Start-ups hit Cash Crunch in Silicon Valley

http://online.wsj.com/article_email/SB10001424052970204450804576625043573078086-lMyQjAxMTAxMDEwMjExNDIyWj.html

by ahsanhilal • 15 years ago

78 69 15 years ago

online.wsj.com

ahsanhilal• 15 years ago

What is so interesting to me is how everyone was worried about a start-up bubble earlier this year to now where start-up financing is drying up. The whole notion of media speculation by noting short-term trends makes for some great gossip columns, but in reality do not provide real news to the reader. Because in the end this is not news just speculation more fitting for the Sun rather than WSJ.

tatsuke95• 15 years ago

I'm not suggesting it will play out this way, but financing drying up can be a step in the bubble bursting.

pg3• 15 years ago

If this is happening at all, it must be a very recent trend. There was no sign of valuations decreasing a month ago.

startupcto7• 15 years ago

Really? I've talk to several VCs that were very active previously and they all agreed that valuations are frothy and now is not the time to invest. Naturally valuations are going to be lower since that's what the buyer's perception of that market.

perokreco• 15 years ago

Well if the valuations are lower now, wouldn't that mean that now is the best time to invest?

startupcto7• 15 years ago

@perokreco just like the stock market, the best time for entrance is when the market's at rock bottom.

ahi• 15 years ago

"Nobody goes there anymore. It's too crowded." Unless I misunderstood what you meant by "frothy".

tansey• 15 years ago

Isn't that possibly a selection bias though? Isn't it possible that the YC brand is still trending up while the market is starting to correct? Or do you believe there is no such thing as a YC brand and every YC startup is judged independently, thus giving you an unbiased sample of the market?

Granted, Jessica's a YC alum, but presumably the further out from YC you go, the less the YC brand matters and the more things like revenue start to influence funding.

jlm382• 15 years ago

Based on my chats with other founders, I think the seed financing market is still pretty strong. Companies that should get funded are still getting funded, and I don't see that changing anytime soon. I wouldn't get too worked up on the scary headline...

In reply to another comment I saw, this applies even to non-YC companies.

9oliYQjP• 15 years ago

What are the chances that VCs are planting these sort of stories in order to try to scare startups into accepting deals with terms that are more advantageous to the VCs? Exactly one week ago, there was a story printed in the New York Times that read very similarly to this one.

rohern• 15 years ago

I do not think it is VC inspired, but this article does take a strange tone. "glut of Web start-ups"?

"A fundamental mismatch is now starting to show: While scores of Web companies were founded in recent years, there isn't enough venture capital to keep all of them going indefinitely."

Duh? Hasn't this been true since the dawn of time? What on earth is this observation?

pg3• 15 years ago

I wouldn't say they are consciously planting them. But when people are interviewed by reporters they often say that something they want to happen is already happening.

iamelgringo• 15 years ago

If a handful of YC companies are truly asking for a $9M or 14M pre... as rumors are flying around in Silicon Valley state... Then, I could see why VC's might say that the market is overpriced and frothy. Especially, since 6 months earlier, those same startups were priced by YC at a $300k pre.

No doubt YC has a phenomenal brand, and does a great job, and has had a couple of impressive rounds raised recently by AirBnb and DropBox.

But, there's a huge segment of the startup ecosystem that doesn't really show up on HN.

MassChallenge is graduating 125 startups next month. Their last batch, last summer has raised $100M in total.

Angel List has helped over 700 startups get funded in the past 18 months.

Startup Chile just seed funded 125, and opened applications open for another 100 startups today.

Then, there's 500 Startups, IO Ventures, RockHealth, AngelPad, StartX, BlockBox, TechStars, etc... And, a number of those startups have raised really impressive rounds, but they don't tend to get the local blog coverage or coverage here on HN.

Who knows... Here's hoping things slow down a bit.

pg3• 15 years ago

Yes, you're right, I mostly know about funding rounds raised by YC startups. It could be they are just unusually fortunate-- that YC's brand and connections are so powerful that they have insulated startups we fund from a downward trend affecting everyone else. But while I'd like to believe we had that kind of power, it seems unlikely.

Hitchhiker• 15 years ago

pg is right. If anything, companies that attack really difficult problems and aim to address them will emerge. In short, we can expect to see some unbelievable startups in the near horizon doing stuff that will be uncomfortable for many established players. They will focus on getting to profit way more than focusing on investors, WSJ, Techcrunch etc.

This is the time for giant killers.

" It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."

