Startups Once Showered with Cash Now Have to Work for It
nytimes.com
nytimes.com
For lean startups with a strong business model and profitability, or a clear and viable path to profitability, washing out the junk startups will only help.
Otherwise, companies without a promising business model flaming out is definitely a good thing.
In other words, "We're getting less deals to look at, so we're looking at the ones we have more closely."
In boom times, VCs cut short their due diligence because if they dawdle or seem too skeptical, they won't get to be in the next Theranos round.
In jittery times, VCs check everything because otherwise they will be in the next Theranos round.
I saw an echo of this with mortgage appraisals. In the housing bubble, we got refinanced one time with an appraisal that didn't involve stepping inside the house. The appraiser just took two photos from the street and didn't even ask me if the home was habitable.
After the housing finance crack-up, the next appraiser not only walked through every room, he clicked dozens of photos of everything from our smoke detectors to the straps holding on the hot-water heater. It was almost like having a crime-scene photographer pay us a visit.
I might be misreading things, but I think that has made people more conservative about what scales of exits are eventually attainable.
If cash stops being a cocaine-tier obsession for these guys, we might have to compete with them. Sad.
Major cashflow changes tend to be disastrous for most companies, it's just not that easy to realign everything. If you're up against a competitor that has raised a lot easy money and now needs to show results, you should be happy to see this.
Been there, done that, it sucked.
The people that are used to easy VC money (without growth or a business model) will probably wash out of the ecosystem. I doubt they're going to reshape their business structure to be a bootstrapper competitive one.
Conventional reasoning is that decreased VC investments is actually good news for bootstrappers, as it winnows down the competition of people offering unsustainable unit prices with outsized markets. If everyone is forced to seek fast profitability, bootstrappers are the most experienced at it.
I don't actually think that will happen much: typically the structural costs associated with VC-backed companies is too high (e.g. SF rents) to even get close to what bootstrappers can do.
Where did the VCs get the money from [1][2]? If they didn't break a sweat, they won't hesitate to throw it around without asking questions about profitability.
EDIT: People who are downvoting are trying to hide the truth of the market, whether it's a bubble or not, this is the source of the money and in turn, your livelihood ;)
[1] Probably from banks who got it from the gov't who got it for cheap, right?
[2] http://agilevc.com/blog/2014/10/29/where-do-venture-capital-...
[1] http://blogs.wsj.com/digits/2014/08/04/banks-lure-fintech-st...
Banks invest in VC the same way that auto manufacturers do: to suss out potential innovations and/or to have inside access to future disrupters. They don't do it for the returns.
This is a constantly overlooked factor in what's been driving the VC climate for the past few years. "Cheap" money (in the form of low interest rates) pushes more money into riskier positions, and the VCs have to give that money to someone. It's no coincidence that the correction is coming at the same time as interest rates finally rising again.
Plus, are you accounting for tax benefits and other ancillary forces?
Good VCs usually maintain the same investing standards in good times and bad. But during boom times, there are more VCs, and many of the newcomers aren't particularly good at it.
When money is cheap, it is much more likely that they will be able to find someone controlling money who believes it is. When money is expensive, the intersection of [people who have money] x [people who believe CoolApprfy is a good company] is much smaller. For companies that are actually good companies, this intersection will likely (although not always; good companies fail to get funded in challenging fundraising climates all the time) still be non-zero. For companies that are bad companies, it's much more likely they will be unable to find anyone who believes they are good companies.
Markets are made up as individuals, but they don't behave like individuals. An effect does not have to be observable on the individual level for it to be observable in the behavior of the market as a whole.
That's why you're being downvoted. You're attempting to take a controversial position without any logical proof. The "truth of the market" doesn't support your conclusion.
edit: Wright->Wilson, thanks gist.
You mean Fred Wilson.
You are getting downvoted because while your point about money coming easily might be correct, your link for where money comes from directly contradicts your point.
VC LPs are overwhelmingly people who (a) have a financial incentive to see good returns and (b) are qualified investors. They include family offices, mutual funds, and sovereign wealth funds.
A big part of the latest outsized valuations are actually startups which route around VCs by directly taking investments from so-called "dumb money"—investors who might actually be pretty good at managing a basket of investments, but are not qualified or experienced enough to directly established suitable valuations for startups.