Personally, in times like this I can think of three places to invest:
1. Government Bonds
2. Cash (hoarding it)
3. Early Stage Startups
The most fun and promising is #3, because they will take a few years to reach public markets anyway, and by that time there should be another bull cycle. In the meantime, things need to be built anyway. Especially startups that build stuff that people need or things that save money (like metaverse saves on traveling) because they'll cut down on non-necessities (including entertainment, travel and fuel).
The two companies I personally run are 10 and 4 years old, respectively, and have never taken VC, let alone IPO. They have been designed to help communities in the hard times ahead, with their own social networks, coins, etc.
Typically, even as a pre-seed or seed company, you can rely on being able to raise your next round if you hit certain milestones in your key metrics.
For example, if you are a SaaS company, you have a good story and team, and your TAM makes sense, you could have previously hit $300k-$1M ARR and raised a Series A. Some startups were even raising A's pre-revenue. In the new environment, that ability will likely dry up.
I've heard of VCs at all stages opting to sit out for a quarter or two to see how things shake up before resuming any deals. It was suggested that fundraising right now could take 9-12 months -- 1-2 quarters for folks to sit on the sidelines, and then another 1-2 quarters to kickstart their best deals. Plan accordingly.
You're right, it's a little over the top. It was in response to some feedback I got on my draft which was "OK, I read the article, but what's the relation to Canvas?". I added a divider and a disclaimer.
I try to write helpful content first, and only then plug the company, so this is good feedback, thanks.
Personally, I thought the content was good and then the plug at the end was fine. It didn't detract from the content in any way that I could tell or make me suspicious of your motives.
I thought the plug was good. I'm looking to start a startup soon, so I've been consuming a lot of this type of content. The topic is echoed among a lot of VCs right now, the charts were nice, and it tied into the app plug well. I even shared it to my friend who does managerial accounting.
The same place as the rest of the money: misc investments that are now worth a lot less than a few weeks ago. Or did you think that cash was sitting in some bank account happily inflating month on month? To make that cash available, they'd have to sell shares, bonds, options, etc. that that money is currently invested in at a loss. The better strategy is to wait for a recovery. That might take some time. Selling at a loss to make risky investments in startups is not a good plan.
The even better strategy is to invest whatever cash there is into those things more likely to recover quickly rather than sketchy startups as there are likely quite a few undervalued things in the market that could recover by a sweet 10-20% in the next month.
And since that money technically belongs not to the investors but rather conservative entities they represent (like pension funds) they are going to have to do conservative things in times like this. Hence the temporary lack of liquidity for startups.
That's not how the funds flow works. The capital call structure was baked into the GP's raise from the LP -- if that happens at ATH and is highly beneficial to the GP, then the LP has a contractual obligation to adhere to that structure.
As sibling comments have mentioned, of course, whether the GP exercises that contractual right is far more complex and based on the relationship to the LP; and indeed, VC is a relationship driven game, so the natural behavior on part of the GP is to take their time, see how things shake out, use leverage to get better deals and take a wait and see approach.
The point is, though, if a VC chose /not/ to take a wait and see approach and instead go out guns blazing to take advantage of a buyer's market -- they would be within their rights to do that.
Important to understand that when a VC raises a fund, it's just commitments from LPs, not all the money right away.
So if a VC "raised" a huge fund and the market shifts and all the sudden their LPs might not like a bunch of huge capital calls, the VCs will become more conservative. Ultimately the VCs customer are the LPs, and they won't do anything that is going to piss off all their customers.
Correct. The fund also isn't going to be returned for 5-10 years, so even if you are making great investments that will have huge returns in 10 years, if you have a bunch of annoyed LPs now, you may still essentially get knocked out of the industry.
Oh please, I've had investors sign legal documents that they'll invest, be legally obligated, and then reneg on those during crypto winter or some other downturn. More than once. The only thing you can rely on is the big ones with a reputation to uphold.
Cheap money means lenders or investors will be more likely to compete for what they perceive to be a good deal.
More of a ‘sellers market’ from that perspective.
If the buyers are hesitant to invest/lend because they’re worried they’ll catch a falling knife, it makes it much harder to close at all and valuations tend to err on the risk adverse rather than the ‘please pick us!’ side.
Aren't high valuations the definition of cheap money? If you can only raise some money in exchange for a boatload of equity, money is expensive rather than cheap.
interest rates are rising (i.e. cost of borrowing money) and at least on VC (i.e. provider of money) has also signaled publicly - https://avc.com/2022/05/how-this-ends-2/
That said, what's really at issue is that funds will focus on their winners. So even if the money is still cheap and the valuations are still OK, the marginal and "come on, you can literally never be a profitable entity" companies are going to be sacrificed.
Nobody knows how long it will take for the market to be founder-friendly again, but it could be a while.
Quite a while. Demographics meant an incredible amount of capital flow in the last two decades as the largest generation in American history, the boomers, reached the height of their careers and investments. That party is over. 2022 is the peak of the curve for boomer retirement. As they retire that money is leaving the market. Gen X is small and their capital peak won't be nearly as high. Millennials won't be reaching that level of earning for at least another decade if not longer.
His demographic analyses are good but I don't know how much I trust his general predictions. Too often he says things which are factually wrong that would've been very easy for him to research.
Same here. So many easily verifiable inaccuracies in his essays/videos, as well as a dogmatic adherence to demographic and geographic determinism. Still, a perspective I appreciate.
At the same time, US debt is reaching record highs, so the Fed will have to keep printing once this whole supply chain situation is over. And the US is still one of the most immigration friendly countries in the world, so we'll still see continued capital influx I think.
Think of rich people as the thin layer on top of a larger tide. They won’t stop, but the level they are at will change, and it won’t be higher than it was. Many of them will be changing strategies too.
