Startups are pummeled in the ‘great unwinding’ • Hacker News Board

Re: Startups are pummeled in the ‘great unwinding’

#81

Post by dchyrdvh » Sat, Apr 04, 2020, 8:44 PM UTC

julius_set wrote: post #62

So I’m curious will property and rental prices drop in San Francisco now that funding is drying up? Can’t seem to find much information about that. For example a friend of mine who was laid off still has to pay $3300 / month for his studio. Curious how long this will last for?

These prices are set by the top 30% employees of the big tech firms. Unless there are massive layoffs there (e.g. 250k employees are let go) and this situation lasts for a few years (they have savings for 3-5 years usually), I wouldn't expect the prices to move.

Re: Startups are pummeled in the ‘great unwinding’

#82

Post by caseyf7 » Sat, Apr 04, 2020, 8:44 PM UTC

tedd4u wrote: post #33

Startups have had years to prepare, work on their plan, strengthen their fundamentals, and raise capital if necessary. I think the shock is that probably this is a faster onset and deeper drop scenario than most had modeled. Every [1] startup has been thinking for the past couple years about their plan for when the recession would come. Probably hundreds of articles written in mainstream and economic/financial press…

They may have had a plan, but very few boards and investors were letting management hold excess resources for a rainy day.

Re: Startups are pummeled in the ‘great unwinding’

#83

Post by yellowapple » Sat, Apr 04, 2020, 8:46 PM UTC

qppo wrote: post #54

Startups are in way better shape than traditional small businesses. By our very nature, we need months of runway just to keep running. We're designed to weather this kind of storm because "zero revenue" is the default state. Hearing about Bird cutting 30% of their workforce is awful. But it's nothing compared to the thin-margin Mom & Pop, or medium sized private enterprise that had 1 week of cash on hand and ceased o…

Startups are more than just "us tech bros", though. If your company sells a physical product, for example, then you're typically reliant on either warehousing personnel on your own payroll or a third-party logistics (3PL) provider, both of which have been hit hard with COVID-19-related shutdowns. Pickers or packers or forklift drivers can't (usually) do their jobs from home; they need to be onsite at a warehouse to to do their work, and if the warehouse is literally not allowed to let employees in the door because the company is a "non-essential business", then guess who's getting laid off? For companies selling physical products, this threat is existential.

There are lots of startups that sell physical products. I work for one of them. We're doing pretty great for now (we sell, among other things, toilet paper and hand sanitizer / soap and cleaning supplies), but we also recognize that we're lucky, and that luck is unlikely to persist if this "great unwinding" lasts longer than the COVID-19 panic unless we do everything in our power to reduce costs and extend that runway as long as possible with the current tailwind. Most startups selling physical goods ain't so lucky (see also: the ones in the article, even if the article didn't really go into much detail on it).

Re: Startups are pummeled in the ‘great unwinding’

#84

Post by scarface74 » Sat, Apr 04, 2020, 8:47 PM UTC

qppo wrote: post #54

Startups are in way better shape than traditional small businesses. By our very nature, we need months of runway just to keep running. We're designed to weather this kind of storm because "zero revenue" is the default state. Hearing about Bird cutting 30% of their workforce is awful. But it's nothing compared to the thin-margin Mom & Pop, or medium sized private enterprise that had 1 week of cash on hand and ceased o…

You weren’t around in 2000 or 2008 were you? Your startup is only in “better shape” as long as VCs are willing to keep funding you. VCs are only willing to keep funding you if they have confidence that you will have a profitable exit.

Re: Startups are pummeled in the ‘great unwinding’

#85

Post by x0x0 » Sat, Apr 04, 2020, 8:50 PM UTC

rhizome wrote: post #57

x0x0 wrote: post #11

Earlier quoted context omitted.

Probably this is focused on ownership and there's miscommunication. VCs don't care that much about dollars; they want 18%+ ownership or even big returns aren't material to them.

Yes, significant equity in a large valuation. If you don't want to be a "large valuation" company, then don't talk to VCs and hire a good bizdev.

Should you take VC -- while an important consideration -- is kind of a separate question.

Assuming you've decided to take VC, good ones won't invest small amounts of money. And this is separate from valuation; this applies even at the A stage. The reason is they want 18%+ ownership, ideally 22%. If they get less ownership, even if they have a big enough fund to fully exercise their pro-rata rights, they don't get a big enough return in a success. Hence someone who would be willing to put in $4m for 20% will be unwilling to put in $1m for 5%, or even $500k for 5%. The upside just isn't there.

