R.I.P. Good Times: The Startup Bubble May Be Coming to an End in 2012

http://techcrunch.com/2011/11/26/josh-kopelman-i-think-2012-will-look-more-like-2008-than-2011/

by dylangs1030 • 15 years ago

33 63 15 years ago

So we went from "DOOOM!" in 2008 to funding grilled cheese and daily deals in 2011 and now back to "DOOOM!" in 2012, bouncing between the throttle and the brakes faster than most startups can even prove out their thesis? This seems like an opportunity for a contrarian VC betting against the others, dodging the irrational exuberance but getting better terms when founders need the money badly.

ahoyhere• 15 years ago

It's a pendulum cycle. Boom & bust cycles always are.

What happens is a couple people strike it rich, then a bunch of followers try to do the same thing, it may work for a little while but not for long, and when the stupidest, most inefficient people have got in on the act, there's no money left for them AND they do things that end up looking terribly ridiculous. After all that, even the smart players have thrown in lots of money and/or time, they look at how much they spent and go "hmmmm, that's a lot, better calm down." Then there's a bust.

By "smart" and "dumb" I am referring to: investors, buyers, and founders. The labels apply to them all. VCs don't have infinite money. The two or three companies who do the most acquisitions also do not have an unlimited appetite or money, and they also tend to shut down or wreck most of what they buy.

So at that critical point, everybody lays low for a little while. Then they forget, and start all over again.

Nobody remembers that this is exactly what happened the last time.

knowsnothing613• 15 years ago

It's part of the built to flip mentality of the VC world. Look @ Groupon for godsake. The sustainability of its business model is dubious, but they still rushed the IPO, so they could flip it to ma & pa. But ma & pa aren't buying, so Investment Bank clients that got in during the roadshow are unloading en mass, and has sunk the share price below the IPO price, despite the low float.

web VCs fund companies they believe they can flip. It's also why they are biased towards late stage funding, since they have a higher chance of flipping over their positions.

michaelpinto• 15 years ago

I hope so because that means that it's the best time to do a startup!

dextorious5• 15 years ago

You mean the world doesn't need tons of teams of young geeks working with RoR, Closure, Mongo, Mustache and other wonderful technologies to solve non existing "social" problems? I'm shocked!

(Addendum: I'm starting to think that having a startup is the "I'm gonna be a film star/hip hop singer/rock guitarist" equivalent for the geek youth).

viandante4• 15 years ago

You are being provocative, ok. But there is plenty of space for start up innovation in many sectors, just not any more social apps, agreed on that.

dextorious5• 15 years ago

I agree about all those other sectors.

It's just I'm tired of seeing all those "social" startup stories, and the thousands of posts in the intertubes typically from some aforementioned startup employee/founder using all the half-baked or ill-suited technologies du jour, and posting something better suited for Comp Sci 101 as a huge discovery.

That's what I deserve for scouting all over for some relevant Python/Ruby/Web dev etc articles, I guess.

(disclosure: I work in a startup, but one developing, gasp an actual product (!), sold to the customer etc, employing several PHD guys to code in good ole C and implement new hardcore algorithms for our class of problems.).

itmag8• 15 years ago

What are those other sectors?

Not an insult btw. I genuinely want to know.

cperciva2• 15 years ago

The number of seed-stage fundings is outpacing series A fundings.

Can someone explain to me how this could possibly ever not be the case? Even if 99% of seed-funded companies go on to raise a series A, that's still "seed-stage fundings outpacing series A fundings".

Maybe I'm not understanding what Schonfeld wrote here?

mkuhn• 15 years ago

I think he means that more money is spent on seed-stage deals than on Series A deals.

With seed deals being much smaller than Series A deals that definitely has implications (e.g. there probably will not be enough money around to get a Series A for all those Seed funded startups that get to that next stage)

cperciva2• 15 years ago

Ah, if the word "number" was supposed to be "total value" that would definitely indicate a problem.

ed209• 15 years ago

Maybe it's just getting cheaper to build and maybe monetizing is getting easier too, so it's possible that companies are profitable much earlier and don't need a series a?

haffi112• 15 years ago

So, where will the next bubble be?

mkr-hn6• 15 years ago

Probably automation in the physical world. Watch for the gold rush when the first commercial self-driving cars roll off the assembly line.

itmag8• 15 years ago

I am intrigued and wish to know more of your ideas.