That's still not a logical or empirical explanation, it's just an assertion. What evidence do you see that points to a net decrease in early-stage tech investment at retirement?
It’s an observation, and one I don’t care to spend a lot of time defending. Take that for what you will.
My note was that the macro-economics of going net withdrawal from net contribution with what is currently the largest, wealthiest economic segment in the United States is not likely to increase the size of money seeking to invest, which would, I expect, correspondingly decrease the pool looking for that particular outlet.
And on further reflection, especially since VC, being a fundamentally high risk, high variance of return business, is probably less attractive to those trying to avoid losing money in a bear market, with other, now higher interest earning investments available (due to less easy money).
Hell, if you’re looking for a gamble, even Junk bonds are probably going to be a good play soon.
I’ve only been through 4 (maybe 5?) downturns/market crises so far though personally, so add however much salt you want.
This response conflates the current cyclical trend with the secular assertion I questioned, so I'm going to skip over the cyclical commentary.
> Going net withdrawal from net contribution with what is currently the largest, wealthiest economic segment in the United States is not likely to increase the size of money seeking to invest
From anecdotal observation, VC and PE investors are at a point in their financial life where their earned income is much smaller than their investment income, so I'm not sure this distinction is as relevant for that class.
Perhaps a thinning of multiples in the wider market from the 9-5ers withdrawing their 401k investments will pull money out of riskier investments. But it's unclear that your average VC LP has ever acted rationally (since median returns more or less match the public stock market, but with a decade lock-up).
I think the more interesting inflection point will be in another decade or so when the baby boom generation approaches peak die-off. How much of that money will go to wannabe tycoons a la MBS? How much will go to non-profit endowment funds? IMO there's a reasonable argument we'll get right back to another dumb-money peak like the one we just exited.
My point is that they are (probably) not operating completely independently of the overall market, which is influenced by these macro-economic events. Including what options start to become more interesting for them over others due to changes in the level of competition in the space and available options.
They aren’t constrained in the same way as someone with a 401k, but they are part of the same market and influenced by it, even if in a contrarian way.
I'm no economist but my understanding is that even though we are printing money like MMT advocates, we are not implementing any of the policy decisions to combat inflation. Namely large tax increases on ultra rich.
Since we've started printing we seen a huge rise in wealth inequality and more billionaires than ever, but we don't fight the inflation with high taxes on them so assets they use (high end real estate, art, crypto, yachts) have blown up as have things they invest the extra money into (middle class housing). We should be getting ride of the extra cash floating around with higher taxes.
99.999998% of the population has no idea and doesn't care how much yacht prices have inflated over the last several years. They care about toilet paper, food, energy, clothing, and other essentials.
True, but yachts require inputs like steel, wood, fiberglass, electronics, physical labor, trucks, fuel, etc. Those are all products that 99.999998% of people are purchasing either directly or indirectly, so the prices of those products are impacted.
At this time, that would be a complete 180 as the Fed's messaging all year has been about how they will be raising rates, even if it means sacrificing markets. On an accelerated timeline, no less, compared to what they had floated in January.
I think they are trying to roll back the quantitative easing (aka unleashing the money printers) that staved off a massive recession right when covid lockdowns began.
The fed blames current inflation rates (the highest they've been since the 70s) on all the extra money that is floating around. It is thought that the weird bull market we saw through the end of 2021 was a result of money having nowhere else to go... so when interest rates get raised suddenly other investment vehicles (like bonds) look more lucrative and that money leaves the stock market.
Is there any data on how that interacts with political cycles, which party gets power, and if these changes have been timed in a way that consistently benefits one party?
Too bad I don't have any VC contacts so I was never able to raise a runway to begin with. Instead I've had to work multiple jobs to create my own runway and work on growing revenue. I'm not sure which path is easier right now.
Yeah I'm seeing tons of "free money is over" articles lately but it feels like only a small percent of SF residents had that experinece in the first place. I doubt more than a tiny fraction of HN readers will be affected by this new development at all.
Directly few enough founders on here sure , indirectly everyone is affected.
That company with lot of easy money could be your customer or your customer’s customer , or the employer of your customer.
You could be a neighborhood coffee shop in the bay, with belt tightening, your customers now will think twice about spending or worse be laid off with no money to spend at all.
It could just be the number of people being laid off will depresses salary or getting a job harder if you are looking for a new role, or your company is now finding cheaper replacement to you now in the market easily, making your job lot less safe.
It is easy to say that it was all too good to last everyone should have known, Many have staked their careers on the current market of 10 years . Taken loans for expensive college degrees, bought houses on mortgages assuming salary , got married started families and so on .
Real lives are going to be damaged by this downturn .
That requires my house or some asset to be put on the line instead of just my reputation, and I would be able to get exponentially less than I could with a VC.
Haha, I thought you just failed and shrugged and went home. You have to pay it back? I bet there are a lot of failed startups that don't have the money to pay back.
Easy access to VC was also geographically restricted. In countries like South Africa, with a small but robust and burgeoning startup scene, at least among the startups that I know of where I know the founders personally, all have resorted to either debt or revenue models of funding. None could either get VC funding due to the nature of their work lying in poverty-related solutions or could simply not generate enough revenue to sustain themselves initially and had to rely on taking on debt.
What happens is this rather quickly means a lot of startups (70%?) are going to rather quickly admit that their ‘5 year long term product vision’ they’ve been trying to sell and are ‘almost there’ on launching is not actually going to happen because not enough folks are willing to pay for it, and/or another company already ate their lunch.
Yup. No one likes to fail, especially if they were actually close. And a lot of folks, including employees, will suffer due to lack of other options.
My guess is it will likely be especially harsh because of the length of time this has been going on in tech. We’ve been doing so much stuff with dubious economic value for so long, we barely even notice it anymore.
