We need to talk about startups.

Original author: Andrew Wilkinson
  • Transfer
We have fun again and again as if in the 1999 yard.
"Dude, Kevin Systrom really screwed up when he sold Instagram for a billion." I was at the airport, waiting for a flight home from San Francisco. The guy nearby was loudly broadcasting to his friend, who was nodding. The surprising thing happened in technology: a billion dollars no longer seems like big money! A few years ago, the news that a startup was sold for $ 25 million would make us all lift our jaws off the floor. Today, no one blinks an eye, there is no talk of billions.

Billion dollars

Perhaps a billion is a new million. In the end, the world is changing faster. The Internet and mobile devices have firmly taken their positions, and a new era of exponential growth has apparently begun. Every day, entrepreneurs overthrow the taxi driver kings and hotel tycoons, costing hardly more than smartphones and healthy contempt for foundations. In this crazy new world, it seems that anyone can already create a billion-dollar startup, whether it be Uber for cleaning the house or AirBnB for placing dogs.

And it is not surprising if all this sounds familiar to you. In 1999, at the top of the dot-com bubble, IPOs and billion-dollar takeovers took place every week. Often, it was about startups with illusory business models based on "eye tracking" or "stickiness." We will always remember how Yahoo bought the stupidest Geocities for $ 3.57 billion and Broadcast.com for $ 5.7 billion . And there was such a startup for food delivery WebVan: having an income of only $ 5 million and a negative margin, they went public and reached a capitalization of $ 8 billion .(Translator’s note: according to Wikipedia, the link provided that in November 1999 WebVan’s income was $ 400 thousand, the accumulated minus exceeded $ 50 million, and the market estimate reached $ 4.8 billion.) Two years later, they bent and filed for bankruptcy .

This time it's a little different. Most of the companies have at least some income. Some are even a little profitable. Units tend to IPO, preferring to stay private longer. But many signs indicate that we are again starting a party in the spirit of the good old 1999. Perhaps we are not quite at the party itself, or it is slightly different from the previous ones, but something is clearly brewing. As Mark Twain said: “History does not repeat itself, but rhymes.”

Fun Facts Collection

  • The share of new advertisers in Super Bowl broadcasting this year was the highest since the dotcom, and many of them are startups based on new technologies. Remember this :
  • 114 startups valued above $ 1 billion by venture capitalists at the moment. There were 40 of them a year ago. And again, among them are low-margin food delivery , as well as companies whose income is generated by other startups .
    (This chart is actually somewhat outdated: the 2015 bar should be 44 points higher!)
  • Last year alone, Forbes added 23 freshly baked techno-billionaires to its list of rich people.
  • San Francisco rents have long gone beyond the reasonable . An average odnushka will cost more than $ 3,000 per month (this is the lower bar), having risen in price by 15% over the past year.
  • Income programmer average level reaches $ 130,000 a year in San Francisco, and that's without options and bonuses. But these are small people in comparison with those who have their own agents .
  • High-flying investors such as Bill Gerley and Mark Andrissen (both of whom managed to ride on the wave of dotcoms) believe that startups burn money too quickly, and their estimates are too high , we should worry :
    “Silicon Valley as a whole, the community of venture investors, and startups take unreasonably high risks. Unprecedented since the 99th. In some cases, not so stupid, and sometimes much dumber than in the 99th. “No one is afraid, everyone is thirsty for profit, but all of a sudden this will end.”
  • The stock market is significantly overheated according to all reasonable metrics . The CAPE coefficient (Shiller P / E) reached 27 , exceeding the levels of 1929 and 2007, but not yet reaching only 1999. Once again: companies rush headlong into the public market without even showing a profit . In 1999, 80% of companies entering the market were unprofitable. Last year, their share reached 72%, rising from 46% in 2012, which does not bode well for a return on investment in the future.
  • Instead of entering the public market - which implies strict auditing and management - many companies attract huge amounts of private investment based on dubious calculations. At the same time, many companies that have become public proudly announce their own profitability, without showing profit in accordance with GAAP accounting standards . Moreover, they put on display price / earnings ratios and a sales multiplier, “pumping” the ratings of private investors.
  • Hundreds of startups are launched every day. There are so many of them that startups for tracking startups are gaining popularity. Recently, one of these services, ProductHunt, received an investment of $ 22 million. The incomes of many such startups entirely consist only of the funds of other startups.

Do not get me wrong, I love startups and technologies, a lot of wonderful things happen there, regardless of what was said above. Signs of life gives artificial intelligence. Hand feed to self-driving cars. Drones will be delivering toothpaste to us soon. There is no doubt that an incredible amount of innovation is being born right now.

It would be wrong to say that everything startups work on is useless. But the financial situation suggests that a correction should be expected. I’m trying to say that innovation is all right, but the ratings of companies are completely unstable, and many investors, founders, hundreds and thousands of their employees will receive a strong blow in the coming years.

But who knows, suddenly history will not repeat itself, and exponential technological growth will allow us to break through. Maybe Uber is worth its $ 500 billion. Maybe I'll scornfully look at this post in five years. Yes, I'm just putting on swimming trunks ...
“You will find out who swims naked only when the wave subsides”
- Warren Buffett

Appendix: Defense Instruction

So, you are worried that your startup may be at risk. Do not panic. There are companies that can talk about how they survived the past bubble. Here are a few steps to prepare for the storm:

  1. Diversify your client base
    If your revenue is mainly from venture startups, direct your sales team (or adjust your strategy) to companies that are in the later stages that have existed long enough and have a resource for survival.
  2. Reasonably priced growth (GARP )
    There are many business models where you don’t need to be a genius to keep pouring profits into the funnel of customer acquisition and sales growth. For example, if the value of a client (LTV ) exceeds the cost of attracting it (CAC ). Compete with competitors, but leave the opportunity to press the brakes on time and not fly out over the red line. Fred Wilson recently wrote an excellent post in which he shared the formula for expenses: annual sales growth plus return on sales should exceed forty percent. Somewhere here lies the line between cutting costs and liquidating a business.
  3. Avoid fixed costs.
    Employees can be reduced, but your super-office for $ 100,000 per month (including sports and games rooms, a cafeteria with a chef) is rented under a tight 5-year contract and will not go anywhere. Each dollar of fixed costs draws you to the earth, depriving flexibility during a crisis. A reasonable balance should be found between the space for attracting and growing new employees, and between what is really necessary for the business.
  4. Cash first
    If you live with confidence that you can always attract another round of investment as needed, then you should develop a backup plan. Simulate a situation: what will happen to your company if you fail to find the money? A healthy balance and low costs are a guarantee that the company will survive the storm when competitors are left without money, and when they are eliminated, you will redeem technology for mere cents, if you wish. Bank balance is a ditch around a fortress protecting you from the Mongol invasion.

All this is basically common sense and the basics of business. But I was always surprised at how few people in the world of technology are paying attention to this. The last seven years have been favorable for startups - a continuous holiday! It is easy to succumb to the charm of thinking about the next round of investment, profitable takeover, or IPO - as if all this is close by. But it is more valuable to practice thinking about what will happen if the music suddenly ends.

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About the Author: Andrew Wilkinson is the founder of MetaLab and Flow . Publisher Designer News
KDPV: by Michael Marcovici [ CC BY clause 3.0 ], Via Wikimedia Commons

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