What are some ideas for automation of the physical word? I am always looking to feed my creativity algorithms with new domains.

geogra4• 15 years ago

I'm pretty darn excited for an automated car to drive me to work and then go back to my garage. Or to drive me home after too much to drink at the bar. Or to take me between major cities at like 200 MPH on robo-freeways.

tjmc• 15 years ago

For sure. I'd pay $1000 for a machine that perfectly ironed my shirts. I hate ironing

dmk23• 15 years ago

STATEMENT

  RIP Good Times! DOOOOM! GLOOOM! The Skies Are Falling!

TRANSLATION

  I Need an Excuse to Knock Down Your Valuations and Terms!

dylangs1030• 15 years ago

Perhaps, but alternatively, there has been a huge influx of startups lately. There is probably credence to the view that many of those startups have had heavily inflated valuations - that can't go on indefinitely.

namidark• 15 years ago

Or maybe that new "X" sharing app that does nothing new doesn't need $ 2million in seed funding

itmag8• 15 years ago

Well, good riddance.

Is it just me, or is money being thrown at a lot of crap these days? As long as it has a cutesy name and is based in the Valley, it gets bukkaked with millions of dollars by eager investors.

All this cash floating around also seems to lead to startups sucking up all the best talent. Do coding geniuses really need to be working on photo-sharing apps, as opposed to, say, rocket programming?

I did an interview with Danish madman and super-entrepreneur Morten Lund once. One of the things he told me is that a recession is the best time to start a business: the table is cleared and the posers don't want to work hard to make it. More room for the truly dedicated.

dextorious5• 15 years ago

"""All this cash floating around also seems to lead to startups sucking up all the best talent. Do coding geniuses really need to be working on photo-sharing apps, as opposed to, say, rocket programming?"""

Good point. But for all the "how to hire the best" articles moving around related to startups, I don't see many "coding geniuses" there, and have yet to see a significant contribution to OSS or CompSci coming from a "social" startup.

Mostly fresh-out-of-college, no-real-world-experience, lets-use-what's-shiny types...

Someone like Brad Fitzpatrick runs circles around these guys.

sunchild• 15 years ago

The problem, in part, is that VCs want naive, unfettered young people. The VC model has sort of evolved into a kind of talent betting pool.

If you're sophisticated enough to have a proven track record, you're probably also more sophisticated about retaining equity and control.

lucisferre3• 15 years ago

Rocket programming? Really?

Regardless, one persons useless website is often another person's invaluable tool. Not to say there isn't a lot of waste out there, but I doubt everyone getting hard to work on "rocket programming" will solve that problem. We'd just have a lot of crappy "rocket programs".

mgkimsal2• 15 years ago

"One of the things he told me is that a recession is the best time to start a business: the table is cleared and the posers don't want to work hard to make it. More room for the truly dedicated."

We've been in recession for years now, just not specifically in SV, where most of this stuff takes place. But people latch on to it, and many people think they're "starting a business in a recession" right now.

itmag8• 15 years ago

I'm in Sweden so my knowledge of the situation comes from inferring a general Zeitgeist via online reading on this and other sites. So take my remarks with a few grams of salt.

That's interesting btw, care to tell me a bit more?

gmac• 15 years ago

All this cash floating around also seems to lead to startups sucking up all the best talent. Do coding geniuses really need to be working on photo-sharing apps, as opposed to, say, rocket programming?

I'm not sure your counterfactual is well-chosen. Round these parts (UK), bright physicists/engineers/compscis seem to mainly end up in finance, trying to stay on the right side of zero-sum-game financial jiggery-pokery.

Photo sharing may not be the best possible outlet for their talents, but at least it has some social value.

OoTheNigerian• 15 years ago

This bubble prediction babble is a good example of the saying "a broken clock is right twice a day"

Bubble pundits have to accept the fact that they will not be able to predict the bursting of a bubble. Assuming there is one.

Even the title says "I think"

z92• 15 years ago

What I have learned from share market is that when people predicts the future, that prediction is always accounted for in the present. Therefore things don't go up or down when that time arrives.

Unless of course when the prediction itself changes. And that's when things start to move again -- not in the future, but at present.

asanwal2• 15 years ago

Folks have been predicting this throughout 2010 as well as 2011. The arguments are generally devoid of data, i.e., "based on what we see".