But there is also a ton of value being produced (in real life), so it’s not like tech overall is going nowhere.
I have heard some similar things - lots of belt tightening going on right now. But it may just be a blip... world events are hard to predict, it seems.
Good. I hope we get out of this by focusing on building businesses that actually make profits instead of, you know, play musical chairs with exit liquidity.
None of the recent advice on the topic mention 'having a profitable business model'. Raising money is not the method, it is a method to extend your runway. Designing a sustainable business is another one.
Well among other things, a sustainable business does not ever need to "extend its runway" because it is infinite by definition (sustainable meaning profit > 0) and "default alive" is a mode it operated in since inception.
All advice in these articles applies to the other kind of businesses ("makes $10k and spends $100k/month...") that likely got in that position by what in some cases is basically a ponzi scheme of fund raising, which was completely fine until just a few days ago and then they realized it's not going to work forever. This then resulted in a widespread panic and all this advice about "how to survive" and suddenly realizing that you should also "make the product amazing". These should be default rules to live by for any business, is all that I am saying.
Ah, so you think Venture Capital should categorically not exist and everyone should bootstrap. I understand where you are coming from.
Here's how to grok VC: first of all, realize that even the VCiest VC understands that VC is a niche, and they'll send you on your way if you walk up to them with a bootstrap opportunity, even if it's a good bootstrap opportunity. This is a site run by VCs as a funnel for the VC scene in a VC town, so you'll hear a lot about VC here -- but bootstrapping definitely has its place. If you listen closely you'll even hear people talk about opportunities being better suited to VC or bootstrapping. Opportunities that can be bootstrapped should be bootstrapped, because then you get to keep more equity.
Here's the critical point though: not all businesses can be bootstrapped. What happens if you try to organically grow your way into a new wide-open opportunity in a winner-take-all market? Some other guy raises a boatload of VC, beats you to it, and shuts you out. VC eats bootstrapper lunch. In theory, the returns from these outsize victories are great enough to offset the failures, but as with any kind of investing it really comes down to educated guesswork.
It's not a ponzi scheme because on occasion it is wildly successful. It systematically reduces the time required for industry to colonize new technological niches. However, it does fall flat on its face from time to time, because that's what happens when you run instead of walk (or perhaps parkour instead of run).
> Ah, so you think Venture Capital should categorically not exist and everyone should bootstrap.
Not at all that extreme, I was just bringing attention to the fact that VC funded startups get most (all?) of the talk of the town, making them almost ubiquitous, where the reality is that they are just one of the ways to start and run a business. In particular, none of these 'advice' posts we've seen lately here on HN and elsewhere seem to acknowledge the existence of 'non raising funds' startups which is basically what I objected to in the original comment.
It's in the article, from "Let's look at a hypothetical seed-stage startup with $2M in the bank right now. It makes $10k a month and spends $100k a month" through "Make the product amazing, go to your customers' offices, do crazy things that don't scale, whatever it takes."
Being in a position of "makes $10k a month and spends $100k a month" is the whole problem. Not having a sustainable business model and focusing on raising money at all cost are two reasons that got it in that unenviable position in the first place.
Perhaps the art of bootstrap is not discussed enough here.
You may be confounding the Growth Phase for the Sustainable Phase. Many business models must pass through these phases. Profitable from the first client is... uncommon.
Well I do not know what else to say, other than to observe that we somehow got in a position of understanding the same article in diametrically opposite ways.
Often it's the desire/need for an extremely high growth rate (often imposed on founders by investors) that makes an overwise sustainable business model unviable.
> Many business models must pass through these phases.
I think there are very few categories of companies that ~must~ go through a "Growth Phase". Sure, there are rocket companies like SpaceX and Uber/marketplaces that only work at scale... but the majority of internet software companies cost very little to get up and running and have very, very high gross margins.
Meaning for many companies, the only thing stopping them from immediately entering the "Sustainable Phase" is an incessant need to maintain extremely high growth through excessive spending.
Is it? Outside of Silicon Valley, I don't think there are many businesses that deliberately lose money in an unsustainable way. I know all of mine have been (at least marginally) profitable from day one, at least.
Expenses of $100k/m with income of $10k/m can definitely happen outside SV. Often it is even more extreme, where you spend millions of dollars before you earn anything.
Let's say I have an idea for a new type of air purifier. I will need to build prototypes, test them, sort out manufacturing, build large numbers, get agreements with various distributors, and all this while not bringing in much if any money yet. If all goes well, however, the investment pays off and once I'm making my new product at scale I more than make up for those initial costs.
It's not about losing money, it's about needing to invest money before you are earning your investment back.
In software it's development costs. Outside silicon valley, in the non-techie world, there are many things that work the same way. Eg real estate - building a building is an upfront investment of piles of money that the building doesn't earn back for years. Or eg opening a McDonald's.
The main difference in tech startups is that it's not just entrepreneurship, it's innovation too, so it's unknown whether the product will earn back the money. But sometimes McDonald's falls, builfings fail, etc. The odds there are better though.
if you're building real estate at the very least you have the actual building itself. This isn't comparable to the ephemeral "I'll sell you two dollars for one dollar <something something> we'll monetize the users"
There is no equivalent to MoviePass in the rest of the economy aside from literal MLM. They mailed people a credit card for what was it ten bucks a month, you could watch movies worth more than that with it, and that literally was their business.
And there's plenty of startups out there right now that basically work the same way. The 'business model' is gift people free stuff, so investors gift you free money and then hope you can somehow IPO and dump it on the retail investors.
> But sometimes McDonald's falls, builfings fail, etc. The odds there are better though.
The 6x6 mall in San Francisco is a great example of this. Someone built an entire mall next block to Westfield and it sat empty for 6 years. It's still empty today, but IKEA signs showed up a few months ago so it looks like San Francisco is getting a downtown IKEA.
