3,048 karma · joined April 5, 2013
The use of the term "market cap" is especially ironic given Sam's recent post on "financial misstatements"[1]. If founders are expected to use financial terms accurately and appropriately, shouldn't investors be expected to do the same?
1. There's a broader trend of LPs moving to invest directly in alternative asset classes. There are a number of reasons for this. FOMO is one in this particular market.
2. Because the market is so hot, folks are more interested in ground-floor (seed stage) investments that are harder to get exposure to in traditional venture funds.
You must also realize that optimizing these direct investments is a PITA. Newbie direct investors are going to learn a lot of harsh lessons when it comes to pro rata rights in this market, assuming they even ask for and get them.
> “I find [YC’s] batches are always the best of any accelerator class or demo day that I attend,” says the LP, who asked not to be named. “I’ve found a number of opportunities that were as exciting as any we’ve pursued.” YC’s endorsement, he says, is “a very important signal to us.”
An admittedly more cynical reading of this:
* Family office LP has very limited experience investing in privately-held tech companies.
* LP relies heavily on signals like "YC participant" because LP brings no unique investing insight to the table in this area.
The vast majority of LPs have no business investing directly in startups because they have no ability to add value to the individuals and institutions they represent, are incapable of performing adequate due diligence, and don't have the bandwidth or experience necessary to manage these kinds of investments.
Whether or not the current turmoil in the public markets is the start of something bigger or not, LPs itching to make direct investments strongly suggests that we are at or close to the peak in the current tech investment cycle.
That said, it doesn't really matter whether you refer to your financial projections as projections, goals, etc. What I would observe is that the growth in revenue you targeted and presented to investors apparently has not materialized. At the same time, based on this[1], it appears your burn has doubled in less than a year, and your quarterly burn appears to be significantly higher than what you projected here[2].
This is a quintessential demonstration of what I wrote above: it's far easier to spend money in anticipation of growth than it is to actually grow revenues. I would add that it's usually doubly difficult for venture-backed companies to cut spending, even when it becomes clear it's the fiscally prudent thing to do, because it sends all sorts of negative signals to the investors you're going to be asking to continue buying into your growth story.
[1] https://medium.com/@DanielleMorrill/is-my-startup-burn-rate-...
[2] http://www.slideshare.net/DanielleMorrill/mattermark-1st-ser...
What incentive do founders have to "fix" this when investors aren't doing adequate due diligence?
Pure hubris.
> The main problem is that companies stop doing what they were doing during YC—instead of relentlessly focusing on building a great product and growing, they focus on everything else. They also work less hard and less effectively—the peer pressure during YC is a powerful force.
No, the problem is that it's difficult to build a large company. High growth is easy in the beginning when you're going from 0 to $100,000, but try going from $100,000 to $100,000,000. "Fake work" isn't what prevents the vast majority of companies from doing this.
This is a curious statement because time and materials arrangements don't guarantee maintainable code either. Poorly managed, T&M is more likely to incentivize billing than it is quality work product.
The keys to a successful outcome here, regardless of engagement structure, are:
1. Contract with an experienced freelancer with whom you've discussed the importance of code quality and maintainability. Screen out candidates who can't speak intelligently about these topics and can't point to real-world examples of quality, maintainable code they've delivered.
2. Establish clear requirements before the engagement begins and incorporate them into your contract. A fixed-price contract can actually provide you with more leverage in this regard, as you can tie milestone payments to code reviews. Of course, you must perform these code reviews and take them seriously.
You heard a human recently?!? All I've been getting for the past couple of years are incoherent emails and text messages with all sorts of weird smiley faces.
Every time I go out I see lots of humans but they're all staring at these strange devices that you used to be able to talk into.
Smart, patient entrepreneurs can take advantage of this.
Let angel and VC-backed companies validate markets, and pursue the markets they vacate after the broader crunch occurs.
> My point was: if you buy Google stock, you're paying Google multiples on top of venture investments' multiples. That's exponentially costlier.
Google's venture investments are negligible compared to Google's overall enterprise value. I doubt they are a real factor in the stock price and in fact, it's possible that you're getting exposure to the venture arm for free.
> The venture investments made by Google have the same liquidity constraints...
You're missing the point. When you invest in Google, you can exit your position at any time.
> ...and you could argue Google's SG&A are much more expensive than 2% management fee (not sure about the performance fees, though).
