Seed funding slows in Silicon Valley(reuters.com)
reuters.com
Seed funding slows in Silicon Valley
https://www.reuters.com/article/us-venture-seedfunding-idUSKBN1AH31J
77 comments
Probably an unpopular opinion, but when the startups receive $120,000,000 to make a juice machine that is only really accessible to the top 1 or 2% of the USA, it's not a bad idea to give funding a reset and give people a reason to step back from trying to raise funds and more time to work on more innovative ideas. America has it's fair of crises now, yet a good chunk of people have a smartphone. How can startups help people in the midwest and the coasts? Or what interesting things could be done given most of the world is online now? I'm sure we'll see some cool ideas and another funding boom again with some cool new ideas soon.
I think people forget that vc backed startups are profit and greed driven (like all free enterprises). We all like to drink the cool aid and think that a startup's purpose is societal impact but really they are engineered to make $$$.
As such, it makes sense that people pour millions of dollars to target the 1%. They've got a shitload of more money than the rest of the country. Seriously, if you've got an product that every rich person wants but that no other person cares about, you will have vcs knocking on your door. We need to think of vcs as building cash machines, not as the money behind "changing the world". Yes occasionally vcs fund companies like Google that have broader impact but that's not their primary aim.
If we want more people building ventures that impact society we need to either * change the funding model * build bootstrap ventures * build non profit ventures * ask the government to step in (a socialist approach)
A good example are institutions like the Gates foundation and WHO eradicating polio in the last few years. Yeah it's not sexy but organizations like that are making real societal impact.
As such, it makes sense that people pour millions of dollars to target the 1%. They've got a shitload of more money than the rest of the country. Seriously, if you've got an product that every rich person wants but that no other person cares about, you will have vcs knocking on your door. We need to think of vcs as building cash machines, not as the money behind "changing the world". Yes occasionally vcs fund companies like Google that have broader impact but that's not their primary aim.
If we want more people building ventures that impact society we need to either * change the funding model * build bootstrap ventures * build non profit ventures * ask the government to step in (a socialist approach)
A good example are institutions like the Gates foundation and WHO eradicating polio in the last few years. Yeah it's not sexy but organizations like that are making real societal impact.
Facebook, Instagram [and any similar VC backed company] are not targeting the 1%. Quite the opposite. Mass human scale adoption is their goal. And once this is achieved then their biz models get very interesting. I do hope there is a significant shift towards social impact ventures. This is where some of the hardest challenges are.
> We all like to drink the cool aid and think that a startup's purpose is societal impact
No, we don't. Who do you think you're speaking for?
No, we don't. Who do you think you're speaking for?
A lot of startups say explicitly that out of one side of their mouth while eating money with the other.
That sentiment is commonplace enough that Silicon Valley parodied it: "We're making the world a better place. Through constructing elegant hierarchies for maximum code reuse and extensibility"
Something that's been on my mind recently, given the increasing amounts of inequality, is "why aren't the lower and middle classes more effective at taking rich people's money?".
In other words, rather that thinking about protectionist measures or redistribution (not that I'm particularly opposed to such things), why aren't rich people spending more cash on things and thereby allowing the money to flow down?
One possibility is that we really are topping out our hierarchy of needs. Billionaires are driving round in Priuses and wearing $80 jeans. Capitalism relies on demand being practically infinite. Could this growing inequality be a sign that this assumption is faulty?
Or do we just need to invent more drone mounted, blockchain integrated juicers to sell to them?
In other words, rather that thinking about protectionist measures or redistribution (not that I'm particularly opposed to such things), why aren't rich people spending more cash on things and thereby allowing the money to flow down?
One possibility is that we really are topping out our hierarchy of needs. Billionaires are driving round in Priuses and wearing $80 jeans. Capitalism relies on demand being practically infinite. Could this growing inequality be a sign that this assumption is faulty?
Or do we just need to invent more drone mounted, blockchain integrated juicers to sell to them?