Re: Startups are pummeled in the ‘great unwinding’

#86

Post by rexreed » Sat, Apr 04, 2020, 8:51 PM UTC

qppo wrote: post #54

Startups are in way better shape than traditional small businesses. By our very nature, we need months of runway just to keep running. We're designed to weather this kind of storm because "zero revenue" is the default state. Hearing about Bird cutting 30% of their workforce is awful. But it's nothing compared to the thin-margin Mom & Pop, or medium sized private enterprise that had 1 week of cash on hand and ceased o…

Let's circle back in six months and see how you're doing. Things still feel nice and full when you've had a nice big dinner. But give me several lean days of no breakfast and meager lunch and dinner and you'll see just how full you feel.

Startups are not in any way, shape or form, "better" than any other traditional business. In fact, maybe worse.

Re: Startups are pummeled in the ‘great unwinding’

#87

Post by scarface74 » Sat, Apr 04, 2020, 8:51 PM UTC

bob33212 wrote: post #63

hn_throwaway_99 wrote: post #17

> For start-up workers, the past few weeks have been sobering. Many had bought into the tech industry’s change-the-world ideals, had few boundaries between their work and personal lives and hoped for big payouts if their start-ups went public. This saddened me, because it's a refrain that we hear over and over and over. Same exact thing happened during the .com bust (which scares me to believe that was 20 years ago a…

Good start-up CEOs struggle with this because many of them do care for their employees at a personal level, but they also have an obligation to the owners/investors to be financially successful. And the most findnacially successful CEOs are going to put investors first when they are up against the wall. I assume they rationalize it by saying that if the company is successful that is better in the long run for everyon…

Once you take outside funding, whether the founders “care” about their employees is irrelevant. They don’t guide the company any more. Their investors do.

If they “cared” about their employees and weren’t looking for a large exit, they would be creating a “lifestyle” business and not seek VC funding.

I’m not making a moral judgement either way. Everyone should go into any employment situation with their eyes wide open.

Re: Startups are pummeled in the ‘great unwinding’

#88

Post by edoceo » Sat, Apr 04, 2020, 8:52 PM UTC

Spartan-S63 wrote: post #4

yingw787 wrote: post #3

I've heard numerous times startups have had a hard time getting a smaller amount of funding from angels and VCs. As in, "I want $500k" and "no, we only do deals with $1M+", or something like that. I thought that was crazy. This is probably the pendulum swinging back, as pendulums do. I am interested in how this situation affects larger companies. My guess is since they're so much larger this time around than back in…

I think they get bullied into larger deals that inflate their valuation beyond what they think they're worth. It works in a growing market to fundraise beyond your valuation and then grow into it. It doesn't work when the market turns down. If your runway is sufficiently short, you'll be fundraising a down round in a down economy which will slash your valuation and make it harder to get good terms.

Yea, I had this c2015 when I was seeking 250k to grow a revenue generator. I was told to make a story that compels a 15M future valuation so I could ask for 750k now. But I didn't even believe the revenue projection need to justify! I said no, these are my numbers. I couldn't fake a 10x story and my 6x story wasnt compelling enough.

Re: Startups are pummeled in the ‘great unwinding’

#89

Post by anthony_r » Sat, Apr 04, 2020, 8:54 PM UTC

rexreed wrote: post #79

I'm sorry for some of my schadenfreude here, but really, so many of these startups are overfunded with way too many employees to begin with. They've often paid top dollar for expensive technical talent in locations with very high cost of living. I can't wait to see a pull back to solid fundamentals. I don't see why a daily vacation rental company honestly needs 240 highly paid employees. One company cited in the arti…

See also the "Austrian business cycle theory". But the bust, while clearing the economy of a lot of mal-investment, goes on for quite a painful while before the previous level of output/employment/prosperity is matched.

https://en.wikipedia.org/wiki/Austrian_business_cycle_theory

Re: Startups are pummeled in the ‘great unwinding’

#90

Post by rexreed » Sat, Apr 04, 2020, 8:54 PM UTC

The news just keeps getting worse for SoftBank. "OneWeb, a satellite start-up that had raised $3 billion in venture funding from investors including SoftBank, the Japanese conglomerate, filed for bankruptcy on Friday and plans to sell itself."

Can we finally admit that SoftBank's model of so-called VC funding success is really just a colossal failure? The throw-everything-into-it approach of making Unicorns a reality just doesn't work.