The Upside of a Downturn in Silicon Valley

http://www.nytimes.com/2015/08/27/technology/the-upside-of-a-downturn-in-silicon-valley.html?hpw&rref=technology&action=click&pgtype=Homepage&module=well-region&region=bottom-well&WT.nav=bottom-well&_r=0

by edw519 • 11 years ago

101 26 11 years ago

nytimes.com

danieltillett• 11 years ago

Is there any sign yet of a funding pullback? I am not raising funds, but for those of you who are, are you seeing caution or hesitation from investors?

fredgrott• 11 years ago

see the Calacanis Squawk podcast

shostack• 11 years ago

Reading headlines these days, I can't help but feel this is yet another article trying to foretell the end of the good times.

The market had a correction! This is the end!

People realized China's numbers were not totally accurate! This is the end!

Housing prices in the Bay Area have reached ridiculous levels (again)! This is the end!

Everyone seems to want us to hit another downturn to be proven right. My fear is that once the media engine revs up, it can in fact create a self-fulfilling prophecy.

dandanisaur• 11 years ago

I completely agree with what you said. Media is putting the fear on you. It'll turn into.. 'Whether you think you can or you can't, you're already right.'. People will fail simply because they think they will.

Just to note: Facebook just had 1 billion unique users in 1 day (2015). The year 2000 only had 350+ million INTERNET USERS.

It doesn't help that we are reminded by our predecessor's to watch out for the impending doom (something that might not have been expected). In the scheme of things, the context of where technology/internet was at the time was completely different to now.

Tloewald• 11 years ago

This article actually seems to be suggesting that a downturn would be a good thing for Silicon Valley because it would help sort the wheat from the chaff, and allow the wheat to get resources more cheaply.

tragic• 11 years ago

The point is not whether or not there will be a downturn. In any sector, there will be a downturn ... eventually. That's just capitalism. (And it could be triggered in the short term by something like the small reasons you mock - it is merely not wise to bet your shirt on one or the other being the exact proximate cause.)

The point according to OP is that the start-up scene has become soft and flabby, and lean times, whenever they arrive and for whatever reason, will toughen it up - and for those who can survive the initial chill winds, lower costs of labour, real estate etc will provide a boost.

bsder3• 11 years ago

Series A's are currently a bitch.

Angels who want to hand you half million seem to be everywhere. $100+ million seems to be all over the place because there are so few companies to invest in.

God help you if you want $2-$10 million because the VC community sure won't.

And then they wonder why there are so few $100+ million companies to fund.

rowborg• 11 years ago

This has been ongoing for a while now (see http://fortune.com/2015/03/11/seed-surge-series-a-crunch/) and is due to the commoditization of computing infrastructure and the size of the internet audience, which allow very small teams to generate significant levels of revenue/traction. VCs now expect more at a Series A because so much more is now possible.

pchristensen• 11 years ago

Yes

ryanSrich• 11 years ago

Series A is very very difficult.

gluecode• 11 years ago

My partners and I created a startup during the last severe downturn. It was indeed the best time since resources ended up being cheaper for us and we got a longer runway. We ended up never needed to raise capital and had our exit in 2012.

copsarebastards2• 11 years ago

This is a paradox of invention, as well as of investing: Bad times feed good ideas, which in turn lead to good times, which breed complacency, waste and lots of bad business plans.

These days when I discover a new startup, I basically assume they're riding investment money for personal income until proven otherwise. The amount of frivolous startups right now is ridiculously high.

I also think this shows the idiocy of the idea that capitalism rewards productivity and efficiency. The majority of these startups are doing stuff that nobody uses now, probably nobody will use in 5 years, and that flat out won't exist in 10. But that's not stopping lots of people from going out and making their fortunes doing this. Meanwhile we can't raise the minimum wage when in fact at least the bag guy at my grocery store is providing a real service that people benefit from.

jinushaun• 11 years ago

The "market" has realized and optimized for creating frivolous startups that act as extended resumes in order to be acquired. It's really sad. :(

The speed at which startups are created and subsequently acquired is so fast now that, as a user, I have no faith any more in signing up for the "next big thing" and giving them my data. The site will shut down in a few months anyway…

eruditely• 11 years ago

These days when I discover a new startup, I basically assume they're riding investment money for personal income until proven otherwise. The amount of frivolous startups right now is ridiculously high.

It's supposed to be an alternate way of working if we follow pg. You're making it seem like it's a scam when it's a different paradigm of working that happens to have the optionality of massive growth potential.