The reason that lower and middle class people are not more effective at taking rich people's money is because if they were effective at taking money, they would not be lower and middle class. They are lower and middle class because they are effective at other things that have nothing to do with taking money.
Perhaps I should have phrased the question as "why have the lower and middle classes become relatively less effective at taking rich people's money in recent years".
This is a tautological explination which adds absolutely nothing to the discussion. Yes we all understand that A = A.
I found it much more helpful than this reply.
Its not an unpopular opinion, but that Juicing thing was definitely an exception, not the norm.
As to why everyone is chasing unicorns, one of my friends who's actively trying to get funding for his hardware startup sums it this way: VC's would make more from 1 unicorn than 50 other mildly successful businesses, and the other 50 businesses would probably require just as much work as the unicorn.
Its a really fucked up calculus to be sure. I'm not sure what the solution is though. How do we encourage VC's to invest in more meaningful startups?
As to why everyone is chasing unicorns, one of my friends who's actively trying to get funding for his hardware startup sums it this way: VC's would make more from 1 unicorn than 50 other mildly successful businesses, and the other 50 businesses would probably require just as much work as the unicorn.
Its a really fucked up calculus to be sure. I'm not sure what the solution is though. How do we encourage VC's to invest in more meaningful startups?
Unfortunately in capitalism, the only carrot you have is profit. The question then becomes: How do we make "meaning" profitable? I really don't mean this as snark; if you could find a way to have helping the mentally ill increase shareholder value, you could probably make it work. I'm not arguing that this pursuit isn't horribly broken from a humanistic standpoint, merely that it might work and would be a lot more feasible than changing something which has become fundamental to how our world functions within this lifetime.
The problem is it's impossible to predict success in an early stage company. Optimal way to ensure profit is to place many bets and hope one pays off enough to cover the costs of the losers. Asymmetrical outcomes are a requirement for sane strategic investors.
If all you can do is buy lotto tickets, you are better off buying insane payoff opportunities than trying to pick which lotto tickets will have a higher frequency of payoff, but a much lower yield.
If all you can do is buy lotto tickets, you are better off buying insane payoff opportunities than trying to pick which lotto tickets will have a higher frequency of payoff, but a much lower yield.
The point though is that these are not really lotto tickets. A lot of high-tech startups are working on monetizing some obscure technology, or inventing a more efficient way to do a task, or something along those lines. They are actually providing value, other than the payoff from their sale or IPO. I think we as a society are failing somewhat to give an appropriate monetary value to that kind of contribution.
The problem is that a VC doesn't care how much value a product provides to society. It only cares how much value it can extract for itself.
some VCs do look at what non monetary value their investment generates. I.e. Reddit.
Exception?
> A futuristic new kitchen appliance that is being called the "Keurig for food" could forever change home cooking. Called Tovala, the countertop machine is a broiler, steamer, oven, microwave, and toaster in one ... The price of the machine will eventually go as high as $279.
http://www.businessinsider.com/tovala-will-replace-every-coo...
> The June Intelligent Oven can detect what you’ve just popped into the oven, and will heat up or cool down based on how you’ve indicated you want it cooked. It’s connected to your phone, so it can tell you when your food is ready. This countertop convenience comes at a steep price of $1,495 per oven.
http://www.sfchronicle.com/business/article/June-Intelligent...
> A futuristic new kitchen appliance that is being called the "Keurig for food" could forever change home cooking. Called Tovala, the countertop machine is a broiler, steamer, oven, microwave, and toaster in one ... The price of the machine will eventually go as high as $279.
http://www.businessinsider.com/tovala-will-replace-every-coo...
> The June Intelligent Oven can detect what you’ve just popped into the oven, and will heat up or cool down based on how you’ve indicated you want it cooked. It’s connected to your phone, so it can tell you when your food is ready. This countertop convenience comes at a steep price of $1,495 per oven.
http://www.sfchronicle.com/business/article/June-Intelligent...
