Completely, totally agree. I was just discussing this today with my business partner; I think that many people won't even know what to do with extra money if it is given to them. That's never happened before - there's always been the "well, we could use more servers" or "well, we could always hire more engineers" argument. Today, I think a lot of people are beginning to realize that 1) if you engineer your applications properly, and on the right platforms, you can scale your server demands along with your userbase/revenues; 2) more engineering/other assorted human capital won't necessary translate into better, more usable product.
I personally believe this is the beginning of a massive shift, and one that isn't even tied to the economy - but, of course, will be dramatically accelerated as a result of it. On the point of what happens to the startup community, however - I think it will be a lot harder to start a me-too company and get any traction; as a result, even with the lower cost of business, there will be fewer people able to enjoy the benefits. It's sort of like the rest of the economy - if you are the absolute best at what you do, it's a great time to be in business; for everyone else, the situation is precarious. Running on $3000 a month is great, but not if that means you're losing $3000 a month with no foreseeable way of recouping your investment.
Perhaps that's where the VCs will step in - sweep those flailing enterprises under their wings, pump greater capital/human resources into them, and try to brute-force them into successful enterprises. In effect, they would become the startup version of their private-equity peers; not a bad place to be, but again - the best will survive, the rest will die.
I don't think this is likely, because turning a kind-of-flawed tech business into a good tech business usually (though not always) requires a lot of technical work. I could imagine a collaboration between VCs and hackers, though, or just a group of savvy hackers, taking on this kind of role. Basically a larger-scale version of going around to my friends and saying "I think doing X would make your company better and I'll do it for 10%."
I would like to believe Paul's thesis, but in the back of my mind, why do I get the feeling "He is trying to scare investors into putting money"?!
Seriously, I think over-supply of start-ups will crash prices. Yes, there is no limit to wealth creation, but even so, it is easy to upper-bound wealth creation over, say, the next 5 years. We can say with confidence there won't be more than, say, $10 billion worth of web start-up acquisitions over the next 5 years (in total, not per year) - that was about the total in the last 5 I would estimate and I think I am being fairly optimistic here. Even that $10 billion would be parceled out in the 80-20 rule - a couple of YouTube home runs, a few singles and doubles, and the remaining mass of start-ups have to fight over a fairly small pot of gold.
My objection is consistent with economic theory: over-supply leads to serious price crashes, even when you make the favorable assumption (which is not exactly true in the start-up case) that in the long run, the over-supply can be absorbed.
If I were motivated only by self-interest, I should want later stage investors to drop out. That would leave seed stage investors like YC as the only game in town.
And incidentally, I don't see why it's easy to upper bound wealth creation over any time period. If everyone woke up tomorrow and started working twice as hard, what would limit their output?
Why would you want later stage investors to drop out? You have early, cheap equity; don't later stage investors reset the valuation and give you a shot at cashing out if you want? (I really don't know, I'm actually asking).
How many companies that get a series A round end up being successful? It seems like having that opportunity to decide if you agree that the company will keep growing or that you've made enough and would rather reinvest in the next round of startups would be nice to have.
It wouldn't be nice to the startups to do that, because it would send an alarming signal to the series A investors that would drive down the valuation and maybe even prevent the round from closing.
If everyone woke up tomorrow and started working twice as hard, what would limit their output?
demand and supply, as always
it is trivial for some hypothetical foobar corp to spit out twice as many widgets as they do now. but why would they? without viable demand, they indeed show a loss for their effort-spurt. as you heard the CEO of ford say today, oversupply was a major problem for the automakers. working twice as hard will kill you if you don't have twice the demand
the better question is how currency growth can be employed to stimulate demand over a period of time. growth comes from healthy inflation (3-5%). inflation is always a monetary phenomenon. this is why you will often hear opponents of "secured" currencies (gold etc) tell you that you can't get growth in an economy in the mid term unless you have a fiat currency.
What limits demand for cars is that people can't afford them, not that they don't want them. But since by my assumption everyone is working twice as hard, including the buyers, there should be demand to match the supply.
no, the demand does not manifest itself spontaneously. people just don't decide to wake up and work twice as hard, there has to be legit economic growth. there is a monetary role. its no coincidence that "healthy" economic growth conforms to healthy monetary growth. this directly addresses your point of people wanting cars but not being able to afford them. this demand could be trivially induced artificially by monetary means, but it would lead to unhealthy inflation
monetary cycles typically manifest over an eighteen month period. i.e. the increase or decrease in Fed policy would impact demand directly likely no less than a year. the only way to dramatically alter this...i.e. to actually get people to wake up and work twice as hard takes drastic currency action.
"What limits demand for cars is that people can't afford them, not that they don't want them."
Or that they already have them? In the U.S., isn't the ratio of eligible driving population to drivable autos approaching 1? So, twice as many cars would likely not find buyers and drive down prices a lot.
Sorry if I'm missing the bigger picture stuck on this specific detail.
Is it not the case that like a VC, a seed-stage investor maximizes his income when the startup he funds tries to hit a home-run? And are not home-runs much more likely if a VC invests in the startup?
