[HN Gopher] Extend your runway, cheap money is over
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Extend your runway, cheap money is over
Author : drx
Score : 179 points
Date : 2022-05-23 16:46 UTC (6 hours ago)
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| jjcm wrote:
| Question about investing in companies - given cheap money is hard
| to find now, from an investor side does it make more sense to try
| and invest in companies now than it did before, as I assume you'd
| get more for your money?
| djbusby wrote:
| Every deal is independent.
|
| In short: no, going forward it makes the same amount of sense
| as it did yesterday and also 10 years ago. Prevailing market
| forces aren't what makes a good investment.
| flyinglizard wrote:
| You'd be entering the market at risk that the company you
| invested in: a. Won't be able to find follow on investors for
| its next rounds b. Will be encountering customers that want to
| freeze or downsize their spend
|
| That said, VCs raised a ton of money the last couple of years
| and eventually it _has_ to get invested.
| freediver wrote:
| None of the recent advice on the topic mention 'having a
| profitable business model'. Raising money is not the method, it
| is a method to extend your runway. Designing a sustainable
| business is another one.
| [deleted]
| jjoonathan wrote:
| What do you mean? They all mention it, usually towards the
| start, and it's definitely the core idea under discussion.
|
| In this one, I'd point to the title ("Extend your Runway"), and
| if you really picked at those nits I might fall back to
| "Default Alive."
| freediver wrote:
| Well among other things, a sustainable business does not ever
| need to "extend its runway" because it is infinite by
| definition (sustainable meaning profit > 0) and "default
| alive" is a mode it operated in since inception.
|
| All advice in these articles applies to the other kind of
| businesses ("makes $10k and spends $100k/month...") that
| likely got in that position by what in some cases is
| basically a ponzi scheme of fund raising, which was
| completely fine until just a few days ago and then they
| realized it's not going to work forever. This then resulted
| in a widespread panic and all this advice about "how to
| survive" and suddenly realizing that you should also "make
| the product amazing". These should be default rules to live
| by for any business, is all that I am saying.
| jefftk wrote:
| It's in the article, from "Let's look at a hypothetical seed-
| stage startup with $2M in the bank right now. It makes $10k a
| month and spends $100k a month" through "Make the product
| amazing, go to your customers' offices, do crazy things that
| don't scale, whatever it takes."
| freediver wrote:
| Being in a position of "makes $10k a month and spends $100k a
| month" is the whole problem. Not having a sustainable
| business model and focusing on raising money at all cost are
| two reasons that got it in that unenviable position in the
| first place.
|
| Perhaps the art of bootstrap is not discussed enough here.
| flyinglizard wrote:
| Not everything can be bootstrapped. Hardware is the obvious
| example.
| lumost wrote:
| In enterprise software, it's rare that you can win your
| first clients with a low touch strategy. This means there
| is a phase where you are investing a lot to win specific
| clients, and getting little in return.
|
| The above seed stage startup could be in the boat where
| they won a customer bootstrapping, but are now scaling
| through the use of sales engineers etc.
|
| A 100k per month burn may translate to needing to win 1-10
| deals to break even.
| jupp0r wrote:
| This is completely normal lots of today's sustainable
| companies have been operating like that for a while. As
| long as you use those $100k/month of spending to keep
| growing fast, everything will be fine. This doesn't mean
| that you don't have a good sustainable business model, just
| that you need to invest a lot into growth.
| at-fates-hands wrote:
| >> Perhaps the art of bootstrap is not discussed enough
| here.
|
| Twelve years ago, I bootstrapped my own company. Took a
| very small loan from my parents ($5,000), got a friend to
| work with me and we were off and running. We still worked
| our full time jobs, but I was taking vacation on Thursdays
| to cold call clients and give them my elevator pitch. Then
| it was setting up appointments, making the presentations
| and trying to get people signed up using a subscription
| based model we had developed while he was working on the
| mobile app development.
|
| We were about two months from generating enough revenue to
| quit our full-time jobs when my buddy died suddenly and
| unexpectedly. It was pretty hard to continue after that. I
| slowly wound down the clients I had signed up over the next
| year or so, and quietly closed the business after two
| years. I still do business under the company name, but the
| organization is long gone.