The unicorn thing is temporary. This will self-correct.
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There are many innovative ideas out there that go unfunded. The problem here is that disruptive innovation is risky and VCs are sheep.
[deleted]
That's a preposterous and intellectually dishonest position to hold. If there's so much money on the table go raise your own fund and get wildly rich on all these ideas the sheep won't touch. Or admit that deeds are harder than words.
yeah, so i'm essentially doing that actually
> when the startups receive $120,000,000 to make a juice machine that is only really accessible to the top 1 or 2% of the USA
Given that even most crack houses probably have more than $399 worth of kitchen equipment, to the extent it's only 'available' to the 1% is only because it doesn't offer enough utility to justify the cost. Had they made a less shitty product that cost the exact same amount then no one would be complaining about class inequality or whatever.
Given that even most crack houses probably have more than $399 worth of kitchen equipment, to the extent it's only 'available' to the 1% is only because it doesn't offer enough utility to justify the cost. Had they made a less shitty product that cost the exact same amount then no one would be complaining about class inequality or whatever.
The fallacies of the armchair venture capitalist:
1. Hindsight -- it is much harder than you think to determine not only what could be profitable, but also what is impactful. A lot of it is character judgment -- it isn't like Facebook was a revolutionary new idea, but it was the competitive team with (some) vision and (a lot of) execution that brought it to new heights.
2. Just because unicorns get the majority of the media attention doesn't mean they are the majority of startups.
1. Hindsight -- it is much harder than you think to determine not only what could be profitable, but also what is impactful. A lot of it is character judgment -- it isn't like Facebook was a revolutionary new idea, but it was the competitive team with (some) vision and (a lot of) execution that brought it to new heights.
2. Just because unicorns get the majority of the media attention doesn't mean they are the majority of startups.
VC funds will invest their money in what they believe will maximize the return on the value invested. They are not particularly trying to "help people", neither are they trying to segregate society, they are simply pursuing their stakeholders best interests, and there is nothing wrong with that.
It has nothing to "reset" or having to think about helping the 99%. Silicon Valley isn't a charity and the VC crowd nor anyone else in silicon valley care about society or doing good. It's all about money. The FED has been raising interest rates and has signaled they will continue to do so going forward for many years to come.
The smart/connected VC and the smart money are now cashing out to front run the recession. Soon the second-most connected will pull out and so on and so forth. And when the FED signals a low interest rate environment, the smartest/most connected will be the first to jump back in.
The US has been on an epic economic boom since 2009 and the economy has been drowning in cheap money for almost 10 years.
It worries me how so many people have an idealized fantasy about silicon valley, tech gurus and the industry itself. The tech industry is all about greed just like wall street, oil industry, clean energy industry, etc.
Elon Musk is just as greedy as Goldman Sachs CEO.
If silicon valley could make more money with juice machine for the top 1%, they'll keep investing in it even if it means 99% is starving. Musk, Page, Zuckerburg, etc aren't saints no more than wall street big wigs are saints. They all just want money. Which isn't necessarily a bad thing.
The smart/connected VC and the smart money are now cashing out to front run the recession. Soon the second-most connected will pull out and so on and so forth. And when the FED signals a low interest rate environment, the smartest/most connected will be the first to jump back in.
The US has been on an epic economic boom since 2009 and the economy has been drowning in cheap money for almost 10 years.
It worries me how so many people have an idealized fantasy about silicon valley, tech gurus and the industry itself. The tech industry is all about greed just like wall street, oil industry, clean energy industry, etc.
Elon Musk is just as greedy as Goldman Sachs CEO.
If silicon valley could make more money with juice machine for the top 1%, they'll keep investing in it even if it means 99% is starving. Musk, Page, Zuckerburg, etc aren't saints no more than wall street big wigs are saints. They all just want money. Which isn't necessarily a bad thing.