Google's overhead is associated with a business that generated more than $65 billion in revenue last year. The management fees paid to your friendly neighborhood VC are not.
When you invest in a new venture fund, you're not buying anything at book value. You're providing capital and trusting that the folks who are going to deploy it will be able to achieve a return consistent with your goals. Most funds charge an annual fee of 2% of assets under management and investors are locked in for at least 10 years, so there's no free lunch. Given that the multiples in the private market today are even more pronounced than in the public markets, investors in venture funds are effectively paying significant premiums too.
Bottom line: if you like the core Google business and want some exposure to the craziest ideas in Silicon Valley, Alphabet might be attractive. It's definitely not comparable to a venture fund but still might be as close as your average retail investor will ever come to a Bay Area venture fund. Who knows, it could become the next-gen Idealab if Larry and Sergey have their way.
Many freelancers are coders and temporary employees.
There are freelancers who have the skills and experience necessary to become members of the consultant class, but there are many freelancers who don't. Just because you can code doesn't mean you're a business problem solver or entrepreneur, or want to be.
If I need to hire somebody to knock out some code for a few months, I'm not going to hire somebody who is pitching himself or herself as a panacea for all of my business problems. Solos should be thoughtful about the personal and professional implications of their positioning. It's one thing to want the financial rewards of consulting, but it's another thing to deal with the day-to-day demands.
> What about the first month they make money?
Mattermark has nearly $300,000/month in revenue and several dozen plus employees. It's not newly hatched, and it's a fairly straightforward B2B play in which customers pay for access to a service.
At what point would you suggest that metrics like rent to revenue become meaningful? 10 years in? When its revenue reaches some meaningless, arbitrary amount? When NASA announces the discovery of extraterrestrial life?
Just look at slide 12 at http://www.slideshare.net/DanielleMorrill/mattermark-2nd-fin.... Less than a year ago this company was projecting $400,000 in monthly revenue by June 2015. According to this post, it generated less than $300,000.
This is precisely why you pay attention to metrics like rent to revenue. "We're VC funded and the rules don't apply to us" doesn't work forever, and it often works for far shorter than expected when growth in revenue starts to lag projected growth in revenue and your spending has been based on projected revenue.
But one shouldn't assume that the angels that have flooded the market are all making real money. Even many of the minority who have seemingly enviable portfolios are primarily sitting on unrealized gains, and many of those have a very sizable portion of those unrealized gains concentrated in a very small portion of their portfolios.
Additionally, there are a lot of barriers to success as an angel even if you are good at picking winners. From position sizes (small) to pro rata rights (ignored or too expensive to exercise), a lot of things can conspire against optimal returns even when you invest in good companies.
My sense is that a good deal of angel capital in the Bay Area, particularly that which is frequently invested in party rounds for the most attractive early-stage startups, is recycled from folks who have done well at a previous company (or two or three) and are having fun with their monopoly money.
2. Rent to revenue is even more important for unprofitable startups. Investor-funded startups are at high risk of failure because it's far easier to spend money in anticipation of growth than it is to actually grow revenues. What's more, your investors are likely going to encourage this because they're playing a game in which a few big winners will hopefully make up for a lot of losers.
Just Google "Zirtual" for a recent, ugly example of what happens when you spend too much and investors refuse to bail you out.
As San Francisco startups like this one[1], which has an all-in cost of $146,000/year per employee and an insane rent to revenue ratio of 15%, demonstrate, investors are largely footing the bill for the explosion in residential and commercial real estate costs that the boom they're funding has helped create.
For comparison, according to Cushman & Wakefield, law firms, many of which have space in expensive buildings with prestigious addresses, spent about 6% of gross revenue on their real estate in 2014.
I hope the investors who are funding these kinds of startups have some exposure to real estate funds that own commercial space in the Bay Area because that's where a lot of their money is going.
First-mover advantage is overrated, and in the tech industry, you'll notice that many if not most successful companies were not first-movers. Often, first-mover advantage is a disadvantage.
In even the most established markets, you can find meaningful niches and adjacencies that the big players aren't tapping. Many times, the untapped adjacencies can expand the overall size of the market significantly (see Airbnb).
This is hardly a list of the best companies, and a few of them don't support the argument:
1. The search/portal market was already significant when Google launched. Companies like Yahoo, Excite, Lycos were already public traded at the time, and were some of the hottest issues in the tech space. So it's no wonder Andy Bechtolsheim cut Larry and Sergey a check for $100,000 before a corporate entity even existed.