Home-runs are more likely if VCs invest, but it is hard to say whether this is because VCs select the companies most likely to be big successes, or because their participation makes companies big successes. So it is very hard to predict what would happen if startups stopped taking VC.
"If I were motivated only by self-interest, I should want later stage investors to drop out. That would leave seed stage investors like YC as the only game in town."
But isn't the entire YC experience designed to get angels and VCs at demo day to make an investment in each company?
No, the main focus is on whatever the startup is building. Toward the end of each YC cycle we switch to talking about how to pitch to investors. But even there the way to be convincing is to be working on something genuinely great, and just tell the truth about it.
Why are you focusing on acquisitions? There are profitable companies that remain private, like 37signals (plus ones you never hear about because there's no point in talking about how much money you make) and also IPO, which is rare but potentially huge. Google alone is worth $86B, at that IPO was only 4 years ago, so your "$10B in the past 5 years" number is clearly incomplete.
If your thesis is correct, then these are really the ones that need focusing on. If the world is about to be be bombarded with startups, they can't all be bought or go to IPO.
The remaining startups will need to find a middle ground of some sort.
I don't think there's any limit to the number that could get bought. The upside that founders are willing to trade in exchange for safety is an opportunity that would call acquirers into being if they didn't already exist.
And why couldn't there be 100 or 1000 times as many public companies? Stranger things have happened in history.
It's a mistake to view political barriers as insurmountable. It's practically impossible to repeal the legislation, but maybe someone will open another liquid market for equities through some weird loophole. And remember that we are talking about social change in a timeframe of decades here. There is no telling what could happen.
Efficiency and reason tend to win in the end. There is much to be gained by having less bureaucracy and red tape for public companies, assuming that they are public companies of a different type than what they are today.
Private companies can issue dividends too - it's what we plan on doing if we're fortunate enough to get that far (1). M&A is for suckers (2) and IPOs aren't worth the trouble anymore unless you desperately need liquidity (e.g. Google) or you're not profitable.
1 - Assuming the capital gains tax remains similar to what it is currently.
If there's any truth to pg's claim that the paradigm is shifting and that talented people are increasingly likely to start their own thing than go work for a boss (and personally, I believe there is), then one would expect just the opposite of what you assume: more wealth should be created this way in the next 5 years than in the previous 5, because more value will be. And the productivity delta between startups and large companies will grow even faster, since the latter will be increasingly starved for new talent.
Edit: one might also expect current economic conditions to accelerate this process, since downturns are harder on inefficient players than efficient ones. It occurred to me the other day that for this reason, downturns are a healthy part of the economic system, kind of like forest fires in ecosystems.
If there's any truth to pg's claim that the paradigm is shifting and that talented people are increasingly likely to start their own thing than go work for a boss (and personally, I believe there is)
no there isn't. come back in five years, the top ten internet companies will control 95% of all traffic and 99% of all revenues. this market has almost zero friction...how is it that google has already sewn up over 80% of ad revenues on the web? where are all the mom-and-pop ad networks? they're on deaths door
by the same token anyone can build a PC...so what happened to the 10,000 little PC makers that used to be in every strip mall? today we have basically three pc makers....hp, dell, apple. so much for "low barrier to entry = high res"
I don't get this argument. Assign the top ten companies as high a percentage of whatever as you like: it won't prevent people from seizing opportunity to create value at a higher rate than large organizations are able to do. The point is that the two barriers that largely prevented talented people from doing so in the past - cost of entry and cultural beliefs - don't hold sway anymore.
The fact that some markets have matured and been commoditized hardly implies that there is no new value to be created.
The problem is, "low cost of entry" is just another way of saying "commoditization". Your argument depends on the assumption that because it's cheaper to produce a website than (say) a motherboard, it's therefore going to be easier to create a valuable website. That's wrong.
Ultimately, there's no strategic advantage to be gained by entering an industry where the barrier to entry is so low that everyone can do it. When you're competitor N+1 in a market like that, your only hope is to compete on efficiency (i.e. the Dell model), or novelty (i.e. the Apple model). Otherwise, you're just a guy in a strip mall, selling beige boxes; you might make a living from it, but you're not going to get rich.
In short, don't think of the PC industry -- think of the teriyaki restaurant industry. It's cheap to open a teriyaki joint, and anyone can do it, but unless you're going to serve gourmet teriyaki, or find a way to produce it for less (/shudder/), it's not the place that you want to be as an aspiring entrepreneur.
The woods are peaceful, and have a way of changing your perspective. I recommend them.
(Seriously: I am not a pessimist, but compared to some of the wild-eyed optimism that gets thrown around here, I may sometimes seem like one. My world view is that, given a choice, you should live life in a way that maximizes health, happiness and satisfaction, not money. Start a company because you want to work for yourself, not because you want to get rich -- because you probably won't.
If your whole goal when starting a project is to achieve fame and fortune, you will go through life in an almost perpetual state of disappointment. If, instead, you make choices that allow you to live a good life now, you'll be happier by definition.)