I'm not sure the pause in unicorn IPOs is directly related to a slowdown in seed funding -- perhaps indirectly by minting fewer angel investors.
A lot of the popular press -- even the popular tech press -- conflates startup funding. But late stage investing, which is mostly where unicorns play, is a totally different game from seed investing.
Also, there are two stories here... one is about the shift in average check size and fewer deals. This is really just investment grade inflation, where larger deals are being called 'seed.' Not sure why but it's how it works. So much of the former seed rounds are probably underreported angel / micro fund rounds now.
[Source: my startup's funding isn't publicly disclosed for that precise reason.]
A lot of the popular press -- even the popular tech press -- conflates startup funding. But late stage investing, which is mostly where unicorns play, is a totally different game from seed investing.
Also, there are two stories here... one is about the shift in average check size and fewer deals. This is really just investment grade inflation, where larger deals are being called 'seed.' Not sure why but it's how it works. So much of the former seed rounds are probably underreported angel / micro fund rounds now.
[Source: my startup's funding isn't publicly disclosed for that precise reason.]
It really has to do with expectations. The expectations of a company that has raised a "Seed" are X, the expectations of a company that's raised an A are 3X, a series B are 15x etc. By positioning yourself as having only raised a seed it makes it easier to raise later rounds. It's a very real anchoring effect.
From NYT that has actual numbers:
> Seed and angel investors completed about 900 deals in the second quarter, down from roughly 1,100 deals in the second quarter of 2016 and close to 1,500 deals during that time period in 2015, according to a report released last month by Seattle-based PitchBook Inc, which supplies venture capital data.
> The dollar amount provided by seed and angel investors was $1.65 billion in the second quarter. That's just shy of the $1.75 billion for the same time period of 2016.
That's slowing from 2015, but IMO these changes are pretty insignificant.
> Seed and angel investors completed about 900 deals in the second quarter, down from roughly 1,100 deals in the second quarter of 2016 and close to 1,500 deals during that time period in 2015, according to a report released last month by Seattle-based PitchBook Inc, which supplies venture capital data.
> The dollar amount provided by seed and angel investors was $1.65 billion in the second quarter. That's just shy of the $1.75 billion for the same time period of 2016.
That's slowing from 2015, but IMO these changes are pretty insignificant.
"The median seed deal is now $1.6 million, according to Pitchbook, up from about $500,000 five years ago. That's more in line with what big venture firms used to invest."
Cost of living, office space, employees (due to the cost of living) has to be a factor here. Maybe $500k was viable a few years ago in the Bay Area, but imagine these days a company NEEDS a larger seed round in order to get to a viable state.
Cost of living, office space, employees (due to the cost of living) has to be a factor here. Maybe $500k was viable a few years ago in the Bay Area, but imagine these days a company NEEDS a larger seed round in order to get to a viable state.
Yup. Assume there's two founders both of which draw a 50k salary, likely after months of bootstrapping. 400k is not even three engineers in SF.
400k is like the fully-loaded cost of a single engineer if you're trying to hire "top talent" and actually get them to come work for you (i.e. they're valuing any equity you're offering at the likely result of $0).
But those "top talent" engineers will be starting their own company so you don't have to worry about that.
Can anyone who was at a seed stage startup 5 years ago provide some insight into what salary looked like? I moved here about 2 years ago and constantly here how crazy housing and salary have gotten in just the last few.
We were seed stage in 2011. We squeaked by in Redwood City on ~$30k/yr salary sharing 1-bedroom apartments which ran about $1,200/mo. That same unit now rents for $3-4k/mo.
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I think it has to do with the traditional app model slowly being phased out.
There is a huge saturation of apps on every major platform and it's getting harder and harder for new devs to get enough userbase that way.
There is a huge saturation of apps on every major platform and it's getting harder and harder for new devs to get enough userbase that way.
"it's getting harder and harder for new devs to get enough userbase that way."