Upfront investment: $150,000,000 according to [1]. Never got a single tenant or opened its doors.
Most businesses operate this way,where you need to be profitable on day one( or within a year). It's only the biggest, the most outrageous or boundary pushing companies that need to be super capitalised to eventually reach profitability. It's a fairly recent phenomena.
In enterprise software, it’s rare that you can win your first clients with a low touch strategy. This means there is a phase where you are investing a lot to win specific clients, and getting little in return.
The above seed stage startup could be in the boat where they won a customer bootstrapping, but are now scaling through the use of sales engineers etc.
A 100k per month burn may translate to needing to win 1-10 deals to break even.
>> Perhaps the art of bootstrap is not discussed enough here.
Twelve years ago, I bootstrapped my own company. Took a very small loan from my parents ($5,000), got a friend to work with me and we were off and running. We still worked our full time jobs, but I was taking vacation on Thursdays to cold call clients and give them my elevator pitch. Then it was setting up appointments, making the presentations and trying to get people signed up using a subscription based model we had developed while he was working on the mobile app development.
We were about two months from generating enough revenue to quit our full-time jobs when my buddy died suddenly and unexpectedly. It was pretty hard to continue after that. I slowly wound down the clients I had signed up over the next year or so, and quietly closed the business after two years. I still do business under the company name, but the organization is long gone.
If nothing else, it proved to me you can bootstrap your own company on your off-time, and eventually make that transition to full-time with very little to no overhead (office space, equipment, employees). Also, it showed me you don't need $10M in funding to build a niche company serving an underserved industry.
But bootstrapping isn't easy. Cold calling people isn't easy, getting out there and grinding away on a consistent basis isn't easy. Having your own money invested with a "do or die" attitude isn't easy. Believing in your idea isn't easy. I'm not sure constantly having to raise money is any easier, but the difference is one one hand you're constantly working on your product and business which makes your business sustainable. On the other hand, I'm not sure constantly chasing investors and their money will really benefit your company in the long run.
Yeah it was devastating. Died of a massive heart aneurism. We were scheduled to meet that day and his wife called and told me what happened. I guess he died pretty instantly. It was so massive, it literally ripped his aorta in two.
The company he was working at came out in full support of his fiancé. The entire church was standing room only. They had some 150 people just from his office who knew him which was really heart warming. He was a really great guy, gone way to soon. He was still in his 30's, I was pushing 40.
When something like that happens, it really makes you think about your own mortality and if you're really living every day to the fullest, or just breathing. It really made me take stock and make a lot of changes in my life. I just don't take anything for granted anymore.
Sorry to hear that, that was an unfortunate turn of events that was beyond your control..
> But bootstrapping isn't easy. Cold calling people isn't easy, getting out there and grinding away on a consistent basis isn't easy.
VC funded business have all these same challenges. On top of them you need to somehow find time to raise money and endure board pressures often conflicting with your vision as a founder. I have two bootstrapped business behind me, and in the middle of a third, and although I could use more funding, I am also concerned about taking it. I think I would be overwhelmed with the additional complexity (perhaps I am not one of those "infinite business capacity" founders).
This is completely normal lots of today's sustainable companies have been operating like that for a while. As long as you use those $100k/month of spending to keep growing fast, everything will be fine. This doesn't mean that you don't have a good sustainable business model, just that you need to invest a lot into growth.
A sibling comment touched on it, but I want to expand a little bit on that.
Given two companies competing on the same problem, where one is profitable and one isn't, which is likely to come out on top? I'd argue it's the one that brings in the most money (via profits + funding). At early stages, funding will almost always be greater than profits. A profitable company that does not seek investment will eventually lose out to an unprofitable one that has funding because it will grow faster. At some point, the larger company will seek to optimize for profit, acquire the profitable company, or become the default company for the problem space (a near-monopoly).
The sad state of current affairs is that the market is optimized to promote dominance, not capital efficiency.
And with that changing, maybe we can have winners who make better products, or are more efficient with resources, or just...listen to their customers. Rather than merely being better at attracting VC capital.
You don't need the extra VC money, but often financing can get you to the point of addressing a far larger market far sooner. IF (big "IF") that more rapid growth is critical in your market segment, such as to obtain a better defensible moat by having far larger market share sooner, then VC can be a very good tradeoff. But if that is not your market dynamics, maintaining your freedom and growing organically can be best.
Different take on my sibling commenter:
When VC has the choice to invest in two startups.
Both on par, the one is already profitable, the other burning money, which company to invest in seems clear…
Cheap liquidity is just unhealthy for the economy as a whole. Just allows zombie companies to thrive that create no long term value or productivity gains.
The issue is whether the gains of cheap money[1] (new valuable companies etcetera) outweigh the costs of cheap money (zombie companies etcetera).
Your comment is unbalanced, because it only considers costs while ignoring gains, assuming that “cheap liquidity” also creates valuable gains.
Or perhaps your comment is tautologically true: liquidity is defined as cheap when the economic returns are strongly negative overall?
[1] “Cheap liquidity” is a terrible definition, because liquidity is predominantly considered a good thing in functioning markets, and cheap transactions are usually seen as good as well. I am assuming you mean “cheap liquidity” to mean “cheap money” (not a clear definition either) or that “raising funds is easy for startups and costs them relatively little”.
Your “reply” is not very engaging, and it feels like you are mocking strawman shit that was never said. That is very unpleasant, and nobody likes that. You have read an awful lot into two sentences where there was only a short opinion. Not every opinion has to offer a 'balanced' take of pros and cons on every issue.