No I'm not -- my comments are limited to saturated markets.
Obviously, one of the ways to get rich is to create a new market and exploit it. But that's probably not as easy as building the better Teriyaki restaurant, judging by how rarely lucrative new markets emerge.
Low cost of entry means anyone can try any number of ideas with minimal investment. Commoditization means all of those ideas will be the same, thereby lowering the value of the idea.
There might be a limit, but it's much bigger than $10B in 5 years. Just in 2007, I counted up $29B of publicly announced web startup acquisitions. That easily justifies thousands of startups trying for a piece of that pie.
The startup I work for just hit profitability and we're basically giving up on funding. The offers that we were getting weren't good enough. We'll grow slower, but we won't get dilution unless it's really worth it.
What I'm curious about is that I thought the purpose of VC was not just to stay in business, but to grow fast. I'm pretty sure PG said in a previous essay or comment that if you skip out on VC and someone else takes it you can get overtaken or not be able to catch up to the market leader.
That's an excellent question. Begs these questions:
How much speed does the investment buy you? How much is speed really necessary?
Take the viaweb example: Supposedly, their advantage was in being first. A 6 month head start was a great thing to have when the concept of an online shop was 3 yrs old, the concept of an online shop builder 2 years old & the concept of an online online shop builder 1 year old.
But was it such an advantage? Sure it was from viaweb's perspective. That may have been what allowed them to sell. But what did Yahoo (the buyer) gain from this extra 6 months?
There are still companies making & selling online shop builders of various sorts. They are still largely built by startups. A 6 month head start is virtually meaningless in that market. Yahoo stores is older then any of the players, & it doesn't stand out really. It's a player with a piece of the pie in a pie industry.
Yahoo search on the other hand could have used a 6 month head start. If Google had left them a couple of years to realise they were losing search share, realise how important that was & do something about it, they mightn't have to sit in fear of a hostile takeover.
What am I saying? I think I'm saying that from the early perspective, it's difficult to know if moving first is important. Since when it is important, it is very important, acquires will buy early leaders so the problem is theirs not founders'.
On the other hand, I think it seems likely that the winner take most market is not going to remain the default target. That changes the game. If it's 1997 & you are building an online shop builder to be a serious player with a serious slither of the market in 2017, you can afford a six month break. If you expect a winner to be declared in 18 months, you need any speed available.
The catch 22 is: If speed isn't that critical, you need a different advantage against big companies. But then I think there is one somewhere. Most online shops are not made by huge companies.
It's true that it can be dangerous not to take VC if your competition takes it. But it's not so dangerous if the reason you don't take it is that VCs are saying no to everyone, because that implies your competitors are also less likely to get it.
Yes, but the question the essay is setting out to answer is: what happens when the VCs recover?
I think one of the last points I need to buy into the essay is that it isn't just the starting up costs which have gone down. The commoditization of computing in the cloud means that as long as you're profitable on a per-user basis the cost of scaling is also way down (although the amortized cost might be up).
The other danger is not being able to hire enough of the right people, but the number of people necessary does seem to be going down as the tools get better. The startup I'm working for has just decided to stop looking for funding and do our hiring more slowly over the next year, so I suppose we're a part of that trend.
Yes, but the question the essay is setting out to answer is: what happens when the VCs recover?
I've been thinking about this a lot recently. I think that the answer is, that VC's aren't going to be able to fund web based software startups as much. We just don't need the money.
Who does need the money? Green Tech, Biotech, hardware/embeded, enterprise software. Those companies can use the capital and might actually be willing to jump through the hoops necessary to IPO. VC's only really get paid off when companies IPO or get acquired for huge sums of money.
I think that this is going to be a water shed in Silicon Valley culture. One of the reasons that there are so many software engineers in the Valley, is because there have been a lot of VC funded startups and jobs since the first bubble in the 90's.
VC money is going to start chasing different kinds of companies, which means more green tech, biotech and hardware/embeded, enterprise software jobs. That means more electrical, genetic and chemical engineers and less software engineers in the area.
This in my mind is the interesting question ... does cloud computing provide the means for scaling. No doubt a web business can achieve profitability on much less than before, but the question of whether VC is needed is in scaling that business to something other than a small profit maker and/or an exit to a larger company.
Wealth is created when people take existing resources and transform them into something of higher value. Money is simply one very liquid type of input that a creative entrepreneur can use to create wealth.
If the marginal value of more investor capital to web entrepreneurs falls below the cost of acquiring and managing investors, then predictably web entrepreneurs will stop seeking capital. A more interesting insight, though, is that long before things get to that point, smart investors should be seeking to deploy their capital to ventures that can actually use the money to produce a better return. If capital is no longer the limiting reagent in web startups, then the money should go to places where money is the limiting reagent, and consequently has a higher value.
It's worth noting that Kleiner Perkins, as one data point, got out of the web startup business some time ago and has been investing in energy and biotech.
This is an interesting perspective, but it seems to be (potentially) true of one class of startup, but there are many others, requiring much large amounts of money to start, that will still rely on VC funding.