There's nothing frivolous about it as long as it's legitimate and can accomplish what it's setting out to do.

copsarebastards2• 11 years ago

It's supposed to be an alternate way of working if we follow pg. You're making it seem like it's a scam when it's a different paradigm of working that happens to have the optionality of massive growth potential.

In many cases, it is a scam. Ponzi schemes could also be rebranded as a different paradigm of working. And if you get out at the right time, a Ponzi scheme also has the opportunity of massive growth potential.

99% of startups aren't actually doing anything. They're just putting shiny interfaces on vapor.

There's nothing frivolous about it as long as it's legitimate and can accomplish what it's setting out to do.

It's not legitimate, because it's not setting out to do anything except make money. Most startups aren't producing anything. I'd use the phrases "lipstick on pigs" or "turd polishing", except pigs and turds are actually useful. Most startups actually produce things worse than pigs or turds: they produce nothing of any value. And of the startups which are actually solving real problems, many startups actually are are solving problems for people I don't care for, and are actually actively harmful.

Yes, you can make money and be "successful" as a startup, but to quote Randall Munroe, "I never trust anyone who's more excited about success than about doing the thing they want to be successful at."

I'll give you one thing: people's intention when they start a startup isn't usually to openly steal people's money; they usually at least fool themselves into thinking they will be providing some real utility. But that doesn't make much difference to people whose retirements will take a hit when the tech bubble bursts.

briholt• 11 years ago

I always assume startups are riding investment money for personal income until proven otherwise.

rdlecler1• 11 years ago

Let's be clear. There are four tiers of companies. The Googles and Facebooks of the world, that have the ability to pay for talent at whatever cost. The Ubers that get billions in venture funding who need to compete with this limited talent pool dollar for dollar. Then there is the 1%ers that are backed my major VC firms that are having boatloads of money dumped on them. They're trying to get good talent and they need to pay for it. and then there is the rest of us. every nickel is our prisoner. Founders pay themselves no more than they need for rent and food, and often less, and their employees make 2x-3x what they do because the market will pay 4x-5x. This is a winner takes all talent war. Companies that spend a lot of money are forced to, and this will mean that margins at big companies like Google will have to come down. But this is what the market is demanding. There is still tremendous growth opportunities In tech. Almost by definition technology implies growth.

adventured• 11 years ago

You missed the radical majority of all existing technology companies: moderately successful companies that have taken little to no venture capital, and operate all over the US and the world. Most have been in business for at least three to five years, are profitably self-sustaining and require no major venture capital. Most are growing modestly, and are easily able to keep the lights on and pay real salaries. They have ~$1 million to ~$50 million in sales.

Those companies make up nearly the entire technology industry across the US on a number of companies basis.

Start-ups (both big and small) are the minority and so are Googles/Facebooks.

humanrebar• 11 years ago

Founders pay themselves no more than they need for rent and food, and often less, and their employees make 2x-3x what they do because the market will pay 4x-5x.

I don't get that attitude, to be honest. If you were making chicken sandwiches, would you buy discount chicken to cut costs until you "made it"? Would you hire under-qualified or substandard cooks?

OK. You'll "offer" equity to take up the slack. So you're basically requiring your employees to be investors in the company. What is the realistic ROI for the difference in their incomes compared to the market rates? If it doesn't realistically add up to at least 10% APY, isn't the whole setup a bit dishonest?

Well, maybe you're different. You're a guaranteed unicorn, so 0.1% of the company is a huge pile of money. I hope you're right. If you even get a modest buyout after that kind of deal, you're walking away with a nice chunk of change and your employees end up in a big net negative, financially.

So props to the founders who run the math after sub-billion dollar buyouts (most of them) and at least make up the difference to the investors (employees) they over-promised and under-delivered to.

"You don't understand. My pet-messaging flea collar slash social network would never get made if we didn't structure things this way!"

You're probably right. I guess that would be a shame. It still sounds like either a flawed or dishonest business model to me.

jondubois• 11 years ago

I think the current economic environment has been distorting pretty much every aspect of the software industry. I think that the next tech bubble will be both an economic crisis and a technological crisis.

Too much engineering effort has been wasted on overhyped ideas/technologies. This is true for both the consumer and b2b/high-tech sectors. Everybody is focused on growth and nobody is willing to invest time to refactor their increasingly complex systems/achitectures (no one cares about running costs) - So instead, we just cram all this inefficient mess inside Docker containers, hook up hundreds of expensive and unecessary external services to it and then we legitimize this huge pile of expensive junk by calling it a microservices architecture!

... And then a startup will hire a team of 100 engineers to maintain something which should otherwise only require 10 engineers.

The Upside of a Downturn in Silicon Valley

Related Stories