If you must have an elephant-winded reply, surely you most likely know perfectly well what was meant by "cheap liquidity" in the sense of accommodative monetary policy, low interest rates, and quantitative easing more broadly. As has been seen around the world, this was intended to maintain asset levels, liquidity in key markets such as mortgages and bonds, reduce unemployment, and keep investor and consumer confidence buoyed. What we received in addition to this partially successful set of policies however were significantly cheap debt encouraging record household and corporate debt levels, near zero savings rates incentivizing spending and penalizing retirement savings, artificially inflated asset levels with the twofold consequences of encouraging risk taking at unprecedented levels to achieve quick returns and of outsized housing prices keeping many renting or paying a very large portion of their income for basic housing, and a slew of overpriced tech companies and startups, many of which were scams and never going to be profitable, that probably won't survive the current, ongoing market slowdown. Zombie companies, record wealth concentration, market control and production being concentrated into increasingly fewer firms through aggressive acquisitions and mergers, and rampant inflation are all ongoing consequences of this "cheap liquidity." Many companies have borrowed billions of dollars to raise dividends and to initiate stock buybacks as is their won't during low interest rates. However, many of these companies operating in critical industries also expect government bailouts without any strings attached or consequences given. Please do be pedantic and explain how all of this is positive, perhaps in a 'tautologically' true way and balanced manner.
Question about investing in companies - given cheap money is hard to find now, from an investor side does it make more sense to try and invest in companies now than it did before, as I assume you'd get more for your money?
In short: no, going forward it makes the same amount of sense as it did yesterday and also 10 years ago. Prevailing market forces aren't what makes a good investment.
You’d be entering the market at risk that the company you invested in:
a. Won’t be able to find follow on investors for its next rounds
b. Will be encountering customers that want to freeze or downsize their spend
That said, VCs raised a ton of money the last couple of years and eventually it has to get invested.
From a startup engineer's POV this is a non issue - a 18-24 month tenure is pretty standard.
However I can't help but feel the bubble will burst eventually and it will be a success to run a VC-backed startup for a few months without seeing it become a shitshow.
I can't complain though, salaries are skyrocketing in my area and getting a major raise is easier than ever. It must be scary for founders / owners though.
> From a startup engineer's POV this is a non issue - a 18-24 month tenure is pretty standard.
This assumes there's another job waiting for you at the end of it. Raises and job offers remaining plentiful at the same time funding is drying up would require quite specific circumstances to continue - namely, that none of the companies driving today's offers depended on cheap money to get to where they are. If a substantial group of them did, there may not be much of a next round.
That said, a lot of what we see right now appears to just be crowd-following, a lot of what really happens will depend on if businesses see substantial customer exits, not just funding tightening. But if, say, there's a big enough startup crunch to hit AWS's bottom line in such a large way that they start laying people off, suddenly you can start seeing potential feedback loops pushing salaries down and difficulty of finding a job up.
Considering how much AWS recruiters message me constantly, an apocalyptic scenario where even the big players are having to lay off substantial amount of engineers is pretty low on the probability curve. Especially given the crunch to hire literally anyone of any skill, which is incredibly difficult at the moment.
I will say there's probably about to be a bunch of WEB3 crypto bros about to need a new job, to which I say good riddance; the days of them grifting people is probably over.
How much of AWS is paid for by those crappy startups? Not much. AWS doesn't give a fuck about any company paying less than a few million in a year in cloud expenses.
I can't imagine a world where there's an economic recession but AWS does better. I'm sure they'd slow hiring too. Companies of all industries will scale back spending, including cloud spending.
I’m not sure you’re thinking this through completely… if startups’ funding goes away, do you think the market for startup engineers might not stay so strong?
Depends on your lifestyle. If you spend all that money, it will be a problem. If you enjoy a bit of luxury while it lasts and save 50%+, you'll enjoy riding the wave and won't mind the inevitable crash as much.
Sure, it can be more, or less of a problem. I've always done what you describe, and it's helped immensely in terms of not being too worried about this kind of thing. But even with a 50% savings rate, you might still prefer to not be out of work :-)
Obviously, anyone want's to keep making good money :) But if you successfully avoided lifestyle inflation, a drop won't hurt as much and you've probably taken some proper savings from the good years, so the benefits (like earlier retirement) will last.
My brother who survived through the dot com crash says that this is exactly what all of his engineer friends thought and then there was a complete hiring thaw for years and salaries got back to earth
There has been a lot of FOMO from businesses into tech after covid. But most of these tech undertakings haven’t really been fully implemented or had a chance to show their impact.
Its entirely possible that a lot of businesses will realize that their massive new tech teams didn’t really translate into a healthier bottomline. Perhaps they overhired, overengineered, or simply didn’t have the culture or expertise or even the need to go all-in on tech.
The most amusing part will be watching these VC-backed companies realize the tiny bit of revenue they do have is from other VC-backed startups in uncomfortably familiar positions to their own.
So, in the dot-com bubble companies were rushing to market with ideas and no products because delivering products was a massive technical undertaking. It seems like we now have companies rushing to market with products -- which are seemingly much easier to build nowadays -- but without profitable business models. I wonder what the next bubble will look like.
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[ 3.2 ms ] story [ 218 ms ] thread1. Government Bonds 2. Cash (hoarding it) 3. Early Stage Startups
The most fun and promising is #3, because they will take a few years to reach public markets anyway, and by that time there should be another bull cycle. In the meantime, things need to be built anyway. Especially startups that build stuff that people need or things that save money (like metaverse saves on traveling) because they'll cut down on non-necessities (including entertainment, travel and fuel).
The two companies I personally run are 10 and 4 years old, respectively, and have never taken VC, let alone IPO. They have been designed to help communities in the hard times ahead, with their own social networks, coins, etc.
https://intercoin.org/overview.pdf
If you aren't going to be able to raise money in the next year, this is even more important, no?