Software startups, specifically web startups, have been a favorite of VCs (for good reasons). If those startups no longer seek VC funding, will it trigger a renaissance in funding for other startup classes (e.g. semiconductors or hardware)?
Biotech, greentech and embedded systems are a few areas that look poised to keep growing and need a more significant amount of capitalization to get off of the ground.
but greentech will require more funding per instance than any VC firm will be able or willing to put up. show me the VC firm that is going to put over $1 billion into any single investment...when it comes to nuclear or hydrogen, a billion might only bootstrap the company. these industries are going to need massive amounts of funding. only one entity can do it - uncle sam, DARPA and the DOE
when it comes to nuclear or hydrogen, a billion might only bootstrap the company.
One of the only giant LBOs that isn't a disaster area is the buyout of TXU. I would expect VCs to hand it off to PE guys if they had an asset that generated a steady, regulated cash flow.
There's a lot more to Greentech than energy or hydrogen fueling. Also note that most people don't consider nuclear power green. (Arguments of cleanliness aside, it's just usually one of the thing that green campaigners disapprove of.) My co-founder tonight met with the founder of greenvironment.com and I know that they're certainly not working in the billion-dollar range.
There are probably in thousands of potential greentech companies that could achieve profitability on 10 - 100 million. Probably the best example here is solar, as many companies already have achieved profitability, but there are tons of opportunities in fuels, materials, building technology, vehicle technology, water supply, agriculture, construction, data centers, refrigeration, industrial processes, road construction, and so on. There might exist companies you'd need to pump a billion into, but why attempt it?
If you believe Al Gore, for $90MM you can build a giant New Mexico wind/solar farm that would supply enough electricity to power the entire US. (It's been a while since I saw the presentation so some details might be wrong but I am at least in the ballpark, especially regarding the price tag). Seems like 10 VC firms could easily get that sort of money together.
90 Million? The entire US? That's way off. I haven't seen the numbers, but that's like saying a car engine can get 1500% efficiency, or that a ten-year-old neighbor can bench-press 2000 pounds. It's just not in the cards.
A lot of people want to start companies now, VC or no VC. But IT and development jobs remain relatively abundant; someone who can make a credible run at a startup can also land a new job in less than a month. That may not remain the case, and job security could constrict the flow of talent into crapshoot startups.
I'm not very knowledgeable about this, but from the charts I remember seeing during the Sequoia "buckle-up" PowerPoint, isn't it an undisputed fact that there has been an unsustainable boom in VC? Investment in VC has been independent of it's marginal profitability declining due to traditional deals becoming fewer and the recession in general.
The shift in what is funded is no surprise by now. The only questions are 1)if the new bio/green tech startups will be successful, and what the role for VC will be in other sectors and 2)What will happen to the current crop of VC firms now? As flattering as it is that funding in VC has remained constant, is it still a wise investment?
I don't know what the answer to these questions are, but they're the ones that stick in my mind. On a positive note, at least one stressful part of the Internet startup process is in decline.
I agree with Paul's point, but it seems like the flip side of the equation is that most startups these days don't have the kind of big exits that internet giants like Amazon, Ebay, Yahoo and Google had (or even the mass market penetration that MySpace and Facebook have gotten for that matter). If a these new startups truly had the potential to capture huge markets, they would need the funding, because 3 guys in an apartment simply can't go after a $5bil opportunity. I think the phenomenon Paul describes is the result of 2 trends, not just one: 1) it's cheaper to start companies and 2) most startups are going after small markets (or whatever is left from big markets that bigger companies have already captured).
I think pg's right in regards to web startups. The only role I see for VC is in scaling sales and marketing. If you get your business to a point where you can spend $10 million on sales and marketing and turn it into $30 million, then taking VC makes a lot of sense. It gives you a lot of extra leverage.
I do hope VC thrives in other sectors - clean energy, hardware, automobiles, biotech - etc. If Kleiners-Perkins can make money off its CleanTech investments, the world will be a vastly better place.
Would be possible to build a google/facebook/linked-in all the way to profit without significant cash up front?
Any business relying on network effects is going to need upfront cash. Since these types of business tend to become the fund-making "homeruns", I think VCs will stick around, doing what they are best at - chasing the big hit.
TicketStumbler, like any other marketplace, definitely relies on network effects. And, Google arguably doesn't rely heavily on network effects. Google's value to me (in the short run) is unaffected by how many other people use it.
Sort of. We rely on how many providers we have, but even that has its limits once you have all the big ones (which we do). TicketStumbler is just as useful for one person as it is for 1,000.
You'd be right if you applied your statement to Stubhub or Ebay. We're more of an aggregator than a market place.
I'm pretty sure facebook was __started__ without significant upfront cash. Obviously they got to a certain point where they needed more, but the key thing is to have lots of momentum when you get there.
See, for example, digg.com. ~ $15 k upfront, $50k angel funding 6 months in, VC around month 10.
"we got a record number, up 40% from the same cycle a year before."