|
| If nothing else, it proved to me you can bootstrap your own
| company on your off-time, and eventually make that
| transition to full-time with very little to no overhead
| (office space, equipment, employees). Also, it showed me
| you don't need $10M in funding to build a niche company
| serving an underserved industry.
|
| But bootstrapping isn't easy. Cold calling people isn't
| easy, getting out there and grinding away on a consistent
| basis isn't easy. Having your own money invested with a "do
| or die" attitude isn't easy. Believing in your idea isn't
| easy. I'm not sure constantly having to raise money is any
| easier, but the difference is one one hand you're
| constantly working on your product and business which makes
| your business sustainable. On the other hand, I'm not sure
| constantly chasing investors and their money will really
| benefit your company in the long run.
| freediver wrote:
| Sorry to hear that, that was an unfortunate turn of
| events that was beyond your control..
|
| > But bootstrapping isn't easy. Cold calling people isn't
| easy, getting out there and grinding away on a consistent
| basis isn't easy.
|
| VC funded business have all these same challenges. On top
| of them you need to somehow find time to raise money and
| endure board pressures often conflicting with your vision
| as a founder. I have two bootstrapped business behind me,
| and in the middle of a third, and although I could use
| more funding, I am also concerned about taking it. I
| think I would be overwhelmed with the additional
| complexity (perhaps I am not one of those "infinite
| business capacity" founders).
| johntiger1 wrote:
| sorry to hear about your buddy
| djbusby wrote:
| You may be confounding the Growth Phase for the Sustainable
| Phase. Many business models must pass through these phases.
| Profitable from the first client is... uncommon.
| freediver wrote:
| You do not need to be profitable from the first customer,
| but you need to have a hope or at least a sound plan to
| profitability.
| jefftk wrote:
| I don't see where you think the article disagrees with
| that?
| freediver wrote:
| Well I do not know what else to say, other than to
| observe that we somehow got in a position of
| understanding the same article in diametrically opposite
| ways.
| cj wrote:
| Often it's the desire/need for an extremely high growth
| rate (often imposed on founders by investors) that makes
| an overwise sustainable business model unviable.
|
| > Many business models must pass through these phases.
|
| I think there are very few categories of companies that
| ~must~ go through a "Growth Phase". Sure, there are
| rocket companies like SpaceX and Uber/marketplaces that
| only work at scale... but the majority of internet
| software companies cost very little to get up and running
| and have very, very high gross margins.
|
| Meaning for many companies, the only thing stopping them
| from immediately entering the "Sustainable Phase" is an
| incessant need to maintain extremely high growth through
| excessive spending.
| AussieWog93 wrote:
| >Profitable from the first client is... uncommon.
|
| Is it? Outside of Silicon Valley, I don't think there are
| many businesses that deliberately lose money in an
| unsustainable way. I know all of mine have been (at least
| marginally) profitable from day one, at least.
| jefftk wrote:
| Expenses of $100k/m with income of $10k/m can definitely
| happen outside SV. Often it is even more extreme, where
| you spend millions of dollars before you earn anything.
|
| Let's say I have an idea for a new type of air purifier.
| I will need to build prototypes, test them, sort out
| manufacturing, build large numbers, get agreements with
| various distributors, and all this while not bringing in
| much if any money yet. If all goes well, however, the
| investment pays off and once I'm making my new product at
| scale I more than make up for those initial costs.
| edanm wrote:
| It's not about losing money, it's about needing to invest
| money before you are earning your investment back.
|
| In software it's development costs. Outside silicon
| valley, in the non-techie world, there are many things
| that work the same way. Eg real estate - building a
| building is an upfront investment of piles of money that
| the building doesn't earn back for years. Or eg opening a
| McDonald's.
|
| The main difference in tech startups is that it's not
| just entrepreneurship, it's innovation too, so it's
| unknown whether the product will earn back the money. But
| sometimes McDonald's falls, builfings fail, etc. The odds
| there are better though.
| Barrin92 wrote:
| if you're building real estate at the very least you have
| the actual building itself. This isn't comparable to the
| ephemeral "I'll sell you two dollars for one dollar
| <something something> we'll monetize the users"
|
| There is no equivalent to MoviePass in the rest of the
| economy aside from literal MLM. They mailed people a
| credit card for what was it ten bucks a month, you could
| watch movies worth more than that with it, and that
| literally was their business.
