I'm the founder of a pretech startup firm that provides technology to the new construction markets. We launched in August 2019 (simple beer and pizza), booked our first revenue of $27k in September and booked $88k for October (to date). Although we are operating from a beta website built in a garage (true story), I did not allow newhomes.house to launch until we were certain that the process worked and revenue would be generated quickly.
This is my sixth business startup (second tech) and old school ways are critical. It's about revenue - first and foremost. There is no excuse, no options but do the deals and make money first. Everything else will then fall into play after that simple concept is achieved.
We are starting our seed round shortly. With our revenue streams, the seed round should be successful. No hype, just a profitable company that will scale nationally.
11
Wall Street is trying to replicate Amazon. Lose a TON of money at the beginning until you get HUGE and then make a TON of money. Make ALL the money.
The problem they are having is that Amazon had things going for it that don't exist now. A different economy. An internet that was growing. Amazon became THE default market for small businesses (along with Ebay).
Think how *easily* Sears could have eaten Amazon's lunch had they stayed in the "catalogue" business and moved it to the Internet! They had a hundred years of experience in warehousing and selling things mailorder--had they hired the young and hungry tech people. They had physical places to pick up your orders and return them. Everything you hated about early Amazon, you would have LOVED about Sears, had they not eviscerated themselves on the edges of their own hidebound armor.
Amazon could have been very different and a different future might have taken place.
8
Pure hogwash. Silicon Valley is now all about suspending reality until the IPO cash out. But now it's much darker and by any means necessary including the literal of dealing snake oil by JUUL and Theranos. Silicon Valley's "change the world" and "disruptions" are now a threat to our very health.
1
Duh.
1
Too much capital and too few good ideas. "Good ideas" in this case means ideas that can generate profitable end-user products and services that consumers can afford. This means only one thing from the macroeconomic perspective - the money is overvalued. Nearly all assets are grossly overvalued. The reckoning will be painful.
11
@Mister Ed
Exactly! I'm trying to locate academic research on the concept of "too much capital." It is causing distortions in multiple areas of the global economy and capital should be redirected (hello, Sen. Warren) to the labor and consumption side of the economy.
Having Sand Hill Road lose a few billions in that excess capital is a good start.
Might be difficult to quantify, but isn’t the root cause of the problem too much venture capital chasing too few good deals? Competition creates an upward spiral of growth at all costs to increase valuations for each round of investment. Ultimately, the business becomes untethered from reality. Until Wall Street shines a harsh light on company’s financials. Would this dynamic change if there was significantly less capital to invest, forcing VCs to be more selective? And rational.
10
So I guess these guys are not going to invest in the next Amazon.
It just shows that you can’t generalize about these things. The trick, which even experts have difficulty mastering, is to assess individual cases accurately, not to live by broad brush rules.
5
@Donalan - Amazon was cash-flow positive relatively early on. Investors recognized that it could have, at any time, booked it as profits, but it chose to conquer the world. Uber, on the other hand, is already facing pricing pressure, paying its driver under market, and still burning through cash. There is little hope for it to either book profits or expand, putting it in a different situation from Amazon.
2
In an era of Liquidation preferences - valuations can be manipulated .....
When price discovery remains opaque and dictated by a few private large investors, the startup is like a precocious child, meeting reality as they have to access public markets to provide liquidity, eventually.
Price by earning valuations can withstand earthquakes of Richter scale 9.0 - Price by (steroid/cheap mega funding round driven) revenue can collapse at 2.0.
1
Multiple Silicon Valley projects have ensured 'The Ugly American' has again reared it's head around the world. The condescending assumption that Taxi services in 'Foreign Cities' were as dirty, uninformed , impolite and unsafe as in most of the US. But untrained, uninsured drivers, armed with little more than an app and GPS -gained a lot of initial publicity, but most have failed to Grab or conquor Uber Alles. Starbucks had a some expensively created global success -based not on the coffee ( less well regarded internationally than McCafe) but on the relaxed sitting time for those needing good wi-fi out in town. Most of Silicon Valley's ultra rich are 'one hit wonders'. In music 'one hit wonder' is somewhat disparaging. Those who hit the jackpot with a single internet related program / product / idea or app...make so much (directly or indirectly) that US media and culture - including publicity hungry (but usually uninformed) Presidents and Politicians hail the one hit wonders as modern geniuses...guru's ..and good bets for future investment. So the circle has been- unbroken pretty much till now. Right now- the greatest danger for consumers and investors is that in many international locations travellers tourists and locals are increasingly wary of sitting in the potentially dangerous window seats of those Ugly American related outlets let alone grabbing an app to take you who knows where uber the hills.
3
One problem is that few venture capitalists ever discuss the role of luck. Yet, when they hit it big, part of the reason is good luck. There are actually a lot of similar startups with similar ideas. For example, the spreadsheet software we associate with Microsoft and Excel was first developed by VisiCalc and then by Lotus Development. The winners deny the role of luck and think it was all genius. They convince themselves and others that they are geniuses and then they don't even think about the role of luck or acknowledge that they might not always be lucky.
4
@Kay Sieverding Agree on luck, but I think it's also about execution. Similar companies with similar ideas -- but if you dig into the team and execution -- it very much is not the same.
1
Uber and Lyft take the cake. Gotta love those speculators paying top dollar for cab companies, hoping against hope that the greater fools come along eventually.
4
Bird, WeWork, Peloton, and SmileDirect are not Silicon Valley companies. Not tech either. Maybe the VCs need to get back to what they know.
3
@Anj
'Silicon Valley' is being used as a metaphor as well as an actual place in this article
3
Nihil Mehta doesn’t regularly look at gross margins... wow, talk about a place that shouldn’t see any investor dollars. Ever.
6
These companies are marred with a culture of banality, and this article doesn’t do much enlightening. My father told me that when he grew up before the moon landing Americans were quite believing there would be flying cars in the 21st century. What will it take to move away from capitalists taxis and commitment phobic scooters toward life as the Jetsons?
1
Not a single mention in this big debate (or this article) about what approach is best for customers, employees or society. Just what’s optimal for investors (who don’t actually do any of the actual innovating or work).