I agreed with much of this article, but not that line. A lot more people have heard of YCombinator since a year ago, so all else equal, you'd expect applications to rise over that period. So comparing the number of apps with the corresponding value from a year ago isn't a fair comparison.
Indeed, looking at http://siteanalytics.compete.com/ycombinator.com/?metric=uv we see that the number of unique visitors to ycombinator.com is up 3x from a year ago. But applications are only up 40%. To be fair, we probably can't expect applications to grow 3x since many of those visitors are international, or otherwise unlikely to apply to YC. But to make the statement pg wants to make, I think we need a better metric than raw growth in applications.
Perhaps I should have added that 40% was more than applications usually go up year to year.
I'm pretty sure, based on conversations with founders, that this spike in applications wasn't due to people learning of our existence for the first time. Most people we interviewed seemed to have known about us for a while.
I don't think application numbers are much correlated with News.YC traffic either. I think most people who come here are just looking for what people found at Reddit 3 years ago.
The interviewees might be a biased sample of applicants, though. I guess you could get some insight into that by looking at data on the age distribution of the the accounts that applied, and comparing that to previous cycles. But I suppose you have better things to do :)
"I'm pretty sure ... that this spike in applications wasn't due to people learning of our existence for the first time."
Maybe the spike wasn't, but my application was. I never heard of YC until three days before the deadline. It's a coincidence that I was already working on a new app so I had a reason to apply.
Wasn't it also the first cycle where "Startup Ideas We'd Like to Fund" came into play? That seems like a giant roadmap for anyone who may have heard about YC and never seriously considered it before.
I guess the test is: Were the pitches clustering more around those ideas?
I realized that might be a difficult question to answer.
One more test I can think of: If, as expected, the recession is still bottoming at the Spring deadline then the numbers (gross or percent change) should be comparable if that craziness is driving folks, in swarms it seems, to the founder path. However, if it was "Startup Ideas...", then, as a singular event, the growth should be closer to a normal rate if not an overall decline in gross from the Winter.
While mid-October was well after the "crash" there would have been no impact on founder's and their dreams. The types of founders that YC encourages are recent college grads who have not learned anything about economic cycles. They do not look at what is happening to housing, the stock market, the bond market, and decide to hunker down and get a job or go on to grad school.
Drawing conclusions from a single data point, proposals received in October, is as faulty as deciding the world is careening into climatic disaster based on drops in temperature measured in fractions of a degree C over the last few years.
"Maybe things will be different a year from now, if the economy continues to get worse, but so far there is zero slackening of interest among potential founders."
Partly. "High-Res" and "Artists Ship" were both things I started during the summer and didn't have time to work on again till after interviews. This last one I wrote a month ago and then had to sit on because it was supposed to appear in a print report.
I actually forgot about "Artists Ship." Then a few days ago I was talking to Paul Buchheit and he mentioned how great it was to be able to release code instantly at Friendfeed, compared to the delays he had at GMail. As we talked about the question I had this weird sense of deja vu, so I went home and looked around my hard drive, and sure enough there was this nearly finished essay. The write date was Aug 11, so I must have started it just before Demo Day and then forgotten it during the ensuing bustle.
1. investors are entering a period of risk aversion that is just starting, and will likely last a decade or longer.
2. the next market, energy tech, will require funding on levels very few if any VCs can deliver (billions per investment). this is why the govt is likely going to be more pivotal in funding energy work through the DOE etc
The current generation of founders want to raise money from VCs, and Sequoia specifically, because Larry and Sergey took money from VCs, and Sequoia specifically.
Excluding YC and the likes, I would have thought, by now, a lot of startups would want to raise money from angels that have formerly started startups -- there are tons of them around. That would be the #1 choice.
#2 choice would be the Founders Fund, Union Square Ventures, First Round Capital, Atomico, Ambient Sound Investments and the like.
Failing these, the #3 would be the Sequoia's, KPCB, Khosla Ventures, Benchmark, Accel's, Menlo's of the world.
Agree 100%. Although we were talking to some of the VCs in your 2nd bucket, we ended up going with #1. Our seed round is entirely angel funded, with one institutional player (#3 type) making an exceptional angel investment.
"The reason startups no longer depend so much on VCs is one that everyone in the startup business knows by now: it has gotten much cheaper to start a startup. "
Maybe I'm biased because I was in YC and it was mostly first-timers, but most of us don't even remember a time when it was a lot pricier.
Great post Paul. One thing to highlight is that traditional VCs, historically, don't make "venture level" returns in efficient markets.
Your examples highlight the cash efficiencies of early stage software/web based businesses from which VCs have been making a fairly vocal move away from for years. Similarly scaled efficiencies aren't yet being recognized in clean tech, new materials, networking hardware, semiconductors, pharmaceuticals and many many categories.