|
| And there's plenty of startups out there right now that
| basically work the same way. The 'business model' is gift
| people free stuff, so investors gift you free money and
| then hope you can somehow IPO and dump it on the retail
| investors.
| Swizec wrote:
| > But sometimes McDonald's falls, builfings fail, etc.
| The odds there are better though.
|
| The 6x6 mall in San Francisco is a great example of this.
| Someone built an entire mall next block to Westfield and
| it sat empty for 6 years. It's still empty today, but
| IKEA signs showed up a few months ago so it looks like
| San Francisco is getting a downtown IKEA.
|
| Upfront investment: $150,000,000 according to [1]. Never
| got a single tenant or opened its doors.
|
| [1] https://archive.curbed.com/2020/7/23/21334508/dead-
| mall-6x6-...
| polote wrote:
| What's the point of being vc funded and profitable?
|
| By definition if you are profitable you don't need external
| capital to exist and thus don't need vc money
| dehrmann wrote:
| It's just a question of natty or juice. There are also
| business models that legitimately need to reach moderate
| scale before they're viable.
| oaw-bct-ar-bamf wrote:
| Different take on my sibling commenter: When VC has the
| choice to invest in two startups. Both on par, the one is
| already profitable, the other burning money, which company to
| invest in seems clear...
| gowld wrote:
| Right, maximize ROI with a pure play for 100x return.
|
| https://youtu.be/BzAdXyPYKQo
| freediver wrote:
| Brilliant!
| ajkjk wrote:
| I imagine it is not too different from borrowing against your
| profitability in order to grow faster.
| alpha_squared wrote:
| A sibling comment touched on it, but I want to expand a
| little bit on that.
|
| Given two companies competing on the same problem, where one
| is profitable and one isn't, which is likely to come out on
| top? I'd argue it's the one that brings in the most money
| (via profits + funding). At early stages, funding will almost
| always be greater than profits. A profitable company that
| does not seek investment will eventually lose out to an
| unprofitable one that has funding because it will grow
| faster. At some point, the larger company will seek to
| optimize for profit, acquire the profitable company, or
| become the default company for the problem space (a near-
| monopoly).
|
| The sad state of current affairs is that the market is
| optimized to promote dominance, not capital efficiency.
| lostcolony wrote:
| And with that changing, maybe we can have winners who make
| better products, or are more efficient with resources, or
| just...listen to their customers. Rather than merely being
| better at attracting VC capital.
|
| One can hope.
| toss1 wrote:
| You don't _need_ the extra VC money, but often financing can
| get you to the point of addressing a far larger market far
| sooner. IF (big "IF") that more rapid growth is critical in
| your market segment, such as to obtain a better defensible
| moat by having far larger market share sooner, then VC can be
| a very good tradeoff. But if that is not your market
| dynamics, maintaining your freedom and growing organically
| can be best.
| puranjay wrote:
| Cheap liquidity is just unhealthy for the economy as a whole.
| Just allows zombie companies to thrive that create no long term
| value or productivity gains.
| sakopov wrote:
| So, in the dot-com bubble companies were rushing to market with
| ideas and no products because delivering products was a massive
| technical undertaking. It seems like we now have companies
| rushing to market with products -- which are seemingly much
| easier to build nowadays -- but without profitable business
| models. I wonder what the next bubble will look like.
| jupp0r wrote:
| Crypto tokens for product ideas that never get realized.
| mkl95 wrote:
| From a startup engineer's POV this is a non issue - a 18-24 month
| tenure is pretty standard.
|
| However I can't help but feel the bubble will burst eventually
| and it will be a success to run a VC-backed startup for a few
| months without seeing it become a shitshow.
|
| I can't complain though, salaries are skyrocketing in my area and
| getting a major raise is easier than ever. It must be scary for
| founders / owners though.
| majormajor wrote:
| > From a startup engineer's POV this is a non issue - a 18-24
| month tenure is pretty standard.
|
| This assumes there's another job waiting for you at the end of
| it. Raises and job offers remaining plentiful at the same time
| funding is drying up would require quite specific circumstances
| to continue - namely, that none of the companies driving
| today's offers depended on cheap money to get to where they
| are. If a substantial group of them did, there may not be much
| of a next round.