Until Silicon Valley’s and Wall Street’s blinkered greed is tempered by a broader perspective, the little swinging pendulum between prioritising growth or profit will be a distraction from much more important questions.
18
Did no one learn anything when the dotcom bubble burst? How soon we forget.
4
I don't know about others, but as an occasional user of Uber and Lyft, I feel pretty good every time I use them, because I know that my fare is being subsidized by venture capitalists. I may go back to using regular taxis when Uber and Lyft start charging real market rates, because why would I want some random tech company to (continue to) track my whereabouts.
8
@Who am I Except you won't be able to go back to regular taxis because the entire business model of Uber and Lyft is to charge undermarket rates that eventually force everyone else out of business. It's the Amazon model of growth--everyone forgets that Amazon lost unimaginable amounts of money its first decade in business. But VCs continued to pour money into the company and now it's the only place you can buy a book anymore.
16
@Amy there are lots of places to buy books if you only look.
5
Was just in the Bay Area and witnessed many ‘abandoned’ electric scooters littering the sidewalks. Pretty cool. And a really great idea for the North/North East of the US between, say, November and April. Sign me up!
13
Reality check - you cannot stay in business if you don't make a profit. Period, end of story. The hype of 'high tech' more than faltered in 2000 when it crashed due to the fact that it was over-valued; no profits.
I know the NYTimes and readers believe that profits are a sin and those that seek them should be disgraced and shamed. But the reality is that we trade on money. If we do not have money, we cannot buy things. If a company operates in the red, it cannot exist for long unless it can convince investors with money to give that money to the floundering company. That may work for a while as investors take risks, but is not a long-term game plan.
36
You can’t stay in business long term without making a profit, but you CAN raise a ton of venture capital, get a big valuation, go public, and cash out - without making a profit. And that’s really what these entrepreneurs are trying to do.
255
@Ma
Reality check - Corporate Finance 101 you can stay in business forever without making a profit as long as your cash flow is positive.
This is why companies hire MBA's
15
@Bryant Pump it up, sell it off, and run away very fast. After that it's all tulips.
32
Nice to see the geniuses in Silicon Valley are beginning to develop the rudimentary business acumen of a 6 year-old running a lemonade stand and recognizing the importance of “positive unit economics”. Ah the brilliance.
28
@JFB But the 6-year old doesnt have Mom and Pop with 'infinitely deep' pockets like some VCs seem to.
7
Why no mention of Amazon? The company was unprofitable for years and has served as the dot.com business model par excellence. I wonder if Amazon would be as attractive today to VC investors had been launched last year. Perhaps not....
8
@Philip
If it wasn't for having made money in cloud computing I wonder how long Bezos's model would have lasted.
I made a lot of money shorting AMZN in the late 90's (mid 5 figures).
3
The " great " new idea: a scooter company. Remarkable. Groundbreaking. Truly something worth over 200 million in investments. Silicon Valley is pathetic, and the greedy investors are the enablers of reckless behavior and childish ideas disguised as tech breakthroughs.
Let's face it, if the regulators would have any real teeth and spine, Facebook would be audited for all sorts of privacy violations, and other legal transgressions. But it flew under the radar for long enough time to acquire the status of ' too big to fail' , another modern capitalism fallacy meant to legitimize greed under the guise of economic forces " logic".
43
@Andy This comment is the moment I fell in love with you.
9
this only makes sense to me if their plan was to "grow" an *illusion*, and then cash out (sell the illusion)
if the business is not profitable and lacks a clear road to future profitability, then it is literally nothing.
is selling someone nothing not a a con job?
14
@dB
or a campaign promise...
1
.
@dB,
.
"Oh, let the buyer beware."
That mantra of the first Gilded Age
has been resurrected in force for this
this Second Gilded Age of deregulation, gerrymandering and
campaign financing via the Citizens United decision of the USSCourt
----------
Paul Volcker: “The central issue is we are developing into a plutocracy.” Oct 2018
.
Volcker is a former Chair of the US Federal Reserve & a former VP @ Chase Manhattan Bank
.
NYTimes Oct 2018 https://tinyurl.com/y7rnydf5
.
1
Back in the late 90s in San Francisco, I recall both the excitement in the air around South of Market, where start-ups were concentrated, and the absolute lack of profit-making ideas and common sense behind the majority of them, as well as the incompetent people hired for those companies, many of whom had the thinnest of resumes in companies starved for labor. They were flush with investment capital, thought that they had the next greatest idea, spent cash on lavish parties and offices because even if the company failed, they would have gotten their piece of the freewheeling lifestyle and would move on to the next bet. Since the group of people all more or less knew each other, there were few willing to say that the Emperor wore no clothes. (I did at one company, turning me into Cassandra until the entire group was dissolved within months). That was also the time when I realized how incestuous most corporations are, via their members sitting on each other's board of directors.
And it wasn't just California - New York had its heyday.
I thought it had calmed down after the dot com bust, but obviously, with the more recent startups and IPOs such as Uber, or Theranos, investors, board of directors and employees alike were willing to be hoodwinked once again.
Have they really learned this time around as the article suggests, or will human behavior revert the next time something sounds too good to be true ?
19
.
@lm,
.
"Ms Theranos" is headed for prison.
One of her con victims was Henry Kissinger
.
When Thomas Cook went bankrupt last month, its 2018 revenue was on par with Uber, both at about $12 billion. Its loss was $180 million while that of Uber was $1.8 billion (10x larger). But Thomas Cook was valued at $0 while Uber was valued at about $50 billion.
That doesn't seem like reality to me.
46
.
@William Fang,
.
For reality in finance,
look into cryptocurrencies, Bitcoin being one of the best known --
Theyr all-digital, no paper, no metal,
and no govt involvement
.
.
Investors with too much money are stumbling over themselves to invest in "startups" of dubious value. No one starts a small company and builds it anymore- the new paradigm is to announce an idea - any idea- associate a mythical value to it and then pitch it to people with more money than they know what to do with. Where does the investment money come from? People who aren't taxed enough.