- Charles Dickens, A Tale of Two Cities

sajid• 15 years ago

@davemclure: "agreed we aren't seeing any lack of capital availability. maybe slight stepback in valuation by 10-20%"

There's an interesting discussion about this on Twitter:

http://twitter.com/#!/naval

Some other choice tweets:

@naval: "Early stages of decline, IMHO. Asks high, bid low, median deal not clearing as fast"

@naval: "Top tier deals still hot. But bottom falling out. Make your own sub-prime analogy..."

startupcto7• 15 years ago

It's disturbing to read XXXXX "has been burning through its $1.1 million quickly" and all they could think of is raising more money. Why about revenue? Did the idea of making money just drop off the face of the Silicon Valley?

That's just to show that inexperience entrepreneurs like Jessica ( not saying she's not a smart person ) has hype caught up with reality. It's not surprising that these entrepreneurs will fight a long and tough battle ahead.

chopsueyar• 15 years ago

George Santayana?

moses1400• 15 years ago

Go read Jessica's blog post from August - she advocated raising as much money as you could, etc. I asked the same question as you did on her blog but never got a response. What's wrong with you know making money to grow instead of trying to just grab vc cash.

startupcto7• 15 years ago

The only time it make senses to grab as much money as you can is when you're building to flip. I've always viewed raising as little as you can if you are serious about building a sustainable business.

Sol2Sol• 15 years ago

It would be interesting to know what these start-ups facing a cash crunch are all working on. Are they all chasing the same pie or are they a diverse bunch engaged in finding technology solutions for problems in a range of industries? I asked the question but I think I already know the answer.

jmjerlecki• 15 years ago

Lot of action on Twitter about this. Recent tweet from Chris Dixon: http://twitter.com/#!/cdixon/status/124297282274340864

joshuamerrill2• 15 years ago

I haven't observed web startups running into a "cash crunch."

That said, it does seem to me that the market is exuberant right now. There are business cycles that imply things will go the other way at some point.

I also want to point out that it's utterly specious to compare the 826 consumer web startups funded in the last two years against the 416 funded in 1998-2000. How much bigger is the total addressable market? ~200 million people in the late '90s vs. 2.1 billion today? And that doesn't include mobile.

Similarly with the comparison of VC fundraising. The capital requirements of an Internet business are completely different today than they were in the '90s. (Does anyone from Web 1.0 remember budgeting $150,000 for servers?)

alperakgun• 15 years ago

This last wave of startups has brought an incredible number of successful ones, and innumerable number ones waiting for monetization. As you said, the audience grew to billions of people. I remember in 2000, we were still trying to convince people that Internet is here to stay,to shop and to do business.

joshuamerrill2• 15 years ago

Similarly in mobile, where worldwide subscribers have grown from ~400 million in 1999 to over 5 billion today. The smartphone segment of that is still relatively small, but it's growing 100% year over year.

Meanwhile, today's largest Internet companies have five times as many users as the entire Internet subscriber base in 1999. My point is, startups that can profitably solve a problem have HUGE markets to sell to!

deepGem• 15 years ago

If a startup idea is really solid and has a potential for revenues, lets say in the short term ( < 1 year), do these market conditions affect funding such a startup idea. I mean, why would a VC or an angel not be convinced to invest in such an idea regardless of market conditions. Just trying to understand.

jpdoctor5• 15 years ago

Having been through the tech crash v1, I cannot stress enough: You must always have an alternative to VC financing or you are playing russian roulette with the availability of new money.

suking• 15 years ago

Profitability - but VCs don't give a shit about that - in fact one told me that right on the phone... Maybe things will change.

jpdoctor5• 15 years ago

That should not be surprising: Profitability makes VCs less necessary, which gives you leverage to walk away from a term sheet.

Google was a great example of that.

sudonim• 15 years ago

My take-away from the article was that at most the stupid money is drying up, and very likely the article is wrong.

Opportunities still abound to use technology to disrupt existing markets. If that can be demonstrated to people with capital, they will invest. Even better, if that can be demonstrated to customers, you don't need people to invest.

larrys3• 15 years ago

Indinero should consider pivoting.

Compete.com only shows them at 800 or so uniques per month. But more importantly it will be extremely challenging for indinero to pick up enough small business accounts to make this idea work. While it's possible that this company could be an acquisition for Intuit that's not going to happen with anything like the user base they have. And getting time strapped small business owners to see value in this service in my opinion (with many years selling to small business and owning several) doesn't seem likely at all.

Bartlet• 15 years ago

Citing Compete is dangerous territory indeed.

mlinsey2• 15 years ago

I don't have access to Indinero's data, but for my own startup, Compete's data is no more accurate than a random number generator. Both the absolute numbers and the shape of the graph have essentially zero resemblance to the real data.

larrys3• 15 years ago

If the sample is small then the data will be way off. That's the point. There is low traffic so there is nominal data.