|
| That said, a lot of what we see right now appears to just be
| crowd-following, a lot of what really happens will depend on if
| businesses see substantial _customer_ exits, not just funding
| tightening. But if, say, there 's a big enough startup crunch
| to hit AWS's bottom line in such a large way that _they_ start
| laying people off, suddenly you can start seeing potential
| feedback loops pushing salaries down and difficulty of finding
| a job up.
| deeptote wrote:
| Considering how much AWS recruiters message me constantly, an
| apocalyptic scenario where even the big players are having to
| lay off substantial amount of engineers is pretty low on the
| probability curve. Especially given the crunch to hire
| literally anyone of any skill, which is incredibly difficult
| at the moment.
|
| I will say there's probably about to be a bunch of WEB3
| crypto bros about to need a new job, to which I say good
| riddance; the days of them grifting people is probably over.
| puranjay wrote:
| My brother who survived through the dot com crash says that
| this is exactly what all of his engineer friends thought and
| then there was a complete hiring thaw for years and salaries
| got back to earth
|
| There has been a lot of FOMO from businesses into tech after
| covid. But most of these tech undertakings haven't really been
| fully implemented or had a chance to show their impact.
|
| Its entirely possible that a lot of businesses will realize
| that their massive new tech teams didn't really translate into
| a healthier bottomline. Perhaps they overhired, overengineered,
| or simply didn't have the culture or expertise or even the need
| to go all-in on tech.
| kwertyoowiyop wrote:
| Hiring thaw or hiring freeze?
| nowherebeen wrote:
| > founders
|
| Not all founders are VC backed . It's only the ones that are
| and never thought about how to turn a profit that should be
| scared.
| ericd wrote:
| I'm not sure you're thinking this through completely... if
| startups' funding goes away, do you think the market for
| startup engineers might not stay so strong?
| Sebb767 wrote:
| Depends on your lifestyle. If you spend all that money, it
| will be a problem. If you enjoy a bit of luxury while it
| lasts and save 50%+, you'll enjoy riding the wave and won't
| mind the inevitable crash as much.
| api wrote:
| It's like clockwork: fed raises rates, cheap money dries up.
|
| Seems like all markets for the last 15 years (since 2007-2008)
| have just been tracking the fed.
| matthewdgreen wrote:
| And then the markets cool down and head towards recession
| territory, and the fed lowers rates. Which is driving which?
| tomc1985 wrote:
| At this time, that would be a complete 180 as the Fed's
| messaging all year has been about how they will be raising
| rates, even if it means sacrificing markets. On an
| accelerated timeline, no less, compared to what they had
| floated in January.
| echelon wrote:
| > On an accelerated timeline, no less, compared to what
| they had floated in January.
|
| Is the Biden admin asking the fed to get this over with in
| time for the election? Quick shock and return to normalcy
| in an attempt to retain power?
|
| Or is this because they moved too slow and we're heading
| into something worse than a minor recession?
| jupp0r wrote:
| Historically the Fed has been independent and the current
| administration (in contrast to the last) seems to respect
| this tradition.
| lazide wrote:
| I can't wait for the retconning to happen with the Modern
| Monetary Theory folks.
| big_youth wrote:
| I'm no economist but my understanding is that even though we
| are printing money like MMT advocates, we are not
| implementing any of the policy decisions to combat inflation.
| Namely large tax increases on ultra rich.
|
| Since we've started printing we seen a huge rise in wealth
| inequality and more billionaires than ever, but we don't
| fight the inflation with high taxes on them so assets they
| use (high end real estate, art, crypto, yachts) have blown up
| as have things they invest the extra money into (middle class
| housing). We should be getting ride of the extra cash
| floating around with higher taxes.
| lazide wrote:
| I guess we'll find out soon!
|
| I doubt taxing capital gains is going to go well startup
| wise though. :s
| fundad wrote:
| The ever so clumsy phrase "printed cash" is the grump-signaling
| I'm here for.
| candiddevmike wrote:
| Too bad I don't have any VC contacts so I was never able to raise
| a runway to begin with. Instead I've had to work multiple jobs to
| create my own runway and work on growing revenue. I'm not sure
| which path is easier right now.
| andreilys wrote:
| Even without VC funding you still have debt based funding which
| is a lot easier to get when interest rates are at all time low.