16
@rd most of the $$$ come from 'institutional' investors - ie pension funds etc
5
Motorized children's scooters for adults, drone-powered food delivery, and app-dependent taxi service. If Silicon Valley represents the spear tip of the U.S. economy, we've had it.
24
Techie here for nearly 20 years. I was curious and took a look at the top apps I used this week on my phone. Browser, email, texting apps, plus phone take all the top spots. The only two apps I use regularly now that I didn’t have during the blackberry days are navigation and cloud storage. Not much to show for the billions invested.
27
@gizmos
There's a game I play a lot. It's the same one I played 6 years ago.
Seriously, not much to show for all the billions invested.
4
What we lose on each unit we make up in volume.
20
1996 to 2001. Lather rinse repeat.
18
New Mantra? Making a profit? Gee how novel! LOL
11
These people are just too funny; they've suddenly discovered profitability, and think they're prescient geniuses.
31
"...his company was now focused on profit and not growth."
A business that actually makes money. What an absolutely novel idea. And people think our education system isn't working...
27
At the end of the day, the old but unglamorous economic theories are still relevant, and any business, unicorn or non-mythical creature would do well to consider these questions without any self deception.
How much is people willing to pay for your goods and services (if they aren’t willing to pay, how can you monetize it)? When monetized, how much money can you realistically expect to bring in? Are there barriers for entry into your business and how easy is it for someone else to just waltz in and steal your customers?
4
Get out of educationally related software for kids. The backlash is coming. They need more real hands on experiences, not more stupid Google tools.
16
They're just NOW looking at gross margins? And these guys invest in and run businesses and probably went to top tier business schools? Jeez Louise.
"At Eniac Ventures, a venture firm in New York and San Francisco, the partners recently combed through their companies and identified the “gross margins” — a measure of profitability — for each one, said Nihal Mehta, general partner of the firm. This was not something the firm regularly looked at, he said, but they were inspired by Mr. Wilson’s cautionary blog post."
26
@John Hay Spot on sir! VC's are as far from accounting and profitability as the unicorns are from reality. No wonder VC & unicorns ride together - it's the ride of fantasy fueled by borrowed investor funds and grand exits.
9
@John Hay - never underestimate the stupidity of American businessmen
8
Too bad Facebook and Twitter made the cut. They are responsible for allowing interference in democracies around the world, and especially ours.
29
Silicon Valley is a sucker for revenue growth. It doesn't matter if a dollar of revenue costs a buck and a half to produce. They can tap other Silicon Valley types to back fill the losses as long as revenue is growing rapidly. Why do they do this? They believe that operating cost can be reduced over time, and overhead costs can be spread over the greater level of business, to achieve profitability. Unfortunately, a lot of businesses don't behave like this. Faster growth just digs a bigger hole faster.
Silicon Valley clearly needs more people with operating experience, as opposed to tech and finance experience.
12
Here we go again, over priced startup non-talent that “guarantees” to make our ,Ives and society better. HA!
Having lived in this “promise land” for 8 years and leaving many years ago nothing!, and I mean nothing!, has changed. SV always thinks that they know better than the rest of us in our society and therefore, feel that they and their ideas are worth more than the “market rate”. When will these funders finally wake up?
My hope is that there will be a day of reckoning and a shakeout so that real products get funded and make it to market. How many scooter rental companies do we need to endure on our streets? How many food delivery services are required especially when this delivering the food make squat?
Give me a break, please!!!!!!
11
Three key things to look for:
1. Who is on the cap table and what are their interest?
Growing revenue vs profit are two different paths and founders become careless with easy capital and use shortcuts because the VC's are pumping the dollars for a big exit and quick return.
2. Who are the founders and who is on the board.
Cronies of the VC and the founders should be a no-no in every case because of the conflict of interest. "Independent" seasoned business strategy, sector and financial experts only should be advisors or board members
3.The most important - debt/costs should be aligned to revenue. This is basic accounting and it feels like VC's are clueless about actual valuation when it comes to unicorns.
Theranos should have been a clear warning to VC firms as the value was based on "air" and had no real substance. But VC's have their head in the clouds and so unicorns collapsing will continue till the math actually makes sense.
Save your money- public investors, you are being ripped off by the VC's in these fake "IPOs".
3.
13
I think price is also an issue. The start-up community has thought of innovation in terms of price-conscious which makes sense if you have a growing group of consumers can not afford luxury goods. However, luxury goods used to be the area where new technologies became popularized. If the market that supports luxury goods becomes too unprofitable to succeed at creating profits, then innovation becomes defined purely in ways of improving the price of luxury goods and not churning out new luxury goods that could create new markets. This type of innovation- that made by leveraging old systems is the only one where there are enough customers to raise sufficient capital to yield profit at a rate that is beneficial to all sides. Until the purchasing power of more individuals improves such that the luxuries of innovation can increase the gross stock of our economy, we will only be able to marginally innovate on existing imperfect systems.
1
This is the VALinux moment of the current boom. These companies go public and everyone realizes that there's no path to profitability. Ooops.
Why does anyone take VCs seriously? It’s easy to look smart when you make the rules. Unicorn valuation had more to do with the amount and concentration of VC cash than capture of actual value delivered to society.
7
Industries mature. Then they stop having start-ups. Tech has matured. It now has a handful of giant companies dominating. Just like in the oil and banking industries.
No one is wondering why there are no Exxon-like start-ups. Or Well Fargo-like start-ups.
The time has come and gone. Let's move our mindsets forward. Just because we were alive during tech start-ups doesn't mean that tech start-ups will be a thing for our entire lives. They just don't make sense anymore.
It's over. Someday something else will come along. For now, forget all about tech start-ups. Get unused to them.
15
@Polaris Here Here! I wholeheartedly agree and having lived through this “junk” it still amazes me that it continues. SV is nothing more than entitled pieces of trash. We no longer need to hear about this group of wishful thinkers
4
How could we use such investment and technical skill to respond to climate change?
7
@Walter Holemans I am afraid that simply do not care.
4
Amazon looked like a bookstore destined to loose as much money as possible, unless you understood the model. It’s this savvy that separates the winners from the losers. People who lack the insight should stick with mutual funds lest they soon be separated from their money.