For example, if you are a SaaS company, you have a good story and team, and your TAM makes sense, you could have previously hit $300k-$1M ARR and raised a Series A. Some startups were even raising A's pre-revenue. In the new environment, that ability will likely dry up.
https://news.ycombinator.com/item?id=31435407
I've heard of VCs at all stages opting to sit out for a quarter or two to see how things shake up before resuming any deals. It was suggested that fundraising right now could take 9-12 months -- 1-2 quarters for folks to sit on the sidelines, and then another 1-2 quarters to kickstart their best deals. Plan accordingly.
I try to write helpful content first, and only then plug the company, so this is good feedback, thanks.
The even better strategy is to invest whatever cash there is into those things more likely to recover quickly rather than sketchy startups as there are likely quite a few undervalued things in the market that could recover by a sweet 10-20% in the next month.
And since that money technically belongs not to the investors but rather conservative entities they represent (like pension funds) they are going to have to do conservative things in times like this. Hence the temporary lack of liquidity for startups.
As sibling comments have mentioned, of course, whether the GP exercises that contractual right is far more complex and based on the relationship to the LP; and indeed, VC is a relationship driven game, so the natural behavior on part of the GP is to take their time, see how things shake out, use leverage to get better deals and take a wait and see approach.
The point is, though, if a VC chose /not/ to take a wait and see approach and instead go out guns blazing to take advantage of a buyer's market -- they would be within their rights to do that.
So if a VC "raised" a huge fund and the market shifts and all the sudden their LPs might not like a bunch of huge capital calls, the VCs will become more conservative. Ultimately the VCs customer are the LPs, and they won't do anything that is going to piss off all their customers.
More of a ‘sellers market’ from that perspective.
If the buyers are hesitant to invest/lend because they’re worried they’ll catch a falling knife, it makes it much harder to close at all and valuations tend to err on the risk adverse rather than the ‘please pick us!’ side.
Cheap money == fewer strings attached & better $$ to equity ratio. [0]
Easy money == ideas or MVP's with weaker plans or market fit get funding at all.
[0] this has the side effect of raising valuation.
All income is someone else's expense.
interest rates are rising (i.e. cost of borrowing money) and at least on VC (i.e. provider of money) has also signaled publicly - https://avc.com/2022/05/how-this-ends-2/
That said, what's really at issue is that funds will focus on their winners. So even if the money is still cheap and the valuations are still OK, the marginal and "come on, you can literally never be a profitable entity" companies are going to be sacrificed.
Quite a while. Demographics meant an incredible amount of capital flow in the last two decades as the largest generation in American history, the boomers, reached the height of their careers and investments. That party is over. 2022 is the peak of the curve for boomer retirement. As they retire that money is leaving the market. Gen X is small and their capital peak won't be nearly as high. Millennials won't be reaching that level of earning for at least another decade if not longer.
Uh, you might want to look at population growth numbers. Also post-boomer.
I don't see how this piece follows. Why would career retirement stop rich people from investing (as LPs) in VC funds?
My note was that the macro-economics of going net withdrawal from net contribution with what is currently the largest, wealthiest economic segment in the United States is not likely to increase the size of money seeking to invest, which would, I expect, correspondingly decrease the pool looking for that particular outlet.
And on further reflection, especially since VC, being a fundamentally high risk, high variance of return business, is probably less attractive to those trying to avoid losing money in a bear market, with other, now higher interest earning investments available (due to less easy money).
Hell, if you’re looking for a gamble, even Junk bonds are probably going to be a good play soon.
I’ve only been through 4 (maybe 5?) downturns/market crises so far though personally, so add however much salt you want.
> Going net withdrawal from net contribution with what is currently the largest, wealthiest economic segment in the United States is not likely to increase the size of money seeking to invest
From anecdotal observation, VC and PE investors are at a point in their financial life where their earned income is much smaller than their investment income, so I'm not sure this distinction is as relevant for that class.
Perhaps a thinning of multiples in the wider market from the 9-5ers withdrawing their 401k investments will pull money out of riskier investments. But it's unclear that your average VC LP has ever acted rationally (since median returns more or less match the public stock market, but with a decade lock-up).
I think the more interesting inflection point will be in another decade or so when the baby boom generation approaches peak die-off. How much of that money will go to wannabe tycoons a la MBS? How much will go to non-profit endowment funds? IMO there's a reasonable argument we'll get right back to another dumb-money peak like the one we just exited.
They aren’t constrained in the same way as someone with a 401k, but they are part of the same market and influenced by it, even if in a contrarian way.
Seems like all markets for the last 15 years (since 2007-2008) have just been tracking the fed.
Since we've started printing we seen a huge rise in wealth inequality and more billionaires than ever, but we don't fight the inflation with high taxes on them so assets they use (high end real estate, art, crypto, yachts) have blown up as have things they invest the extra money into (middle class housing). We should be getting ride of the extra cash floating around with higher taxes.
I doubt taxing capital gains is going to go well startup wise though. :s
Is the Biden admin asking the Fed to get this over with in time for the election? Quick shock and return to normalcy in an attempt to retain power?
Or is this because they moved too slow and we're heading into something worse than a minor recession?
The fed blames current inflation rates (the highest they've been since the 70s) on all the extra money that is floating around. It is thought that the weird bull market we saw through the end of 2021 was a result of money having nowhere else to go... so when interest rates get raised suddenly other investment vehicles (like bonds) look more lucrative and that money leaves the stock market.
That company with lot of easy money could be your customer or your customer’s customer , or the employer of your customer.
You could be a neighborhood coffee shop in the bay, with belt tightening, your customers now will think twice about spending or worse be laid off with no money to spend at all.
It could just be the number of people being laid off will depresses salary or getting a job harder if you are looking for a new role, or your company is now finding cheaper replacement to you now in the market easily, making your job lot less safe.
It is easy to say that it was all too good to last everyone should have known, Many have staked their careers on the current market of 10 years . Taken loans for expensive college degrees, bought houses on mortgages assuming salary , got married started families and so on .