| candiddevmike wrote:
| That requires my house or some asset to be put on the line
| instead of just my reputation, and I would be able to get
| exponentially less than I could with a VC.
| jupp0r wrote:
| You also forget the small detail of having to pay back the
| money you received.
| natly wrote:
| Yeah I'm seeing tons of "free money is over" articles lately
| but it feels like only a small percent of SF residents had that
| experinece in the first place. I doubt more than a tiny
| fraction of HN readers will be affected by this new development
| at all.
| manquer wrote:
| Directly few enough founders on here sure , indirectly
| everyone is affected.
|
| That company with lot of easy money could be your customer or
| your customer's customer , or the employer of your customer.
|
| You could be a neighborhood coffee shop in the bay, with belt
| tightening, your customers now will think twice about
| spending or worse be laid off with no money to spend at all.
|
| It could just be the number of people being laid off will
| depresses salary or getting a job harder if you are looking
| for a new role, or your company is now finding cheaper
| replacement to you now in the market easily, making your job
| lot less safe.
|
| It is easy to say that it was all too good to last everyone
| should have known, Many have staked their careers on the
| current market of 10 years . Taken loans for expensive
| college degrees, bought houses on mortgages assuming salary ,
| got married started families and so on .
|
| Real lives are going to be damaged by this downturn .
| draw_down wrote:
| james-redwood wrote:
| Easy access to VC was also geographically restricted. In
| countries like South Africa, with a small but robust and
| burgeoning startup scene, at least among the startups that I
| know of where I know the founders personally, all have resorted
| to either debt or revenue models of funding. None could either
| get VC funding due to the nature of their work lying in
| poverty-related solutions or could simply not generate enough
| revenue to sustain themselves initially and had to rely on
| taking on debt.
|
| n = 5 so make of that what you will.
| causi wrote:
| _Nobody knows how long it will take for the market to be founder-
| friendly again, but it could be a while._
|
| Quite a while. Demographics meant an incredible amount of capital
| flow in the last two decades as the largest generation in
| American history, the boomers, reached the height of their
| careers and investments. That party is over. 2022 is the peak of
| the curve for boomer retirement. As they retire that money is
| leaving the market. Gen X is small and their capital peak won't
| be nearly as high. Millennials won't be reaching that level of
| earning for at _least_ another decade if not longer.
| ceeplusplus wrote:
| At the same time, US debt is reaching record highs, so the Fed
| will have to keep printing once this whole supply chain
| situation is over. And the US is still one of the most
| immigration friendly countries in the world, so we'll still see
| continued capital influx I think.
| alexchamberlain wrote:
| Whilst the baby boom was clearly a peak, the subsequent
| generations are much smoother - why would we see such peaks and
| troughs then?
| missedthecue wrote:
| The silent gen preceeded the Boomers, and as they retired,
| Boomers moved up the career ladder. It's not as if Boomers
| expanded into a void.
| mellavora wrote:
| > It's not as if Boomers expanded into a void.
|
| Uh, you might want to look at population growth numbers. Also
| post-boomer.
| FooBarBizBazz wrote:
| If you really believe that, though, then what do you invest in?
| This sounds like, "it's all downhill from here".
| SoftTalker wrote:
| Seems that you might invest in companies that provide things
| that retired boomers will be buying?
| svachalek wrote:
| Nursing homes...
| rory wrote:
| I've got a hot new product that sends a push notification
| to your minimum-wage caretaker from directly inside your
| adult diapers!
| rory wrote:
| > As they retire that money is leaving the market
|
| I don't see how this piece follows. Why would career retirement
| stop rich people from investing (as LPs) in VC funds?
| lazide wrote:
| Think of rich people as the thin layer on top of a larger
| tide. They won't stop, but the level they are at will change,
| and it won't be higher than it was. Many of them will be
| changing strategies too.
| rory wrote:
| That's still not a logical or empirical explanation, it's
| just an assertion. What evidence do you see that points to
| a net decrease in early-stage tech investment at
| retirement?
| lazide wrote:
| It's an observation, and one I don't care to spend a lot
| of time defending. Take that for what you will.