2
Or does Amazon represent the anomalous outlier of chance rather than there are those who “understood the model”? Even a blind squirrel will find an acorn every once in awhile.
9
@Bert and Amazon had something called 'Cash Flow'. Lots of it. They burned it to grow. And keep shareholder value.
1
@Bert Amazon is profitable because of their cloud business. Not sure how that evolved from the retail side but I belive their retail has always shown losses.
6
Didn’t this happen already with Webvan and Pets.com?
3
And dozens if not hundreds more. Those were only two of the higher profile companies.
1
I admit than I'm not an expert on business, markets, economy, what-have-you, but I feel like this article is telling me exactly what I thought this whole time. Not every business is bound to succeed and when they aren't generating any profit, then how can that be sustainable? Especially on the massive scale seen in Silicon Valley
The start ups are not at fault, neither are the venture capitalists, nor the investors. The real culprit is the Fed with its bag of tricks including zero percentage interest rates and QE. The problem with the Fed is that it is always trying to save us from the last crisis it created. Periods of below market or negative interest rates breed asset bubbles, whether it is empty skyscrapers rising to the skies in cities, digital cash like bitcoin or tech unicorns. Fed saved us from the Russian default, LTCM collapse and asian flu with super low interest rates but that inflated the tech bubble. It saved the day with even lower interest rates inflating the housing bubble. Then it rode to the rescue with QE and negative real interest rates. Of course the investment banks cheered the Fed all the way, they all work on commissions which only accrue when the markets go up, but real investors should worry where all the QE money created from thin air went and who will be the bag holder when the money disappears back into thin air leaving behind worthless share certificates or other pieces of paper. Ben Bernanke is still doing the rounds, taking applause for saving the world, but the question to ask is from whom did he save the world.
9
@Rahul The Fed has robbed the investors of rational free will?
3
@Rahul Really? Take a short trip to SV and then come back and tell us if you have learned anything as it pertains to this largesse?
OK, let me vent on millennials. They are marketers, They are personal branders, They are hypers. They landed in a transitional time when computers and the internet created massive opportunities. They are not hard workers. They don't connect business with profit. They have not changed the world. They just rode a wave and sucked investor money into pipe dreams. What about Apple and Microsoft you say? Not millennials. Wework, 40. Uber, 41. Lyft 35. You do the math.
13
@William Taylor What really gets me about the millennials is the way they used their time machines to go back in time and cause Tulip Mania and the Crash of 29! Dagnabit millennials and their time machine! Get off my lawn!
22
Even dumb money eventually runs out.
12
Private equity - it’s as if the smartest kids in the room and their investment bankers migrate like biblical locusts from a “dot-com” bubble to mortgage securitization to private equity.
7
Scooters? Really? Smart people are investing millions of dollars in a company that makes motorized scooters? In my city, Philadelphia, I would venture to guess that if these devices were to actually catch on and be used in traffic we’d average an accident a day. I think this company is one giant liability lawsuit in the making. The bigger it gets, the bigger the lawsuits. It’s just like vaping - vaping lawsuits are going to be in the billions in a decade. People should invest in safe, user-friendly products that actually work without hurting anyone. There’s a reason why they call these companies unicorns. Venture capital people should think things through past one week before they invest. How about solar cars? Where are the products that will take us into the future?
24
It would be nice if the focus was on fixing things instead of breaking them.
12
@Joe wouldn’t it be nice if the revolution was working towards progress
2
Does anybody remember when there was actual silicon being fabbed in the valley?
1
@Gugie I do and .the groundwater is still awful.
3
The need for this article is shocking. The fact that people believe unicorns are real is hysterical.
Corporate finance 101 tells you that if your return on invested capital is less than your cost of capital, then every dollar you spend destroys value. One of the main components of this is gross margin (technically it is NOPLAT).
Growth (especially high growth) is an accelerant meaning you destroy value even faster when your ROIC is less than your WACC. So these high-valued startups are actually financial dumpster fires unless they can improve their profitability.
The fact that VC firms were obsessed with growth and didn't prioritise gross margin (along with efficient management of PPE and working capital) shows how uninformed, deluded, and overhyped they are. The fact that they (and the bankers) continue to just apply multiples for valuations, as opposed to robust discounted cash flows, is lazy and embarrassing.
It's basic. Read the book "Valuation." It'll teach you a thing or two. Or maybe I should build an app to teach them the basics—I'll sell it to you for $15B.
15
What gets me about these companies is that no none makes money. You used to be able to make some money driving a cab but Uber ‘disrupted’ that space so now drivers don’t make money but neither does Uber!
Maybe your restaurant turned a buck but then the Grubhubs of the world came along demanding a cut and forcing you to offer discounts and killed your margin. But Grubhub doesn’t make money! So they have money losing businesses turning once money making businesses into losers also.
And now these genius investors will try to convince us they invented a new concept called ‘profit.’
38
@DatMel
"Engineers" doing little work while making six figure paychecks make money.
Landlords in SF renting flop houses for 3k a month make money.
Founders made plenty of money doing absolutely nothing.
But yes, everyone else lost a lot of money.
7
@Todd why the quotation marks on engineer, and why do you say that they do little work? It's not a rhetorical question, maybe I'm just misinformed but I thought the tech workers were pretty overworked in what they do. Sure, I agree with most of the criticism against Silicon Valley startup culture, but I don't see that as a reason to imply that tech workers do little work
2
@LS most engineers I know work around 6-8 hours a day. Not a bad gig for someone making 200k+. I'm a lawyer and I have yet to meet an engineer that works anywhere near the hours I work, but I have met plenty of engineers who make more money than me.
Also, because of the crazy demand for software engineers, a lot of engineers with terrible (or nonexistent) technical skills have been able to float from startup to startup.
4
The fact that the article places “gross margin” in scare quotes speaks volumes on the viability of many of these “businesses”.
3
The best sign of the bubble is the educational and work background of the new crop of VC's. There was a time when you had to be an engineer plus goto b school , plus work at a top tech firm or wall street firm to be a VC investor and ideally with some understanding of global business
It takes 16 years of training and residency to become a good cardiologist because you need good judgment , but to be a principal at a VC firm you can be some startup biz dev guy with no MBA and no tech degree. A BA in History from an Ivy is enough as long as you can talk "growth", "disruption "
So what judgement will someone who has zero business training or corporate business experience have?