As for web and software, I think the lesson many firms are beginning to apply from this last wave is that there's an inflection point a company hits where its been sufficiently derisked and is poised to scale at which time the VC is more than happy to dip into their large funds and "pay up" in terms of valuations. Its what they did with Google and Facebook (among others). I think it will create a more bifurcated web/software venture environment than we have today but I don't see that as the death knell for the broader venture industry. Certainly a great opportunity for seed funds like yours and ours...bryce@oatv
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[ 4.4 ms ] story [ 307 ms ] threadI personally believe this is the beginning of a massive shift, and one that isn't even tied to the economy - but, of course, will be dramatically accelerated as a result of it. On the point of what happens to the startup community, however - I think it will be a lot harder to start a me-too company and get any traction; as a result, even with the lower cost of business, there will be fewer people able to enjoy the benefits. It's sort of like the rest of the economy - if you are the absolute best at what you do, it's a great time to be in business; for everyone else, the situation is precarious. Running on $3000 a month is great, but not if that means you're losing $3000 a month with no foreseeable way of recouping your investment.
Perhaps that's where the VCs will step in - sweep those flailing enterprises under their wings, pump greater capital/human resources into them, and try to brute-force them into successful enterprises. In effect, they would become the startup version of their private-equity peers; not a bad place to be, but again - the best will survive, the rest will die.
Seriously, I think over-supply of start-ups will crash prices. Yes, there is no limit to wealth creation, but even so, it is easy to upper-bound wealth creation over, say, the next 5 years. We can say with confidence there won't be more than, say, $10 billion worth of web start-up acquisitions over the next 5 years (in total, not per year) - that was about the total in the last 5 I would estimate and I think I am being fairly optimistic here. Even that $10 billion would be parceled out in the 80-20 rule - a couple of YouTube home runs, a few singles and doubles, and the remaining mass of start-ups have to fight over a fairly small pot of gold.
My objection is consistent with economic theory: over-supply leads to serious price crashes, even when you make the favorable assumption (which is not exactly true in the start-up case) that in the long run, the over-supply can be absorbed.
And incidentally, I don't see why it's easy to upper bound wealth creation over any time period. If everyone woke up tomorrow and started working twice as hard, what would limit their output?
demand and supply, as always
it is trivial for some hypothetical foobar corp to spit out twice as many widgets as they do now. but why would they? without viable demand, they indeed show a loss for their effort-spurt. as you heard the CEO of ford say today, oversupply was a major problem for the automakers. working twice as hard will kill you if you don't have twice the demand
the better question is how currency growth can be employed to stimulate demand over a period of time. growth comes from healthy inflation (3-5%). inflation is always a monetary phenomenon. this is why you will often hear opponents of "secured" currencies (gold etc) tell you that you can't get growth in an economy in the mid term unless you have a fiat currency.
monetary cycles typically manifest over an eighteen month period. i.e. the increase or decrease in Fed policy would impact demand directly likely no less than a year. the only way to dramatically alter this...i.e. to actually get people to wake up and work twice as hard takes drastic currency action.
this is all undergrad economics
Or that they already have them? In the U.S., isn't the ratio of eligible driving population to drivable autos approaching 1? So, twice as many cars would likely not find buyers and drive down prices a lot.
Sorry if I'm missing the bigger picture stuck on this specific detail.
(Of course, if you think about this carefully enough, the distinction between "more" stuff and "better" stuff falls apart.)
But isn't the entire YC experience designed to get angels and VCs at demo day to make an investment in each company?
The remaining startups will need to find a middle ground of some sort.
And why couldn't there be 100 or 1000 times as many public companies? Stranger things have happened in history.
They would need to be smaller or the economy would need to be bigger. Ties in with your other essay.
Efficiency and reason tend to win in the end. There is much to be gained by having less bureaucracy and red tape for public companies, assuming that they are public companies of a different type than what they are today.
1 - Assuming the capital gains tax remains similar to what it is currently.
2 - http://is.gd/2Fla
http://news.ycombinator.com/item?id=304790
Edit: one might also expect current economic conditions to accelerate this process, since downturns are harder on inefficient players than efficient ones. It occurred to me the other day that for this reason, downturns are a healthy part of the economic system, kind of like forest fires in ecosystems.
no there isn't. come back in five years, the top ten internet companies will control 95% of all traffic and 99% of all revenues. this market has almost zero friction...how is it that google has already sewn up over 80% of ad revenues on the web? where are all the mom-and-pop ad networks? they're on deaths door
by the same token anyone can build a PC...so what happened to the 10,000 little PC makers that used to be in every strip mall? today we have basically three pc makers....hp, dell, apple. so much for "low barrier to entry = high res"
The fact that some markets have matured and been commoditized hardly implies that there is no new value to be created.
Ultimately, there's no strategic advantage to be gained by entering an industry where the barrier to entry is so low that everyone can do it. When you're competitor N+1 in a market like that, your only hope is to compete on efficiency (i.e. the Dell model), or novelty (i.e. the Apple model). Otherwise, you're just a guy in a strip mall, selling beige boxes; you might make a living from it, but you're not going to get rich.
In short, don't think of the PC industry -- think of the teriyaki restaurant industry. It's cheap to open a teriyaki joint, and anyone can do it, but unless you're going to serve gourmet teriyaki, or find a way to produce it for less (/shudder/), it's not the place that you want to be as an aspiring entrepreneur.