|
| My note was that the macro-economics of going net
| withdrawal from net contribution with what is currently
| the largest, wealthiest economic segment in the United
| States is not likely to _increase_ the size of money
| seeking to invest, which would, I expect, correspondingly
| decrease the pool looking for that particular outlet.
|
| And on further reflection, especially since VC, being a
| fundamentally high risk, high variance of return
| business, is probably less attractive to those trying to
| avoid losing money in a bear market, with other, now
| higher interest earning investments available (due to
| less easy money).
|
| Hell, if you're looking for a gamble, even Junk bonds are
| probably going to be a good play soon.
|
| I've only been through 4 (maybe 5?) downturns/market
| crises so far though personally, so add however much salt
| you want.
| rory wrote:
| This response conflates the current cyclical trend with
| the secular assertion I questioned, so I'm going to skip
| over the cyclical commentary.
|
| > _Going net withdrawal from net contribution with what
| is currently the largest, wealthiest economic segment in
| the United States is not likely to increase the size of
| money seeking to invest_
|
| From anecdotal observation, VC and PE investors are at a
| point in their financial life where their earned income
| is much smaller than their investment income, so I'm not
| sure this distinction is as relevant for that class.
|
| Perhaps a thinning of multiples in the wider market from
| the 9-5ers withdrawing their 401k investments will pull
| money out of riskier investments. But it's unclear that
| your average VC LP has ever acted rationally (since
| median returns more or less match the public stock
| market, but with a decade lock-up).
|
| I think the more interesting inflection point will be in
| another decade or so when the baby boom generation
| approaches peak die-off. How much of that money will go
| to wannabe tycoons a la MBS? How much will go to non-
| profit endowment funds? IMO there's a reasonable argument
| we'll get right back to another dumb-money peak like the
| one we just exited.
| lazide wrote:
| My point is that they are (probably) not operating
| completely independently of the overall market, which is
| influenced by these macro-economic events. Including what
| options start to become more interesting for them over
| others due to changes in the level of competition in the
| space and available options.
|
| They aren't constrained in the same way as someone with a
| 401k, but they are part of the same market and influenced
| by it, even if in a contrarian way.
| code_biologist wrote:
| Nice to see a fellow fan of Peter Zeihan style demographic
| analysis in the comments.
| causi wrote:
| His demographic analyses are good but I don't know how much I
| trust his general predictions. Too often he says things which
| are factually wrong that would've been very easy for him to
| research.
| mysecretaccount wrote:
| Same here. _So many_ easily verifiable inaccuracies in his
| essays /videos, as well as a dogmatic adherence to
| demographic and geographic determinism. Still, a
| perspective I appreciate.
| code_biologist wrote:
| 100%. I love him, but his blockchain and battery tech
| analyses are pretty off factually.
| stareatgoats wrote:
| Interesting, but the article is ultimately an ad for Canvas.
| Which tends to detract from the validity of the content, right or
| wrong.
| drx wrote:
| You're right, it's a little over the top. It was in response to
| some feedback I got on my draft which was "OK, I read the
| article, but what's the relation to Canvas?". I added a divider
| and a disclaimer.
|
| I try to write helpful content first, and only then plug the
| company, so this is good feedback, thanks.
| carom wrote:
| I thought the plug was good. I'm looking to start a startup
| soon, so I've been consuming a lot of this type of content.
| The topic is echoed among a lot of VCs right now, the charts
| were nice, and it tied into the app plug well. I even shared
| it to my friend who does managerial accounting.
| bengale wrote:
| Personally, I thought the content was good and then the plug
| at the end was fine. It didn't detract from the content in
| any way that I could tell or make me suspicious of your
| motives.
| pixiemaster wrote:
| agree
| gervwyk wrote:
| also agree, great content well complemented by their
| product. well done to the team, it is a fine balance.
| NickRandom wrote:
| FWIW - I think you got the balance right. Doesn't mean I
| agree with it (or disagree with it)
| parkingrift wrote:
| I don't see any signs that cheap money is over. What I'm seeing
| is the end of absurd valuations and easy money.
| foobiekr wrote:
| Er, cheap money and valuations are tied together.
|
| That said, what's really at issue is that funds will focus on
| their winners. So even if the money is still cheap and the
| valuations are still OK, the marginal and "come on, you can
| literally never be a profitable entity" companies are going to
| be sacrificed.