The problem isn't that it's harder. Harder just means it takes longer. The problem is that most founders and investors are just copying the same strategies that worked ten years ago for Facebook and Twitter. So most funded startups are just shutting down after 12 - 18 months with the investors losing all their money.
The problem isn't that it's harder. Harder just means it takes longer. The problem is that most founders and investors are just copying the same strategies that worked ten years ago for Facebook and Twitter. So most funded startups are just shutting down after 12 - 18 months with the investors losing all their money.
> So most funded startups are just shutting down after 12 - 18 months with the investors losing all their money.
Hasn't this been true since startups existed? Most startups fail, everyone knows that.
Hasn't this been true since startups existed? Most startups fail, everyone knows that.
> Hasn't this been true since startups existed? Most startups fail, everyone knows that.
I think what's new is the string of high-profile companies who have raised lots of money, released a product, and then shut down only a few months later. (Peach, Meerkat, Talkshow, etc.)
I think what's new is the string of high-profile companies who have raised lots of money, released a product, and then shut down only a few months later. (Peach, Meerkat, Talkshow, etc.)
And the Juicero effect.
Being phased out by what?
It's a long talk but
https://youtu.be/ci4kbCmEmOI
It's by James Whittaker. Basically people are downloading and using way less apps than a few years ago. Today to get the users to use something it has to be sortof built-in the ecosystem in an other way then simply forcing someone to go search for and download a specific app.
https://youtu.be/ci4kbCmEmOI
It's by James Whittaker. Basically people are downloading and using way less apps than a few years ago. Today to get the users to use something it has to be sortof built-in the ecosystem in an other way then simply forcing someone to go search for and download a specific app.
The platform building that functionality themselves. Vertical integration in the customer-facing direction. 90% of my apps are Google-made now.
Similarly, Apple News is pretty crappy, but I still check it now and then because its right there. That's a "pageview" that used to go to a "media company".
What does "functionality themselves" mean? If possible please elaborate a bit? TIA
I think he's referring to the platform itself providing most of the apps.
e.g. Google Play Music replaced spotify for me when I used android. It can now play podcasts (like Apple's podcasts app) and also recognize music playing (like Shazam). Google's Inbox replaced Dropbox's mailbox. Google Map has a lot of features I used to find in Waze, even some extra ones (like Timeline). etcetc
It reminds me of what Microsoft used to do: embrace, extend, extinguish.
e.g. Google Play Music replaced spotify for me when I used android. It can now play podcasts (like Apple's podcasts app) and also recognize music playing (like Shazam). Google's Inbox replaced Dropbox's mailbox. Google Map has a lot of features I used to find in Waze, even some extra ones (like Timeline). etcetc
It reminds me of what Microsoft used to do: embrace, extend, extinguish.
"Embrace, extend, extinguish" was Microsoft's strategy for destroying open software interoperability standards. I understand what you're saying, but it's not nearly the same thing.
> It reminds me of what Microsoft used to do: embrace, extend, extinguish.
I guess they still do it on the enterprise level. But they have fallen behind in terms of consumer ecosystem.
I guess they still do it on the enterprise level. But they have fallen behind in terms of consumer ecosystem.
I assume they mean most of the features that were once in separate apps are now built into the OS.
by its own uselessness
It might seem like that now, but in hindsight the opportunities will be obvious. There were multiple search engines when Google came out and many social networking sites when Facebook came out. There are always opportunities, things just get harder. A lot of businesses seemed indestructible have collapsed, every major car manufacturer and wall st bank would have failed if they hadn't been bailed out in 2008. The same thing can happen to tech companies.
In the SEO world you used to be able to put a keyword on a page 1000 times and then make the text white with CSS and rank #1 and make bank, now that gets you penalized. Spamming backlinks used to work, now it gets your site de-indexed.