First, let me say, there will eventually be a decrease in funding levels primarily because the VC asset class is raising less money and since they can only invest what's in their bank accounts, it has to come down. When will that happen? Not sure.

Here's some thoughts based on data we collect.

- 2011 is shaping up to be banner year for VCs ($30B+ invested) - Seed investments whether by VCs, VCs & angels or just angels are growing like mad

If you think of investing as a funnel, i.e., more seed stage companies get funded than Series A than Series B, etc, it def looks like the funnel has gotten a bit fat up top, i.e. a lot more seed deals than Series A, B, etc money down the pipeline.

So if anything, the Seed thing has been overdone. At the same time, many of those Seed companies can become real businesses on just the Seed round, i.e., SaaS companies (just look at UserVoice's second small round raise as a case study). Or these companies get acquired for $20-$50 million. Which is not a great return for a mega-VC who only care about billion dollar opportunities, but can be quite good for a micro-VC. I'd imagine Dave McClure and others like 500Startups would be happy hitting those all day long.

That said, there is an overabundance of seed backed companies and many of these will be orphaned and die. That's not a bad thing. It's the market working.

At the same time, there are a lot more investors at the Seed stage and a lot more can pile in so the trend might continue for a while as everyone hopes to fund the next Facebook, Pinterest, Quora, etc (pick your soup du jour). This is only natural as there are a lot more folks who can invest at the $1 million level than the $10 or $100 million level.

As to whether later rounds will decrease in # and a bubble exists, that can really only happen when the buyers (investors) decide not to pay crazy valuations. I'm not sure what the 'forcing mechanism' will be that will drive this. There is not a long list of public internet companies that will set the "real price" for these companies and cause a correction. So without the forcing mechanism, it comes down to investors agreeing that valuations in private markets are too high. Not sure there is anything out there that would cause an across-the-board shift like that. Of course, some investors might get more conservative but there looks to be no dearth of cowboys investing right now.

Finally, this could all change if the stock market and general economy go into a tailspin. If I could predict that with any precision (or if anyone could), we're in the wrong business.

Some links for those interested in some data -

Startup Cash Crunch? Hardly - http://www.cbinsights.com/blog/venture-capital/startup-cash-...

VC on track for $30B in 2011 - http://www.cbinsights.com/blog/venture-capital/quarterly-ven...

kls2• 15 years ago

Another thing to consider are the built-to-flips. We never had that in the .com era. Where companies where built with the expectation that they would be bought out by a larger player. That eco-system is enjoyed by all parties in it. The large players are actively encouraging this form of company and are purchasing the ones that rise to the top. This means that public exits do not have to be the only strategy for a company and creates a secondary market of purchases therefore offloading some of the risk that a company in the end must become profitable or be able to exit via public funds. The dynamics of the market have changed and many that are claiming a bubble look at the market with the same dynamics that the .com bust had. It's hard not to do, given that it was pretty traumatic for everyone involved but there are different forces at work today and the market has become more resilient. I think it will eventually bubble, but I personally think there is runway left. I am more concerned about the capital flight from the Euro and it trying to find a place to nest than I am with any of the news out of the Vally.

dextorious5• 15 years ago

"""Folks have been predicting this throughout 2010 as well as 2011. The arguments are generally devoid of data, i.e., "based on what we see"."""

Actually, "what we see" is the very definition of EMPIRICAL DATA.

What you probably wanted to say was "devoid of any theory" etc. But no theory has yet untangled the economic prediction thing --too many parameters.

A little manual pruning of the empirical data by someone with experience in the trenches is better than some vague theory or a bunch of stats.

asanwal2• 15 years ago

I don't disagree with you (fully), but unfortunately, hand-wavy predictions about a bubble appear to be the norm. If someone is predicting a bubble, share the empirical data points that led you to that conclusion.

kls2• 15 years ago

This is not a bubble, I think a lot of people are yelling fire because they want to cool the market, but this is no where near a bubble. When the stupidest ideas are being funded after a meeting with 2 guys and a sketch pad, with no product and no company, then we are in a bubble. Wait until the Euro collapses and all that capital flight happens, then we may see a real bubble like the one we saw in the .com boom or worse the kind of money that hit the housing boom.

I think the wise people in the Vally see the capital influx coming and are trying to cool the sector to ducks some of that capital. We have already killed the goose that laid the golden egg once before, I think we are just trying to ensure that we are not to attractive to the stupid money.