| missedthecue wrote:
| Aren't high valuations the definition of cheap money? If you
| can only raise some money in exchange for a boatload of equity,
| money is expensive rather than cheap.
| 7speter wrote:
| In economics, at least, cheap money means loans with a low
| interest rate. I guess high valuations come with being able
| to borrow money for cheap.
| andsoitis wrote:
| > I don't see any signs that cheap money is over.
|
| interest rates are rising (i.e. cost of borrowing money) and at
| least on VC (i.e. provider of money) has also signaled publicly
| - https://avc.com/2022/05/how-this-ends-2/
| onlyrealcuzzo wrote:
| Absurd valuations = cheap money in the context of startup
| fundraising.
| parkingrift wrote:
| Maybe so. I don't conflate cheap with easy.
| ineedasername wrote:
| My own distinction is:
|
| Cheap money == fewer strings attached & better $$ to equity
| ratio. [0]
|
| Easy money == ideas or MVP's with weaker plans or market
| fit get funding at all.
|
| [0] this has the side effect of raising valuation.
| lazide wrote:
| Cheap money means lenders or investors will be more likely
| to compete for what they perceive to be a good deal.
|
| More of a 'sellers market' from that perspective.
|
| If the buyers are hesitant to invest/lend because they're
| worried they'll catch a falling knife, it makes it much
| harder to close at all and valuations tend to err on the
| risk adverse rather than the 'please pick us!' side.
| jxf wrote:
| The implication of the equality is backwards. Cheap money
| _drives_ absurd valuations.
| danuker wrote:
| Then again, a company flush with cash will spend more,
| making money go round and more available. So maybe absurd
| valuations also drive cheap money.
|
| All income is someone else's expense.
| datalopers wrote:
| The most amusing part will be watching these VC-backed companies
| realize the tiny bit of revenue they do have is from other VC-
| backed startups in uncomfortably familiar positions to their own.
| jupp0r wrote:
| Most VC-backed companies don't have other VC-backed companies
| as their primary customer segment.
| mmaunder wrote:
| Or make money. Even a small cashflow can extend a pre profit
| startup's runway significantly.
| lazide wrote:
| What happens is this rather quickly means a lot of startups
| (70%?) are going to rather quickly admit that their '5 year
| long term product vision' they've been trying to sell and are
| 'almost there' on launching is not actually going to happen
| because not enough folks are willing to pay for it, and/or
| another company already ate their lunch.
|
| Which is... harsh.
| mikeg8 wrote:
| How is this harsh? It seems healthy to me.
| ineedasername wrote:
| Harsh on the people it's happening to. Healthy in a macro
| economic sense.
| lazide wrote:
| Yup. No one likes to fail, especially if they were
| actually close. And a lot of folks, including employees,
| will suffer due to lack of other options.
|
| My guess is it will likely be especially harsh because of
| the length of time this has been going on in tech. We've
| been doing so much stuff with dubious economic value for
| so long, we barely even notice it anymore.
|
| But there is also a ton of value being produced (in real
| life), so it's not like tech overall is going nowhere.
| EGreg wrote:
| Where is all that money that VCs raised in Q1 of 2022 going to
| go? Or are the LPs going to reneg?
| streetcat1 wrote:
| Probably optimized for down rounds. Either save their existing
| investment, or get into other investment for penny on the
| dollar.
| jillesvangurp wrote:
| The same place as the rest of the money: misc investments that
| are now worth a lot less than a few weeks ago. Or did you think
| that cash was sitting in some bank account happily inflating
| month on month? To make that cash available, they'd have to
| sell shares, bonds, options, etc. that that money is currently
| invested in at a loss. The better strategy is to wait for a
| recovery. That might take some time. Selling at a loss to make
| risky investments in startups is not a good plan.
|
| The even better strategy is to invest whatever cash there is
| into those things more likely to recover quickly rather than
| sketchy startups as there are likely quite a few undervalued
| things in the market that could recover by a sweet 10-20% in
| the next month.
|
| And since that money technically belongs not to the investors
| but rather conservative entities they represent (like pension
| funds) they are going to have to do conservative things in
| times like this. Hence the temporary lack of liquidity for
| startups.