(Seriously: I am not a pessimist, but compared to some of the wild-eyed optimism that gets thrown around here, I may sometimes seem like one. My world view is that, given a choice, you should live life in a way that maximizes health, happiness and satisfaction, not money. Start a company because you want to work for yourself, not because you want to get rich -- because you probably won't.
If your whole goal when starting a project is to achieve fame and fortune, you will go through life in an almost perpetual state of disappointment. If, instead, you make choices that allow you to live a good life now, you'll be happier by definition.)
Obviously, one of the ways to get rich is to create a new market and exploit it. But that's probably not as easy as building the better Teriyaki restaurant, judging by how rarely lucrative new markets emerge.
They are not the same thing.
A good list (including more than web) is at http://startup.partnerup.com/2008/01/02/2007-acquisitions-we...
What I'm curious about is that I thought the purpose of VC was not just to stay in business, but to grow fast. I'm pretty sure PG said in a previous essay or comment that if you skip out on VC and someone else takes it you can get overtaken or not be able to catch up to the market leader.
How much speed does the investment buy you? How much is speed really necessary?
Take the viaweb example: Supposedly, their advantage was in being first. A 6 month head start was a great thing to have when the concept of an online shop was 3 yrs old, the concept of an online shop builder 2 years old & the concept of an online online shop builder 1 year old.
But was it such an advantage? Sure it was from viaweb's perspective. That may have been what allowed them to sell. But what did Yahoo (the buyer) gain from this extra 6 months?
There are still companies making & selling online shop builders of various sorts. They are still largely built by startups. A 6 month head start is virtually meaningless in that market. Yahoo stores is older then any of the players, & it doesn't stand out really. It's a player with a piece of the pie in a pie industry.
Yahoo search on the other hand could have used a 6 month head start. If Google had left them a couple of years to realise they were losing search share, realise how important that was & do something about it, they mightn't have to sit in fear of a hostile takeover.
What am I saying? I think I'm saying that from the early perspective, it's difficult to know if moving first is important. Since when it is important, it is very important, acquires will buy early leaders so the problem is theirs not founders'.
On the other hand, I think it seems likely that the winner take most market is not going to remain the default target. That changes the game. If it's 1997 & you are building an online shop builder to be a serious player with a serious slither of the market in 2017, you can afford a six month break. If you expect a winner to be declared in 18 months, you need any speed available.
The catch 22 is: If speed isn't that critical, you need a different advantage against big companies. But then I think there is one somewhere. Most online shops are not made by huge companies.
I think one of the last points I need to buy into the essay is that it isn't just the starting up costs which have gone down. The commoditization of computing in the cloud means that as long as you're profitable on a per-user basis the cost of scaling is also way down (although the amortized cost might be up).
The other danger is not being able to hire enough of the right people, but the number of people necessary does seem to be going down as the tools get better. The startup I'm working for has just decided to stop looking for funding and do our hiring more slowly over the next year, so I suppose we're a part of that trend.
I've been thinking about this a lot recently. I think that the answer is, that VC's aren't going to be able to fund web based software startups as much. We just don't need the money.
Who does need the money? Green Tech, Biotech, hardware/embeded, enterprise software. Those companies can use the capital and might actually be willing to jump through the hoops necessary to IPO. VC's only really get paid off when companies IPO or get acquired for huge sums of money.
I think that this is going to be a water shed in Silicon Valley culture. One of the reasons that there are so many software engineers in the Valley, is because there have been a lot of VC funded startups and jobs since the first bubble in the 90's.
VC money is going to start chasing different kinds of companies, which means more green tech, biotech and hardware/embeded, enterprise software jobs. That means more electrical, genetic and chemical engineers and less software engineers in the area.
http://www.crunchbase.com/company/fansnap
http://www.crunchbase.com/company/tickex
If the marginal value of more investor capital to web entrepreneurs falls below the cost of acquiring and managing investors, then predictably web entrepreneurs will stop seeking capital. A more interesting insight, though, is that long before things get to that point, smart investors should be seeking to deploy their capital to ventures that can actually use the money to produce a better return. If capital is no longer the limiting reagent in web startups, then the money should go to places where money is the limiting reagent, and consequently has a higher value.
It's worth noting that Kleiner Perkins, as one data point, got out of the web startup business some time ago and has been investing in energy and biotech.
That may be their PR, but they're very much still investing in web startups. Here's a list of their investments: http://www.crunchbase.com/financial-organization/kleiner-per...
Why a total amount of money spent online should increase? More and more players are competing for the same or diminishing pie slice.
Google can buy only so many startups after all.
Software startups, specifically web startups, have been a favorite of VCs (for good reasons). If those startups no longer seek VC funding, will it trigger a renaissance in funding for other startup classes (e.g. semiconductors or hardware)?
One of the only giant LBOs that isn't a disaster area is the buyout of TXU. I would expect VCs to hand it off to PE guys if they had an asset that generated a steady, regulated cash flow.