Real lives are going to be damaged by this downturn .
n = 5 so make of that what you will.
Which is… harsh.
My guess is it will likely be especially harsh because of the length of time this has been going on in tech. We’ve been doing so much stuff with dubious economic value for so long, we barely even notice it anymore.
But there is also a ton of value being produced (in real life), so it’s not like tech overall is going nowhere.
https://youtu.be/BzAdXyPYKQo
In this one, I'd point to the title ("Extend your Runway"), and if you really picked at those nits I might fall back to "Default Alive."
All advice in these articles applies to the other kind of businesses ("makes $10k and spends $100k/month...") that likely got in that position by what in some cases is basically a ponzi scheme of fund raising, which was completely fine until just a few days ago and then they realized it's not going to work forever. This then resulted in a widespread panic and all this advice about "how to survive" and suddenly realizing that you should also "make the product amazing". These should be default rules to live by for any business, is all that I am saying.
Here's how to grok VC: first of all, realize that even the VCiest VC understands that VC is a niche, and they'll send you on your way if you walk up to them with a bootstrap opportunity, even if it's a good bootstrap opportunity. This is a site run by VCs as a funnel for the VC scene in a VC town, so you'll hear a lot about VC here -- but bootstrapping definitely has its place. If you listen closely you'll even hear people talk about opportunities being better suited to VC or bootstrapping. Opportunities that can be bootstrapped should be bootstrapped, because then you get to keep more equity.
Here's the critical point though: not all businesses can be bootstrapped. What happens if you try to organically grow your way into a new wide-open opportunity in a winner-take-all market? Some other guy raises a boatload of VC, beats you to it, and shuts you out. VC eats bootstrapper lunch. In theory, the returns from these outsize victories are great enough to offset the failures, but as with any kind of investing it really comes down to educated guesswork.
It's not a ponzi scheme because on occasion it is wildly successful. It systematically reduces the time required for industry to colonize new technological niches. However, it does fall flat on its face from time to time, because that's what happens when you run instead of walk (or perhaps parkour instead of run).
Not at all that extreme, I was just bringing attention to the fact that VC funded startups get most (all?) of the talk of the town, making them almost ubiquitous, where the reality is that they are just one of the ways to start and run a business. In particular, none of these 'advice' posts we've seen lately here on HN and elsewhere seem to acknowledge the existence of 'non raising funds' startups which is basically what I objected to in the original comment.
Perhaps the art of bootstrap is not discussed enough here.
> Many business models must pass through these phases.
I think there are very few categories of companies that ~must~ go through a "Growth Phase". Sure, there are rocket companies like SpaceX and Uber/marketplaces that only work at scale... but the majority of internet software companies cost very little to get up and running and have very, very high gross margins.
Meaning for many companies, the only thing stopping them from immediately entering the "Sustainable Phase" is an incessant need to maintain extremely high growth through excessive spending.
Is it? Outside of Silicon Valley, I don't think there are many businesses that deliberately lose money in an unsustainable way. I know all of mine have been (at least marginally) profitable from day one, at least.
Let's say I have an idea for a new type of air purifier. I will need to build prototypes, test them, sort out manufacturing, build large numbers, get agreements with various distributors, and all this while not bringing in much if any money yet. If all goes well, however, the investment pays off and once I'm making my new product at scale I more than make up for those initial costs.
In software it's development costs. Outside silicon valley, in the non-techie world, there are many things that work the same way. Eg real estate - building a building is an upfront investment of piles of money that the building doesn't earn back for years. Or eg opening a McDonald's.
The main difference in tech startups is that it's not just entrepreneurship, it's innovation too, so it's unknown whether the product will earn back the money. But sometimes McDonald's falls, builfings fail, etc. The odds there are better though.
There is no equivalent to MoviePass in the rest of the economy aside from literal MLM. They mailed people a credit card for what was it ten bucks a month, you could watch movies worth more than that with it, and that literally was their business.
And there's plenty of startups out there right now that basically work the same way. The 'business model' is gift people free stuff, so investors gift you free money and then hope you can somehow IPO and dump it on the retail investors.
The 6x6 mall in San Francisco is a great example of this. Someone built an entire mall next block to Westfield and it sat empty for 6 years. It's still empty today, but IKEA signs showed up a few months ago so it looks like San Francisco is getting a downtown IKEA.
Upfront investment: $150,000,000 according to [1]. Never got a single tenant or opened its doors.
[1] https://archive.curbed.com/2020/7/23/21334508/dead-mall-6x6-...
Tech exists outside of Silicon Valley.
> The main difference in tech startups is that it's not just entrepreneurship, it's innovation too,
Innovation exists outside of tech.
The above seed stage startup could be in the boat where they won a customer bootstrapping, but are now scaling through the use of sales engineers etc.
A 100k per month burn may translate to needing to win 1-10 deals to break even.
Twelve years ago, I bootstrapped my own company. Took a very small loan from my parents ($5,000), got a friend to work with me and we were off and running. We still worked our full time jobs, but I was taking vacation on Thursdays to cold call clients and give them my elevator pitch. Then it was setting up appointments, making the presentations and trying to get people signed up using a subscription based model we had developed while he was working on the mobile app development.
We were about two months from generating enough revenue to quit our full-time jobs when my buddy died suddenly and unexpectedly. It was pretty hard to continue after that. I slowly wound down the clients I had signed up over the next year or so, and quietly closed the business after two years. I still do business under the company name, but the organization is long gone.
If nothing else, it proved to me you can bootstrap your own company on your off-time, and eventually make that transition to full-time with very little to no overhead (office space, equipment, employees). Also, it showed me you don't need $10M in funding to build a niche company serving an underserved industry.