| yowlingcat wrote:
| That's not how the funds flow works. The capital call
| structure was baked into the GP's raise from the LP -- if
| that happens at ATH and is highly beneficial to the GP, then
| the LP has a contractual obligation to adhere to that
| structure.
|
| As sibling comments have mentioned, of course, whether the GP
| exercises that contractual right is far more complex and
| based on the relationship to the LP; and indeed, VC is a
| relationship driven game, so the natural behavior on part of
| the GP is to take their time, see how things shake out, use
| leverage to get better deals and take a wait and see
| approach.
|
| The point is, though, if a VC chose /not/ to take a wait and
| see approach and instead go out guns blazing to take
| advantage of a buyer's market -- they would be within their
| rights to do that.
| missedthecue wrote:
| I want to know what Clubhouse is doing with the $110 million
| they've raised.
| peter422 wrote:
| Important to understand that when a VC raises a fund, it's just
| commitments from LPs, not all the money right away.
|
| So if a VC "raised" a huge fund and the market shifts and all
| the sudden their LPs might not like a bunch of huge capital
| calls, the VCs will become more conservative. Ultimately the
| VCs customer are the LPs, and they won't do anything that is
| going to piss off all their customers.
| dopeboy wrote:
| Capital calls are legal obligations though, right? The "not
| liking" part is immaterial until the next fundraise and ask
| is made same LP?
| dannyw wrote:
| If you piss off your LPs you won't be fundraising another
| fund.
| peter422 wrote:
| Correct. The fund also isn't going to be returned for
| 5-10 years, so even if you are making great investments
| that will have huge returns in 10 years, if you have a
| bunch of annoyed LPs now, you may still essentially get
| knocked out of the industry.
| p-christ wrote:
| how much does this depend on the stage you're at? Pre-seed & seed
| funding should be pretty unaffected?
| beambot wrote:
| YCombinator is echoing the same sentiment:
|
| https://news.ycombinator.com/item?id=31435407
|
| I've heard of VCs at all stages opting to sit out for a quarter
| or two to see how things shake up before resuming any deals. It
| was suggested that fundraising _right now_ could take 9-12
| months -- 1-2 quarters for folks to sit on the sidelines, and
| then another 1-2 quarters to kickstart their best deals. Plan
| accordingly.
| drx wrote:
| Typically, even as a pre-seed or seed company, you can rely on
| being able to raise your next round if you hit certain
| milestones in your key metrics.
|
| For example, if you are a SaaS company, you have a good story
| and team, and your TAM makes sense, you could have previously
| hit $300k-$1M ARR and raised a Series A. Some startups were
| even raising A's pre-revenue. In the new environment, that
| ability will likely dry up.
| EGreg wrote:
| Personally, in times like this I can think of three places to
| invest:
|
| 1. Government Bonds 2. Cash (hoarding it) 3. Early Stage
| Startups
|
| The most fun and promising is #3, because they will take a few
| years to reach public markets anyway, and by that time there
| should be another bull cycle. In the meantime, things need to
| be built anyway. Especially startups that build stuff that
| people _need_ or things that save money (like metaverse saves
| on traveling) because they 'll cut down on non-necessities
| (including entertainment, travel and fuel).
|
| The two companies I personally run are 10 and 4 years old,
| respectively, and have never taken VC, let alone IPO. They have
| been designed to help communities in the hard times ahead, with
| their own social networks, coins, etc.
|
| https://intercoin.org/overview.pdf
| ebiester wrote:
| Well, how much money are you making and how much are you
| spending? How much do you have in the bank?
|
| If you aren't going to be able to raise money in the next year,
| this is even more important, no?
| mise_en_place wrote:
| Across the board, producer prices are increasing. Which means the
| only solution for a lot of businesses is downsizing.
| mym1990 wrote:
| Or the consumer businesses can raise their own prices?
| Upvoter33 wrote:
| I have heard some similar things - lots of belt tightening going
| on right now. But it may just be a blip... world events are hard
| to predict, it seems.
| puranjay wrote:
| Good. I hope we get out of this by focusing on building
| businesses that actually make profits instead of, you know, play
| musical chairs with exit liquidity.
| lazide wrote:
| I think you just gave a panic attack to a whole generation.
| fny wrote:
| Beware. The company you work for may be profiting from
| companies that play musical chairs with exit liquidity.
| [deleted]
| UltraViolence wrote:
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