You have to have an edge that separates you from the competition if you want to succeed
In the SEO world you used to be able to put a keyword on a page 1000 times and then make the text white with CSS and rank #1 and make bank, now that gets you penalized. Spamming backlinks used to work, now it gets your site de-indexed.
You have to have an edge that separates you from the competition if you want to succeed
Now you need 100 WordPress blogs on individual ipv4 addrs on SWIP'd blocks hosting AI-generated content about a keyword (which search engines can't distinguish from legit content) and have those rank well enough to get real SERP CTR so you can sell your eBook about how to get rich from the Internet (which is itself just generated from a Markov chain PHP script running against Wikipedia articles).
In summary:
In summary:
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Doing any of the sites.
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What it basics. What the hundreds of second is hardly noticed your site from other web pages or RSS
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1. Creating at all the college-educated line dancerThe Internet has a lot of dead wood and garbage these days.
"slow down" = great time to start a company
Great time for real entrepreneurs starting real companies in organic ways, not shysters looking for $30M seed for their app so they can pay themselves and their buddies comfortable salaries while they work 5 hours/day in a trendy WeWork in SoHo.
This is both true and false - makes it easier to hire talent and attract users/customers, but harder to raise capital. Works out great if you're running as a small business and don't need to raise capital.
Yup Office Space, office equipment will be cheaper. Vendors with less sales will fight to be competitive. VC's won't tolerate superfluous startups and it would be a great time to bootstrap your own.
Why is that? There is less money in circulation, so less chance you'll get any. Are they making wiser choices? So if you're company is a wise choice you'll get funding?
You don't need funding to build a great company. In fact most great companies started out without huge funding.
Perhaps he is referring to Paul Graham's essay Why To Start A Startup In A Bad Economy :
http://paulgraham.com/badeconomy.html
http://paulgraham.com/badeconomy.html
Agreed.
I also don't think the slow down is necessarily a bad thing. It's not that VCs aren't interested. They're just much more cautious about funding companies that end up being sustainable and viable. I think after all these unicorns, VCs have finally been brought back down to earth and are looking in the long term.
I also don't think the slow down is necessarily a bad thing. It's not that VCs aren't interested. They're just much more cautious about funding companies that end up being sustainable and viable. I think after all these unicorns, VCs have finally been brought back down to earth and are looking in the long term.
(Warning: Really loud screaming. Do mute your sound before watching this.)
https://www.youtube.com/watch?v=qydSKppGRD8&t=38
https://www.youtube.com/watch?v=qydSKppGRD8&t=38
Please don't post off topic like this.
I don't think this is terrible news for entrepreneurs. It forces more operating discipline in the earlier stages. And, I believe we could do with more discipline as an ecosystem. As long as there's growth capital around once the business _is_ prepared to scale, we're all good.
The particular point about incumbent advantage, which admittedly has always been a factor, is particularly poignant in my mind. A lot of the recommendation is that founders shout from the rooftops about what they're working on, but in this climate is the better route to be relatively quiet with a small group of beta testers/a personal network? And go public more feature-rich or stable? If you hit a chord early on an incumbent could shift, even just "enough," and water-down your competitive edge to the point where the slag to viability just isn't realistic.
In theory, yes the incumbent can shift just enough to water-down your competitive edge but a company or a team with this kind of agility are few and far between. Getting a consensus is one of the hardest thing to do, let alone the speed at which you have to execute.
In my experience this is one of the greatest hindrances to corporate evolution. If you or anyone else knows of any research into this phenomenon and how to help groups move beyond it I would love to see it and learn from it.
I've been hoping funding would slow so all the dead wood (we don't need all these delivery apps) can burn off without adding more to replace them. Hopefully we'll see companies try to grow sustainable businesses rather than a bunch of zombie startups that persist when they really shouldn't.
The cost of starting a company is also declining. So there is an offset there - In early stage the big outlier in SV is rent. However, most other aspects are getting considerably cheaper (including cloud platforms being very generous with credits)
As it has historically done, this will level out and correct without any intervention required.