That being said comparing compete data to hundreds of parked domains that get enough traffic to have a decent data sample yes I would agree the data is off. But not anywhere near enough to make any difference in the point I was making.

dangrossman• 15 years ago

What would Intuit want with them, though? Intuit already has Mint and their own service for syncing with all the banks. Indinero seems like a business branded Mint, which Intuit would be able to do themselves. It doesn't seem like there'd be much value in Indinero's brand or accounts either at this stage.

jen_h4• 15 years ago

Plus, Intuit's also using Fonzie to shill reverse mortgages to seniors these days: http://www.youtube.com/watch?v=CogQBgAFwI4

As a startup, I might want to steer clear of that particular borg unless prospects were truly dire.

ericabiz• 15 years ago

I own a popular blog, and Google Analytics shows 3x-4x the unique visitors Compete does. So, while I would say that yes, their stats tend to be inaccurate, that's still an alarming trend for InDinero.

(Update: I also compared to my startup's site, and GA shows 10x the visitors that Compete does. But still, even if off by a factor of 10, that's not great traffic for such a high-profile startup.)

jen_h4• 15 years ago

Using Compete as a sole-source gauging a site's success is a problem. As a data point, their estimate of a site I run is 500x off.

larrys3• 15 years ago

Which of your sites are you referring to? For heytell.com compete is showing 8,265 uniques. Certainly you aren't saying that that site is getting 4,000,000 uniques are you?

p2w• 15 years ago

bingo. the small biz segment is crazy expensive from a cust. acquisition standpoint. you have to raise a fair amount of dough to get a sales beach-head established. aside from intuit and the credit card cartels there aren't a lot of folks who have succeeded in getting scale there..

square may have a good run in that space, but they really are just an optimization play on the cc processing flow..nttawwt....

startupcto7• 15 years ago

Or you have to just stay lean and execute well.

tworats• 15 years ago

Interesting twitter thread on this between @davemclure, @pkedrosky, @msuster, and others, part of which is here:

http://twitter.com/#!/pkedrosky/status/124323109032574976

(how do you capture a series of related tweets, btw?)

Summary seems to be: the cash crunch is not happening (yet). McClure calls it "poor reporting".

Looks like TechCrunch has captured a bunch of the related tweets: http://techcrunch.com/2011/10/12/web-start-ups-hit-cash-crun...

chris_dcosta• 15 years ago

I can understand why startups need funding to get them off the ground, but I think this indicates that the focus might change away from "investing in tech that might turn into something" towards "only investing if there is a credible business model".

There's a fundamental difference between funding great people with innovative ideas, and investing in proven business models.

I'm not saying both can't happen to coincide in the same start-up, but there is some great start-ups with really promising technology, who haven't yet reached the stage where the business model should matter, and this would be like cutting them off at the knees.

I guess this is a consequence of bad economic times, moreso than the enthusiasm fading away. At least I hope it is.

nknight• 15 years ago

Whether the trend is real or not, I note two highly encouraging, closely related things:

1) A hell of a lot less money overall is being poured into "Dot Com II". Even if Dot Bomb II happens, it won't be as bad.

2) A lot more companies are being funded, logically with a lot less money each.

There might have been some "excesses" recently, but for once, people did learn.

Moreover, using valuations as a proxy for this analysis is kind of misleading. If you put a million dollars in a company and the company goes bust, you're out the million, whether it "bought" you 5% of worthless shares or 50%. It only matters if the company actually does well.

kokey• 15 years ago

I like watching the discussions articles like this generate. It reminds me of both the dotcom and property bubbles and before it was obvious these were unraveling how people defended their positions. The biggest thing I get reminded of is those who bought property on credit at high values with the intention to flip them quickly at a profit. This reminds me of those who raise a lot of money for a company in order to flip it to the next guy. These are the people who will attack any perceived coming decline the hardest. They will tell you that this time it's different because 1% of China is now online. That technology is here to stay and will always grow and so will the market, with mobiles etc. This is true, but so was it true during the dotcom bubble. We got the timing wrong, and we got the business models wrong for sure.

In reality, like after the dotcom bubble, there are startups that formed over the recent years that will survive all this and be as well known as the giants we have today that formed during the dotcom era. It's just that we'll have a decline of appetite to throw money at me-too ideas with unrealistic business plans apart from flipping the company to the next sucker.

Start-ups hit Cash Crunch in Silicon Valley

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