Al Gore has over $100M. If he isn't doing that....
It all comes down to capital requirements. If you require a lot of money to get going, you need VC.
I think if you read pg's essays for a while, you mentally do that substitution automatically.
The shift in what is funded is no surprise by now. The only questions are 1)if the new bio/green tech startups will be successful, and what the role for VC will be in other sectors and 2)What will happen to the current crop of VC firms now? As flattering as it is that funding in VC has remained constant, is it still a wise investment?
I don't know what the answer to these questions are, but they're the ones that stick in my mind. On a positive note, at least one stressful part of the Internet startup process is in decline.
I do hope VC thrives in other sectors - clean energy, hardware, automobiles, biotech - etc. If Kleiners-Perkins can make money off its CleanTech investments, the world will be a vastly better place.
Any business relying on network effects is going to need upfront cash. Since these types of business tend to become the fund-making "homeruns", I think VCs will stick around, doing what they are best at - chasing the big hit.
You'd be right if you applied your statement to Stubhub or Ebay. We're more of an aggregator than a market place.
See, for example, digg.com. ~ $15 k upfront, $50k angel funding 6 months in, VC around month 10.
I agreed with much of this article, but not that line. A lot more people have heard of YCombinator since a year ago, so all else equal, you'd expect applications to rise over that period. So comparing the number of apps with the corresponding value from a year ago isn't a fair comparison.
Indeed, looking at http://siteanalytics.compete.com/ycombinator.com/?metric=uv we see that the number of unique visitors to ycombinator.com is up 3x from a year ago. But applications are only up 40%. To be fair, we probably can't expect applications to grow 3x since many of those visitors are international, or otherwise unlikely to apply to YC. But to make the statement pg wants to make, I think we need a better metric than raw growth in applications.
I'm pretty sure, based on conversations with founders, that this spike in applications wasn't due to people learning of our existence for the first time. Most people we interviewed seemed to have known about us for a while.
I don't think application numbers are much correlated with News.YC traffic either. I think most people who come here are just looking for what people found at Reddit 3 years ago.
The interviewees might be a biased sample of applicants, though. I guess you could get some insight into that by looking at data on the age distribution of the the accounts that applied, and comparing that to previous cycles. But I suppose you have better things to do :)
Maybe the spike wasn't, but my application was. I never heard of YC until three days before the deadline. It's a coincidence that I was already working on a new app so I had a reason to apply.
I guess the test is: Were the pitches clustering more around those ideas?
One more test I can think of: If, as expected, the recession is still bottoming at the Spring deadline then the numbers (gross or percent change) should be comparable if that craziness is driving folks, in swarms it seems, to the founder path. However, if it was "Startup Ideas...", then, as a singular event, the growth should be closer to a normal rate if not an overall decline in gross from the Winter.
Care to make a guess which way it will go?
Drawing conclusions from a single data point, proposals received in October, is as faulty as deciding the world is careening into climatic disaster based on drops in temperature measured in fractions of a degree C over the last few years.
(http://paulgraham.com/divergence.html)
I actually forgot about "Artists Ship." Then a few days ago I was talking to Paul Buchheit and he mentioned how great it was to be able to release code instantly at Friendfeed, compared to the delays he had at GMail. As we talked about the question I had this weird sense of deja vu, so I went home and looked around my hard drive, and sure enough there was this nearly finished essay. The write date was Aug 11, so I must have started it just before Demo Day and then forgotten it during the ensuing bustle.
1. investors are entering a period of risk aversion that is just starting, and will likely last a decade or longer.
2. the next market, energy tech, will require funding on levels very few if any VCs can deliver (billions per investment). this is why the govt is likely going to be more pivotal in funding energy work through the DOE etc
Excluding YC and the likes, I would have thought, by now, a lot of startups would want to raise money from angels that have formerly started startups -- there are tons of them around. That would be the #1 choice.
#2 choice would be the Founders Fund, Union Square Ventures, First Round Capital, Atomico, Ambient Sound Investments and the like.
Failing these, the #3 would be the Sequoia's, KPCB, Khosla Ventures, Benchmark, Accel's, Menlo's of the world.
What do folks on HN think?
Maybe I'm biased because I was in YC and it was mostly first-timers, but most of us don't even remember a time when it was a lot pricier.
Your examples highlight the cash efficiencies of early stage software/web based businesses from which VCs have been making a fairly vocal move away from for years. Similarly scaled efficiencies aren't yet being recognized in clean tech, new materials, networking hardware, semiconductors, pharmaceuticals and many many categories.
As for web and software, I think the lesson many firms are beginning to apply from this last wave is that there's an inflection point a company hits where its been sufficiently derisked and is poised to scale at which time the VC is more than happy to dip into their large funds and "pay up" in terms of valuations. Its what they did with Google and Facebook (among others). I think it will create a more bifurcated web/software venture environment than we have today but I don't see that as the death knell for the broader venture industry. Certainly a great opportunity for seed funds like yours and ours...bryce@oatv