Th results ... unicorns with no competitive or pricing advantage.. hyped up immature unicorns = hyped up immature VC's
13
A scooter company and WeWork are taken as representative of "silicon valley"??
5
@Mike Believe it! It sure speaks volumes Dow where they have fallen and for what “we” are to believe is needed.
What has happened to us?
Don’t believe the hype.
“I’m an ex-growth guy, and sometimes it’s painful for me...”
Yes, there comes a tme to put childish things behind you.
4
It's interesting that this new concern is coming from the very same investors whose venture capital was predicated on the assumption of outsize returns when the companies went public. Now that these returns have failed to materialize, they worry. Public investors seem less willing to provide endless capital with no hope of return.
All in all, I think more reflection on their own failings of analysis and diligence would be better. Or perhaps we should observe that the ability to invest billions does not imply genius. It just implies unseemly, market-distorting wealth.
3
One question a lot of comments make is a variation on, 'why do VCs keep throwing money at companies that aren't making a profit? Where's the logic in that?'
Perhaps look for part of the answer in the tax rules that allow enormous losses to be carried forward into future years and offset against the bits of a VC's estate that do make a profit. As your President famously said:
'Only the little people pay taxes'.
10
@Alistair 'Only the little people pay taxes'-that was Leona Helmsley.
7
@Marcus Thanks. I'd confused that with Trump's comment that not paying taxes "makes me smart!”. Senior moment! :-)
2
@Alistair
In our life time Trump will serve time in jail.
Some of these start ups deserve to fail. I worked at one where the atmosphere was reminiscent of a frat house. My supervisor couldn't be bothered to train us. He was too busy making himself indispensable to his supervisor. He had no idea how to train a person, how to supervise, or how to be a professional. I've seen that problem in other start ups. I've heard about it too.
In truth, many of the men running the start ups exaggerate what the application or the company can do. They run on lies and get money based upon promises the can't possibly keep. Anyone who is realistic loses the game. It's sad because realism can do a lot more than hype.
32
@hen3ry
Caveat emptor—“let the buyer beware”. VC and PE firms have been throwing money around as if they were in a casino...which, actually, they are.
It’s been said a billion times: If something seems too good to be true, it probably is.
6
The author and Wall Street have extremely short memories. This has all happened before starting with the dotcom bust in the late 20th century. As Trump would say, "there is nothing to see here."
3
@James Ricciardi I was about to post the same comment. I remember looking at financial statements and investment analyst reports in the late 1990s and wondering how certain tech/dotcom companies were able to garner buy ratings, and insanely inflated stock prices, with literally no profit (not even gross, much less net). The signs of history repeating itself have been unmistakable for some time.
9
One of the problems is that VC's put so much pressure on start-ups for growth and not actually building a good business. The mantra is growth at any cost. But you can't build a good business when the only thing you're focused on is growth. You have to pay attention to the product, customer service, your employees, etc. if you're looking to play long term.
I've used one too many of these products where the concept is great but they fall apart on delivery. You can smell the desperation of growth when you sign up and get multiple emails a day from these start-ups.
It will be great if these companies begin focusing on the their financials and other aspects of running a business.
10
@Anji How about you have to start making a profit? No start-up company has lost billions a year for years without going bust, except Amazon--the exception which proves the rule.
1
@James Ricciardi What an old fashioned concept: Actually making money.! A similar concept or issue is the death of the dividend in corporate America. I would not knowingly buy a stock that is focused on “buy backs” instead of paying a dividend. Buy backs should be subject to a shareholder vote.
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@James Ricciardi
In fairness Amazon has been profitable for years now. However, they do reinvest most their profits in the company.
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It's almost never the case that if your unit economics are poor to negative, that you somehow recover from that through growth. In other words, its like the old joke, "we lose money on every sale, but make it up on volume," which seems to be forgotten every decade or so.
As for WeWorks, that has been on the radar of skeptics long before its ill-fated crack at an IPO. Plenty of people in NY real estate and business in general simply could not understand how its business model could warrant its valuation, and no amount of harping by Silicon Valley could make that change. What changed was that the Valley caught up to reality. The madness of crowds is a real thing, but sometimes the crowd gets it right.
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@George Peng "far from the madding crowd" (no spelling error)
1
It's not hard to see why. Just look at all the freshly minted MBAs trying their hand at entrepreneurship. It's the thing to do! It's cool! It's big money! They burn through millions in seed funding to produce vaporware that is acquired by Google or Amazon and cash out. Meanwhile, the true innovators are slaving away silently in garages and cafes. There's only so much money to be made selling powerpoint slides and hot air. Somebody has to write the code and solve the actual problem. As we see with WeWork, no one was doing that. They were just talking about doing it. It's a shame because the idea is compelling - we'd all like better, cheaper, on-demand office space.
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@aaron you win the award for best sentence of the day! “There’s only so much money to be made selling PowerPoint slides and hot air.”” Truth.
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"Unicorn" is the perfect descriptor of many of these ventures. Not just because VCs believe they are rare but also because their value depends largely on myth. The early backer either hopes the myth will turn out to be real or at least to be able to sell before the truth is revealed. Lace, tulip bulbs, subprime loans - all past bubbles created largely on myth or the greed that breeds on finding the greater fool.
Grounding value on business economics seems so sensible that it's amazing to find so many wealthy investors willing to abandon sense in favor of myth...oh wait, I almost forget greed.
1
The dot com boom/bust was all about internet companies with no revenue going public making the venture capitalist rich and leaving the public to wear the losses. The unicorn boom/bust is about companies with revenue but no pathway to profit unable to go public leaving the venture capitalist to wear the losses.
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@Joseph B Where is this irrational money coming from? Is this all from the low interest rate environment?
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@DatMel
Partially that. I have been involved in the stock market since 1968. Got out in 2003. Saw 6 or 7 business cycles in that time.