2. When Facebook launched, Friendster already had millions of users and had received a $30 million acquisition offer from Google. MySpace, which was created by people who saw Friendster's popularity, was founded by people trying to capitalize on the social networking hype that was already present in 2003.
3. Even Airbnb is hardly a post child for Sam's argument. Homeaway, VRBO and Couchsurfing were all well established when Airbnb launched.
For most entrepreneurs, "start out with an idea that doesn't sound very good" isn't likely to turn out very good.
First, if Dan's thesis is right (Facebook "is valued at a small fraction of what it will be in 5 years"), you don't need to work at Facebook to profit. You can invest in FB shares, or even long-dated options, and let folks like Dan do all the hard work.
Second, the real question for Dan is how much of the dollar value of his equity compensation he should hold in FB shares. If Dan has $50,000 in investments, virtually all of which consist of FB shares, that's problematic, even if he believes strongly in his thesis.
> You should think of the grant as cash compensation. If you decide to not sell the stock immediately, this is equivalent to taking out a portion of your paycheck to buy stock in your company.
This is spot on. That doesn't mean that employees shouldn't retain some of their shares, but they should consider whether they'd purchase the same number of shares if they had a pool of cash to invest.
"Earnings" is a measure of profit. Zirtual claims it had an $11 million annual revenue run rate but, as we now know, was not at all profitable.
It's amazing that in startupland folks still can't seem to use basic accounting terms properly, especially in situations particularly sensitive to their misuse.
Huh?
http://www.wsj.com/articles/venture-capitalist-sounds-alarm-...
http://www.bothsidesofthetable.com/2014/09/28/what-is-the-ri...
http://avc.com/2014/09/burn-baby-burn/
http://www.businessinsider.com/sam-altman-email-startup-burn...
> And at the end of the day… “burn” is what happened to Zirtual.
This is, for lack of a better word, lame. Burn didn't happen to Zirtual, like it's some sort of disease that lurks in the exposed brick walls of overpriced SoMa startup offices, secretly coming out to infect innocent startups when employees leave for happy hour.
Burn is something people manage and are responsible for. Clearly, Zirtual was run by people who couldn't competently manage the company's burn. To put it another way, incompetent management happened to Zirtual.
> The reason we couldn’t give more notice was that up until the 11th hour, I did everything I could to raise more money and right the ship.
Based on the description of Zirtual's finances (more money going out than coming in) raising more money would not have righted the ship. Unless Zirtual found a way to operate profitably, an infusion of cash would have only delayed the inevitable.
I think a good number of early-stage startups in Silicon Valley are operating with less runway than many of their employees would believe, but waiting until the 11th hour to do right by your employees in the hopes that investors will essentially bail you out to make payroll is in my opinion inexcusable.
What this demonstrates is that many startup investors know little more than what they read in the press. Lots of people assume prominent startup investors are smart, diligent and informed but the reality is that many angels know little more about the companies they've invested in than the suckers who were eagerly buying toxic mortgage-backed securities in 2007.
You have an $11 million run rate business now. It's just extraordinary. I think the investment community has probably missed this investment. I think they really should be more focused on it. I consider you like a sleeper. At some point the investment community is going to look at this like, well this could be like, similar to an Uber or Lyft or one of these companies that really scales because there is such a huge opportunity to arbitrage between the cities and the work and when you get into the specialized stuff, it's going to be game over.
It gets even worse towards the end, with Calacanis going full talk-up-my-investment mode, gloating about Zirtual's revenue and margin numbers, and the founder's abilities.
That was Friday. Today on https://twitter.com/jason:
1/sorry to hear about @Zirtual shutdown today, as a fan of the service & as an investor. I don't speak for the company & have limited 411.
2/we have @marenkate booked for @TWistartups for this past Friday for weeks, I found out about issues on Saturday while out of the country.
3/wouldn't have suggested being on the show Friday if I knew they were shutting down Monday; confused at a $11m a year business imploding.
You just can't make this stuff up.
This creates an environment in which you have a good number of ambitious people becoming founders and raising capital even though they don't have the experience or ability to run a real business.
Markets like the one we're in can be frustrating because there's so much chaff you have to filter through, but that doesn't mean the entire market is based on engineered hype.