hard. Having (hopefully) learned how to do it on someone else's dime is pretty damned valuable I'd say.
Also against conventional wisdom: families. Plenty of these guys are married and have kids. That teaches you about compromise, talking to humans that don't see the world the way you do and can make your life miserable or awesome. I know that my PhD advisor became a notably better manager after having his first child.
Have we seen anything to confirm that this statistic will change in the next 5-10 years? Boom and busts are quite normal but maybe the real-estate market will make this slowdown permanent? Is that with precedent?
Since when was Boston, which experienced a 45% increase in VC investment and which still ranks #2 in total Venture investment a NON-Coastal, low-cost city? And the top growth location is San Diego (coastal, high cost). I think the key is to look at which sectors are experiencing growth and shrinkage in VC investment and see how that correlates to the locations in which those investments are happening.
BTW, Austin - it's not doing well.
On the other hand, many Longhorns end up in the DFW area, so it's not just to Austin's benefit.
Dallas $127,715,000 / 147% / $75,940,000
Detroit $66,985,000 / 145% / $39,640,000
Portland $42,600,000 / 675% / $37,100,000
St. Louis $23,930,000 / 327% / $18,330,000
Kansas City $13,670,000 / 297% / $10,230,000
So, when it says the "biggest winners"... they really don't mean the biggest winners. They mean that there are some winners that are interesting non-coastal low-cost living locations, but these are interesting winners, not the biggest ones. And of course the big winners are still coastal and high cost of living cities. There's nothing contraindicating in the research that VC patterns have shifted. EXCEPT in the case of Austin, which interestingly is the opposite of what they claim about the biggest winners. Austin was a big loser in Q1.
Oddly, it felt good to confess that to strangers on HackerNews. Thanks for reading