The best book i ever read about the psychology of the Market was The Money Game. Written under the pen name of Adam Smith.
While I admire Warren Buffet as an astute investor, I think Michael Bloomberg is more brilliant and would like to see him as the 47th president after Pelosi.
These people are all talking about a business being - gasp! - profitable or at least cash-flow positive like it is some kind of new idea suddenly worth pursuing. I'll just say, with the best straight face I can muster - I'm not amused. These are supposed to be the best and the brightest of the world's business creators and innovators. Maybe not.
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Perspective from a long-retired venture capitalist - history repeats itself over and over. Go back 20 years and we had the dotcom boom and bust. Companies with little or no profits grossly overvalued and business models that could never be profitable. Dotcom boom/bust was followed quickly by any company with genomics in its name. Some companies were valued in the billions with basically nothing if it had genomics in its name. Genomics companies were valued on the number of possible drug targets that had no biology attributed to them. At least one genomics companies, Vertex was smart enough to realize the folly and used the money they raised in the public market to buy products. After genomics it was real estate as an asset class that saw stupid money going in. Go back further and we see airlines and department stores (yes airline and department store stocks) were all the rage. History repeats itself over and over again and it seems humanity is bipolar and can't remember what happened just almost yesterday when it comes to money.
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Dan Lyons has written some thought-provoking articles on these so-called Unicorns. His book, “Disrupted” is an eye-opener.
Venture capitalists like Fred Wilson are sounding the alarm- uhm, after they pocketed billions. Wilson in particular has masterfully branded himself as some oracle when in fact he’s just another wealth-obsessed capitalist who’d sell Florida as an urban disruption play.
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Glad to see the public is coming to realization. It is not PONZI but a derivative of the PONZI scheme. Put lot of money in a company, find a startup CEO with good looks, charisma and good talker and keep dumping money into his her stupid idea and voila you got a unicorn. Create hype go for IPO despite being money losing machine and con people into (or their pension funds) buying stocks while the rich exit early and you got philosophy of success in Silicon Valley.
Hard to believe how can this place survive which assures you of 99% failure for a startup and even one that succeeds are money losing machine.
AMAZON was also based on same philosophy and has only become barely profitable and on other than its so called main business and FACEBOOK .... what exactly benefit it is bringing to anyone except addiction. The World needs a new Silicon Valley.
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Why isn't Scott Galloway being credited for calling out WeWork as the emperor with a great head of hair but no clothes?
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From what I see, many of the recent startups––car services; eScooters; work spaces––lack Warren Buffett's (in)famous moat. Competition arrives. Price wars ensue; margins go south; investors walk.
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You never go bankrupt making a profit.
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So the tech boom, which also drove up the cost of housing in Silicon Valley and contributed to a huge increase in homelessness in California....that wasn’t even about MAKING A PROFIT?!?!? What!?!?
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@F I suspect it was largely about egos ....
Perhaps the investment prospectuses for Unicorns should carry the warning, "Remember there is a sucker born every minute." I suggest that before we label an organization a 'business' they have to at least demonstrate the ability to create a profit.
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Hopefully this means fewer annoying tech bros using their unicorn cash to ruin neighborhoods that used to be cool.
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@SL
Not just cool... livable, period.
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Reality strikes. It surprises me that the supposedly canny Investing Angels ignored some truisms that were part of the Business Administration curriculum way back when. 1. If you don't understand what they do and how they do it, don't invest in it (see Theranous). If they're losing money on each unit sold, they will never make it up on the volume. 3. If it sounds too good to be true, it usually is.
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I thought it was common sense that any business needs to generate profits. Now this geniuses are realizing it, finally. I had been thinking where I was getting lost in understanding this game but no, I was having the correct idea all the time. Oh well, poor billionaires.
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@CoquiCoqui Start-ups are mostly used for money laundering, and there's plenty of that going on in the US. They didn't need to generate profits because drug money was what was being "invested" and recirculated back into the economy. Their purpose was to absorb that money, i.e., expand, rather than generate profits. I wonder what's changed, somebody doesn't need the cartels' money, wants to reign them in, etc.
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@CoquiCoqui Start-ups are mostly used for money laundering, and there's plenty of that going on in the US. They didn't need to generate profits because drug money was what was being "invested" and recirculated back into the economy. Their purpose was to absorb that money, i.e., expand, rather than generate profits. I wonder what's changed, somebody doesn't need the cartels' money, wants to reign them in, etc.
Did you ever watch Ozark or Breaking Bad? It's so very explicit.
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Had proper regulations been operating, one wonders if the insanely cosmic valuations and subsequent privacy abuses would have been allowed? Would Facebook had been allowed to sabotage democracies across the globe? Twitter? ... and on, and on.. WeWork further fuels the unstable consultant culture, which is unpredictable all around.
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None of these are actually tech companies. Uber is a taxi service. WeWork is a real estate company. Pelloton makes stationary bikes. Why anyone bought into the hype is beyond me.
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Where are the women? I can't help but wonder if there were more female VCs and female VC-backed entrepreneurs if things would have been this way. Would egos still have driven insane valuations and push for growth at the cost of everything else -- from profitability to how employees are treated. Would Uber and Lyft drivers actually have equity in the companies -- versus hourly pay and sleeping in parking lots at night?
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@btb I worked at a start up where the entrepreneur was a woman. She was pretty much ignored by the men. The company had a wonderful idea and the software to do it but because she wasn't a man no one wanted to throw money at her the way they would have if she'd been a man. And so it goes.
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@btb I worked at a software company that did govt work and the CEO was a women. Her husband was the second in command. We got a lot of govt contracts because we got preferential treatment in the contract bidding process by having a female CEO.
Just 1 example, but women are not always losing out in the business world.
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@btb please, women are equal, and smart people have always known that.
Just a larger proportion of men are on the spectrum so in techs software intensive early days there were disproportionately more men.
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Silicon Valley biotech is particularly bad. It's almost laughable how much these companies bleed money every quarter; for years on end. Literally most of these companies in this field have a net profit margin of around -20 % or more.