There are fewer and fewer places for it to run to and tech is one of the last bastions, but it cannot sustain the kind of fiat capital that has been created, we are too weak in our recovery from the last exuberance. That being said, this is not a bubble, it can and has gotten a lot crazier than this. This is what healthy was before the bubble.

moocow01• 15 years ago

"ideas are being funded after a meeting with 2 guys and a sketch pad, with no product and no company, then we are in a bubble"

Unfortunately from a few interviews I went on in SV a few months ago, more than a couple of times this scenario was bragged about by the founders when asking how they started. It was a huge turn off to me but I guess it impresses other candidates. (Ironically though one of those companies was a small social games company that just got acquired.)

mkr-hn6• 15 years ago

I submitted an article from 2004 that gives some context to the start of the latest boom: http://news.ycombinator.com/item?id=3282354

saalweachter• 15 years ago

I'm probably just an egotist, but I really think that any drying up of the venture capital is really just going to hurt venture capitalists.

An engineer -- here's the egotism coming -- is a money machine. She may be more effective working together with other force multipliers (marketeers, venture capitalists, a good CEO), but fundamentally a good engineer creates value all by herself. If the VC isn't along for the ride, less value may be created less quickly, but the engineer is still going to get hers and the VC not.

I can think of one example of an engineer who just didn't seek funding and created a whole bunch of value (notch); does anyone know of a good example of a startup which was forced to bootstrap without significant funding (on account of a burst VC bubble) and survived to stick it to 'em?

davidhansen• 15 years ago

does anyone know of a good example of a startup which was forced to bootstrap without significant funding (on account of a burst VC bubble) and survived to stick it to 'em?

I don't know. We started up in the shadow of the dot com bust, so there was not really any funding available for ecommerce companies. That said, we never actively sought any VC money, so it's incorrect to say we are an example of what you're seeking.

suivix2• 15 years ago

Most engineers are male, why do you use 'she'? Also it distracts from your other points.

mkr-hn6• 15 years ago

Because someone would argue the opposite (that engineering needs to be more welcoming to females) if saalweachter used he instead.

d3vani• 15 years ago

better question is, why do you find it so distracting?

pg• 15 years ago

"The number of seed-stage fundings is outpacing series A fundings."

That is always the case, just as it is always the case that series A fundings outpace IPOs.

steve8918• 15 years ago

Reading the comments below, it completely sounds like the Housing Bubble discussions between 2004 and 2008. You had the doomsayers saying for years that "house prices are too expensive, there's going to be a crash" and the momentum chasers saying "no, this time it's different, there's not enough land, house prices are here to stay."

In the comments, you have the same sentiment of "It's too frothy, there has to be a pullback", or "There won't be a pullback, this time it's different than 2008."

After surviving the dotcom crash and the 2008 financial crash, it definitely seems like we are headed towards a global recession in 2012. No matter what path we take, whether Europe can save itself or not, the best case scenario is going to be a sharp pullback in European economic output. Worst case is that the euro falls apart and the entire global financial system is rocked. My guess is that Germany won't allow this to happen because they will suffer disproportionately, so they will allow the issuing of Eurobonds.

So that being said, economic growth will slowdown worldwide. I think the US is the best place to be, given its sluggish-but-not-catastrophic growth.

BUT it's not the US's GDP that matters, it's the investments of American rich people that matters in terms of funding VCs. If rich people take a hit because a majority of their investments get whacked, then they will stop investing in venture funding. There's a pretty strong correlation between VC funding and the stock market. Already the markets are down pretty hard since they topped in June. If you remember the dotcom boom, it was during a massive bull market in the stock market. As well, after the crash of 2008, the nadir of the markets being March 2009, there's been almost a doubling of the stock market since then, so by 2011 lots of rich people got very, very rich and are willing to spread out their investments.

However, since June, the US markets are down 15%. The German market is down almost 30%, Chinese markets down 23%, Indian markets down 22%, Brazil down 25%. There are a lot of rich people around the world that don't feel as rich as they used to. If this trend continues and spills over to 2012, these rich people will definitely pullback on discretionary investments, the top of them being venture funding. So if you want a gauge on how VCs will behaving, I'm personally going to be looking at the stock market to see how it's going to behave.

R.I.P. Good Times: The Startup Bubble May Be Coming to an End in 2012

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