But bootstrapping isn't easy. Cold calling people isn't easy, getting out there and grinding away on a consistent basis isn't easy. Having your own money invested with a "do or die" attitude isn't easy. Believing in your idea isn't easy. I'm not sure constantly having to raise money is any easier, but the difference is one one hand you're constantly working on your product and business which makes your business sustainable. On the other hand, I'm not sure constantly chasing investors and their money will really benefit your company in the long run.
Yeah it was devastating. Died of a massive heart aneurism. We were scheduled to meet that day and his wife called and told me what happened. I guess he died pretty instantly. It was so massive, it literally ripped his aorta in two.
The company he was working at came out in full support of his fiancé. The entire church was standing room only. They had some 150 people just from his office who knew him which was really heart warming. He was a really great guy, gone way to soon. He was still in his 30's, I was pushing 40.
When something like that happens, it really makes you think about your own mortality and if you're really living every day to the fullest, or just breathing. It really made me take stock and make a lot of changes in my life. I just don't take anything for granted anymore.
> But bootstrapping isn't easy. Cold calling people isn't easy, getting out there and grinding away on a consistent basis isn't easy.
VC funded business have all these same challenges. On top of them you need to somehow find time to raise money and endure board pressures often conflicting with your vision as a founder. I have two bootstrapped business behind me, and in the middle of a third, and although I could use more funding, I am also concerned about taking it. I think I would be overwhelmed with the additional complexity (perhaps I am not one of those "infinite business capacity" founders).
By definition if you are profitable you don't need external capital to exist and thus don't need vc money
Given two companies competing on the same problem, where one is profitable and one isn't, which is likely to come out on top? I'd argue it's the one that brings in the most money (via profits + funding). At early stages, funding will almost always be greater than profits. A profitable company that does not seek investment will eventually lose out to an unprofitable one that has funding because it will grow faster. At some point, the larger company will seek to optimize for profit, acquire the profitable company, or become the default company for the problem space (a near-monopoly).
The sad state of current affairs is that the market is optimized to promote dominance, not capital efficiency.
One can hope.
https://youtu.be/BzAdXyPYKQo
Your comment is unbalanced, because it only considers costs while ignoring gains, assuming that “cheap liquidity” also creates valuable gains.
Or perhaps your comment is tautologically true: liquidity is defined as cheap when the economic returns are strongly negative overall?
[1] “Cheap liquidity” is a terrible definition, because liquidity is predominantly considered a good thing in functioning markets, and cheap transactions are usually seen as good as well. I am assuming you mean “cheap liquidity” to mean “cheap money” (not a clear definition either) or that “raising funds is easy for startups and costs them relatively little”.
If you must have an elephant-winded reply, surely you most likely know perfectly well what was meant by "cheap liquidity" in the sense of accommodative monetary policy, low interest rates, and quantitative easing more broadly. As has been seen around the world, this was intended to maintain asset levels, liquidity in key markets such as mortgages and bonds, reduce unemployment, and keep investor and consumer confidence buoyed. What we received in addition to this partially successful set of policies however were significantly cheap debt encouraging record household and corporate debt levels, near zero savings rates incentivizing spending and penalizing retirement savings, artificially inflated asset levels with the twofold consequences of encouraging risk taking at unprecedented levels to achieve quick returns and of outsized housing prices keeping many renting or paying a very large portion of their income for basic housing, and a slew of overpriced tech companies and startups, many of which were scams and never going to be profitable, that probably won't survive the current, ongoing market slowdown. Zombie companies, record wealth concentration, market control and production being concentrated into increasingly fewer firms through aggressive acquisitions and mergers, and rampant inflation are all ongoing consequences of this "cheap liquidity." Many companies have borrowed billions of dollars to raise dividends and to initiate stock buybacks as is their won't during low interest rates. However, many of these companies operating in critical industries also expect government bailouts without any strings attached or consequences given. Please do be pedantic and explain how all of this is positive, perhaps in a 'tautologically' true way and balanced manner.
In short: no, going forward it makes the same amount of sense as it did yesterday and also 10 years ago. Prevailing market forces aren't what makes a good investment.
That said, VCs raised a ton of money the last couple of years and eventually it has to get invested.
However I can't help but feel the bubble will burst eventually and it will be a success to run a VC-backed startup for a few months without seeing it become a shitshow.
I can't complain though, salaries are skyrocketing in my area and getting a major raise is easier than ever. It must be scary for founders / owners though.
Not all founders are VC backed . It’s only the ones that are and never thought about how to turn a profit that should be scared.
This assumes there's another job waiting for you at the end of it. Raises and job offers remaining plentiful at the same time funding is drying up would require quite specific circumstances to continue - namely, that none of the companies driving today's offers depended on cheap money to get to where they are. If a substantial group of them did, there may not be much of a next round.
That said, a lot of what we see right now appears to just be crowd-following, a lot of what really happens will depend on if businesses see substantial customer exits, not just funding tightening. But if, say, there's a big enough startup crunch to hit AWS's bottom line in such a large way that they start laying people off, suddenly you can start seeing potential feedback loops pushing salaries down and difficulty of finding a job up.
I will say there's probably about to be a bunch of WEB3 crypto bros about to need a new job, to which I say good riddance; the days of them grifting people is probably over.
There has been a lot of FOMO from businesses into tech after covid. But most of these tech undertakings haven’t really been fully implemented or had a chance to show their impact.
Its entirely possible that a lot of businesses will realize that their massive new tech teams didn’t really translate into a healthier bottomline. Perhaps they overhired, overengineered, or simply didn’t have the culture or expertise or even the need to go all-in on tech.
If you're a startup engineer employed by such founders, why wouldn't that mean it's also scary for you?
https://news.ycombinator.com/item?id=31421716
And it wasn't just one shitty product either. But I still agree with you because most of our revenue came from large, well-known, public companies.