Most go under the guise of "we will create the next big breakthrough if you just give us more time." Many biotech companies do already have marketable products but have absolutely no desire for anything other than growth for growths sake. Usually they end up being taken over by lazy managers who don't add that much value, many of whom are paid hundreds of thousands or millions and further slash R&D budgets.
Eventually, investors get tired of the nonsense and the companies implode. Employee stock options become worthless and most laid off employees end up going to another fraudulent Ponzi scheme company for a few years at most.
From what I can tell after working in the valley for many years is most of this place is hype. Only an extremely small percentage of startups and even publicly traded companies here ever become worth anything long-term. Managers are rarely in it for the long haul or care about profitability because they're looking to cash in as soon as possible. They're more interested in artificially inflating their stock valuations by using reckless spending leading to unsustainable growth.
For once I say to Wall Street, good job.
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Whatever happened to the concept of a test market?
You start a product or service in one place, like Milwaukee. You tweek the product or service to see if it can become a profitable enterprise. If you get it right, you expand to St. Louis, Miami etc. But, if you can't make real money in Milwaukee, you keep tweaking until it's profitable, or you pull the plug.
It's hard to imagine how smart people can shovel money at a bad idea globally before it's been proven to be a winner, somewhere.
18
In this beginning of the tech boom, and then 2.0, a few people like Peter Thiel invested a relatively small amount among a number of companies. Thiel's Facebook investment paid off big time. So they figure if they throw enough spaghetti at the wall, a few strands will stick. Problem is, none of the strands are sticking; they're just running sauce down to the floor.
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@HKGuy very interesting pun used by someone located in Hell's Kitchen ;)
All this really shows us is that Wall Street investors are not the geniuses they all tell us they are. In fact they are not that bright.
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@MDM it’s not Wall Street, it’s Silicon Valley. Wall Street is where these valuations are being questioned.
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@Marisa It's "Wall Street" in the sense that these VCs are competing for the same capital from the same deep pockets as the investment markets.
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@Marisa You do know what an IPO is, right?
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The new strategy merely reflects that the sheep so often sheared by IPO [as the venture cap's bail most profitably] are no longer willing to go quietly and pray for positive future returns on their investment.
What a radical idea -- being profitable before IPO. Will certainly decrease the multiplicity of zombies currently living off the IPO sale of their stock. It is painful to watch the inevitable slow agonizing collapse.
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@LawyerTom
Angel investors and incubators always sold their shares at a profit before the IPO - either to other investors or the underwriting investment bank who handles the IPO.
The idea that these are not profitable for investors is comically false. They are extremely profitable for a select few investors who hype the company.
They are not profitable once they become public because their arguments for profitability never included things like answering basic question about cashflow. Why? Because like the initial investors, these people also believe they can find the next gullible sucker to sell their shares to.
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Nice photo of 2 "bird" users on the Santa Monica ocean bike path.
1. They are not allowed on the bike path.
2. The riders are not using the "required" helmets.
I wonder why there is public push back on these devices.
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@Ed Andrews Same kind of carelessness at work in both cases. And what will the newbie riders do when their wheels skid on the sand?
What, wheels skid on sand? Who knew?
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@Ed Andrews
Amen. Not to mention the number of kids under legal driving age who are operating them (sometimes two to a scooter). You cannot convince me that Bird, Lyme et al, do not know the precise identities and ages of those who are using their phones to "unlock" these scooters and whiz out obliviously into motor vehicle traffic. I'd be surprised if they don't have blood on their hands already.
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Pray for an enormous bubble pop, is all I can say. Sooner the better.
Please relieve the Bay Area of it's gold-rush techies-- it would be ironic if actually being asked to make a profit is the downfall of so much greed, bluster and harm.
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@Anna Like wishing Beverly Hills went belly up in the '20s. The Hollywood moguls didn't go away, and neither will the tech giants and their billionaires.
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@HKGuy Oh, I dunno about that. I've lived in San Francisco long enough to have seen several boom/bust cycles: late 1980s (everyone was going to be "the next Microsoft"); Dotcom1.0, the boom triggered by Netscape; the real estate bubble that followed the 1.0 crash, only to crash even harder than the stock market did; now we're in the Second Dotcom Crisis, and why should we think it will play out any differently?
Each time, that cohort of young, ambitious people (men and women both), cushioned by parental funds and educated beyond their intelligence, flooded into SF with the express intent of displacing anyone who had the nerve to live there already. Manifest destiny for the modern era. Until the money dried up, or 30th birthdays arrived on schedule, at which point the men and women of tomorrow packed up the U-Haul and moved on.
Lather/rinse/repeat. It'll happen again, the only question this time is exactly 'when'. And, of course, it'll all be the fault of us folks who live here.
I suggest that all college freshmen should be required to read Joan Didion's "Goodbye to All That."
2
The old way still works for tech.
Many of these new start ups are not tech.
The zero marginal cost of information goods, with the data source being the user, was the way of old.
The new are mostly material goods, with book apps being the information component. Doesnt have the same multipliers.
This plus insane real estate prices, and rising China being the tech capital, are killing the valley.
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@scientella WeWork is a real estate company. Urber and Lyft are car services. Why do the media refer to such companies as tech?
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@HKGuy perhaps because the confuse having a tech interface, which pretty well everything that didnt before will soon, with the original model.
3
This article feels like a year past actual events. Growth at scale started becoming a mantra last year, if not a little earlier (see presentations with unicorn fossils).
I have had the privilege to be part of a firm that eventually gained a unicorn valuation. But that concern had a real business model, opened up a valid, credible market, and offered a compelling vision and solution set. I am not so sure about some of the businesses mentioned in the article here.
Otherwise, people should always be pondering this; be worried; be careful: "unforgiving stock market and challenging investment environment"
7
A lot of great points in these comments.
I can't help but wonder how much the "Trump-effect" actually impacts investment, whether in growth or profit start ups; are we not, as a culture, exponentially more skeptical, not only of "tech", but of all society's "valuations"?
Trump has proven in historic fashion the age old idiom: "Nothing is what it seems".
From Uber to The Weinstein Co., E-Scooters and VR, and all the Fyre festivals and Kim K's undisclosed Instagram #ads in between, I think we're all a bit more cautious about what we truly perceive as "Valuable". So too should VC's be.
9
I have not yet understood how Uber and Lyft, which are essentially less-regulated taxi companies with better dispatch software (which others can copy), ever were viewed as a BIG NEW THING worth billions. Lots of obvious foolishness out there.
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@bernard
For better or for worse, transportation network companies (TNCs) like Uber and Lyft have transformed our ideas of mobility as a service, accelerated the gig economy, and monetized big data. I hope it's not too late for cities to step in and cushion the collapse of the taxi medallion market - which disproportionately affects immigrant communities - but it can't be denied that TNCs were meeting (or creating) a demand that the taxi industry failed to.
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@bernard
Uber has a Freight component; Uber Eats; Uber Autonomous Driving; Uber Health Care; and Uber Bike
So - no - not 'just' a taxi company
4
@SteveRR Yes, they're all under the Uber Loss umbrella of companies.
13
It's getting really annoying that WeWork is used as an example of Silicon Valley's failures and excesses when it's based in NYC.
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@Claudia Gold WeWork could not be a more silicon valley company, it doesn't matter where they have offices. Pretty much every major company has an office in NYC.
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@Jemilah Regardless of where it's based, WeWork is a real estate play. The only thing tech/Silicon Valley about it is the media hype.
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@Jemilah There are plenty of problems in Silicon Valley, but to me WeWork exemplifies what the rest of the world *thinks* is Silicon Valley -- but those of us in it can generally tell the difference.
3
" “This is going to be a healthy reset for the tech industry.”
Perhaps the "reset" that may be most "healthy" is to stop referring to any startup, especially scooters (!), as part of a
"tech industry".
Just because you use an app on your phone, it's not "tech".
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Thus my name "marketing-NOT-'tech' " for the general lot, especially companies that do the same things others do but On A Computer! and "Without" Employees!; and "creepytech" for those that ARE, perhaps loosely, actual technology companies but decide to use their powers for mass surveillance or outright evil (or both, like Bezos).
OTOH I call free-software authors and academics "tech".
3
@Slann
Yes. And why does WeWork appear in this article? That is real estate. Very much not tech, despite all the TED Talk-like psycho-babble that spewed out of it.
7
It shouldn’t be a surprise, doesn’t everyone know that unicorns aren’t real? There’s a reason these companies aren’t called goats or pigs, other than that it would be unfair to goats and pigs.
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"It's like deja vu all over again", Yogi B.
9
Fantastic illustration. Sums it up perfectly
2
Beware. Mark my word. N26 - fintech. Pushed at travelers and esp. college students. Fluff. Hypergrowth on an unstable platform. Valued at $2B it is a bust. Customer satisfaction totally sacrificed for growth. Made me long for JPMorgan Chase.
6
Everyone relying on the Greater Fool. Not a good long-term strategy. Then again, no one (VC, founders, etc) is thinking long-term. The public markets will not be fooled by their deflections/distractions (which they try to spin as a stand-in for old-fashioned profitability.) I guess they got a little too innovative.
7
And this comes as a surprise? The music has stopped for now and the scrambling for chairs has begun.
The only question left is how this will effect Tesla sales in the Bay Area.
32
Sometime in the last 20 years, this became more of a lifestyle and less of a means for starting a business for everyone involved (lets be honest, the VC side was always a lifestyle). Perhaps that should be looked at more closely.
28
Remember when Silicon Valley produced useful technology that improved users’ lives? Yeah me neither.
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As @Thom posts his comment on a piece of consumer tech connected to a global network of computers pioneered by tech companies in Silicon Valley, he wonders, what has Silicon Valley done for me?
15
@Thom It has been awhile. And it would take some thought on the matter. Apple does get credit for helping expand considerably the market for smartphones, but that trend extends from 2007 (over a decade ago). Now the company didn't really have a decent working phone until like 2012.
3
Ooh yes my phone, my phone. How could I forget that I must be grateful for the opportunity to be bombarded by incessant connectivity at the expense of face-to-face interaction.
Or should we talk about how smartphones are over a decade old and were developed by established technology concerns- not these startups and VCs? Silly of me to consider context.
Ooh or do you want me to be grateful for the chance to order things online so that small retailers go out of business and behemoths are all that’s left in the retail landscape?
Oooh or how about those scooters. Everyone loves those scooters? Right? ... right?
The messianic complex with these techies is getting a bit thick for me.
39
Well, duh. Seen this movie a few times now.
Why weren't the investors you quoted talking about profitability before the Lyft/Uber/Peleton crater? Because most VCs are just following the herd, so when the growth mentality takes over most of them sing its praise. When the profit mentality takes hold (often as a reaction to something in the market) all of a sudden it's all about reigning in costs and driving to profitability. Give it a few months or years, and you'll be writing the growth-at-all costs story again.
34
How about making something of value to society?
That would be an innovative idea for the valley.
145
Like a phone that is also a mobile computer?
Like programs that allow essentially every aspect of life today to be far better than 20 or even 10 years ago?
I get it. If you live in rural America, you hear insane valuations and think Silicon Valley is crazy. I think the valuations are crazy too. But you cheapen your argument when you imply that Silicon Valley has never created anything useful.
Here is a non-hyperbolic statement:
Those overpriced valuations were insane and it is good to hear that they are being grounded by having to provide some evidence of profitability in the marketplace.
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@Anil Singh Perhaps he is referring to the more recent stuff coming out of Silicon Valley, which is seemingly aimed at exploiting working class labor or altering local housing markets (Uber/Lyft, Postmates, Instacart, AirBnb etc.) for the benefit of the upper middle class/rich rather than improving lives. Ordering takeout and not having to go pick it up yourself doesn't really count.
83
@Anil Singh every aspect of life is better for who? Not the workers for these companies, not the industries that have been destroyed as a result, and not for anyone who cares about preserving our democracy. But I can see how a tech bro would think that, since most aspects of HIS life probably have improved.
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The fact is that most of these hyped start-ups have poor business models and a very slim path to profitability, and the public markets are finally starting to realize this. Just look at what has happened to Uber & Lyft since they went public.
And does anybody remember Groupon?
88