Fred Wilson's response to "Paul Graham's Letter to YC Companies" • Hacker News Board

Re: Fred Wilson's response to "Paul Graham's Letter to YC Companies"

#31

Post by startupfounder » Tue, Jun 05, 2012, 2:30 PM UTC

"...the Facebook IPO will hurt the funding market for earlier stage startups. But no one knows yet how much. Possibly only a little. Possibly a lot, if it becomes a vicious circle." - PG [1]

"I think it will be particularly impactful on the late stage and secondary markets where most of the IPO valuation speculation is happening." - AVC [2]

We are now in a contracting market where funding for earlier stage startups, late stage and secondary markets is drying up.

AVC referenced PG's letter, but didn't address the letter. Now that we are in a post-frothy market and the froth is drying up, where does this leave early stage startups that are feeding the late stage startups with talent? It would be nice for AVC to address PG's letter directly and not just provide financial analysis to the Facebook valuation.

[1] http://news.ycombinator.com/item?id=4067297

[2] http://www.avc.com/a_vc/2012/06/some-perspective.html

Re: Fred Wilson's response to "Paul Graham's Letter to YC Companies"

#32

Post by samstave » Tue, Jun 05, 2012, 2:36 PM UTC

startupfounder wrote: post #31

"...the Facebook IPO will hurt the funding market for earlier stage startups. But no one knows yet how much. Possibly only a little. Possibly a lot, if it becomes a vicious circle." - PG [1] "I think it will be particularly impactful on the late stage and secondary markets where most of the IPO valuation speculation is happening." - AVC [2] We are now in a contracting market where funding for earlier stage startups,…

So are you saying that the bubble did not burst with the FB IPO, but rather the FB IPO has caused a leak in the bubble which is (still rather rapidly) deflating?

While i feel this is (mostly) true, I also think that we are in so much of a stronger position than the last time the bubble burst that the tech market is not going anywhere any time soon.

Valuations will be lower (which is a good thing) but investment will still be strong.

Re: Fred Wilson's response to "Paul Graham's Letter to YC Companies"

#33

Post by rgrieselhuber » Tue, Jun 05, 2012, 2:44 PM UTC

startupfounder wrote: post #31

"...the Facebook IPO will hurt the funding market for earlier stage startups. But no one knows yet how much. Possibly only a little. Possibly a lot, if it becomes a vicious circle." - PG [1] "I think it will be particularly impactful on the late stage and secondary markets where most of the IPO valuation speculation is happening." - AVC [2] We are now in a contracting market where funding for earlier stage startups,…

> We are now in a contracting market where funding for earlier stage startups, late stage and secondary markets is drying up.

Have some data for that assertion? PG's letter never said that. He just identified sentiment and provided warning advice. I think it's still too early to see if there is a material impact.

Re: Fred Wilson's response to "Paul Graham's Letter to YC Companies"

#34

Post by jopt » Tue, Jun 05, 2012, 2:48 PM UTC

arturadib wrote: post #30

eykanal wrote: post #4

From what I understand, Facebook's main problem is a lack of a stable income source. It's becoming more and more apparent that advertising is not going to be the panacea that it was thought to be, what with numerous studies showing poor facebook ad performance and companies like GM pulling their facebook ad campaigns altogether. Sure, they booked $1B last quarter, but annualizing that number requires some confidence…

As much as I think FB's valuation was high, they have the advantage of having a Product That People Really Want. This means that they have a lot of room to adjust their business model (so long as they don't screw up the UX/product while at it). Contrast this with GroupOn, whose product IS the business model...

I doubt the product itself (UX etc.) is why users are on facebook; rather, the user-base is their competitive advantage.

Re: Fred Wilson's response to "Paul Graham's Letter to YC Companies"

#35

Post by dcaranda » Tue, Jun 05, 2012, 2:48 PM UTC

aurelianito wrote: post #11

I needed to google what EBITDA is in order to understand the artice. EBITDA means "earnings before interest, taxes depreciation and amortization" ( http://en.wikipedia.org/wiki/Earnings_before_interest,_taxes... ). Id est, AFAIK, the money they get, without taking into account the money they spend because their "thigs" age. I hope it helps fellow hackers who don't know finance (like me) to understand the article a li…

EBITDA is a form of profit. Whenever someone says they made X in profit - you should immediately ask what kind - net income, operating profit, etc. Depending on the business, different definitions of profit can produce wildly different numbers.

It's a generally accepted proxy for cash earnings since it looks at profit and takes out:

- non-operating costs such as interest and tax. These are "non-operating" because they have nothing to do with delivering your service/product.

- non-cash costs such depreciation and amortization.

It is worth noting that EBITDA is non-GAAP, which is to say that it's not an officially recognized accounting term. You won't see it in an audit and if you do there will be a big disclaimer next to it. The term gained popularity in the 80s with the rise of private equity. It's used in debt agreements to approximate how a business will pay back loan principal and interest.

Re: Fred Wilson's response to "Paul Graham's Letter to YC Companies"

#36

Post by DennisP » Tue, Jun 05, 2012, 2:51 PM UTC

I don't see why FB's IPO should be considered a failure, from the perspective of earlier investors. They sold stock at an IPO price even higher than the market could support. What's not to like?

Of course institutional IPO investors don't like it, because they want to buy stock at a discount and sell it with a big bump the next day. But the early investors are the losers in that scenario.

I guess you could argue that the IPO investors just won't play ball if they can't get their free money, but I think more likely they'll just be more careful about pricing next time.

Re: Fred Wilson's response to "Paul Graham's Letter to YC Companies"

#37

Post by dxbydt » Tue, Jun 05, 2012, 2:56 PM UTC

AznHisoka wrote: post #27

Build something people want and will pay for. Stop worrying about Facebook and IPO's. Waste of time.

I see this attitude all the time in SV techies - lets just ignore the finance because its all chatter anyway. Frankly, this line of thinking is counter-productive and quite dangerous. Macro matters much more than slapping together some code to build widgets people will want & will pay for. For one thing, most of those people who want & will pay are getting their dough from boring non-tech ventures affected entirely by macro. When things head south, people will batten down the hatches. They will neither want nor pay for, because they simply can't afford to. All of this wanting and paying for is mostly discretionary spending driven by a upbeat macro signalled by IPO markets & especially FB. Once those signals flash red, the wallet stays shut. No more app store purchases, cloud drive subscriptions, ipads, servers, what-have-you. Huge giants ( Sun, SGI, Cray...) fell by the wayside because they collectively put their head down & built what they thought people would want & would pay for. People did want those things initially, but once the economy went into a tailspin, the dot in dotcom became the dot in dot-bomb. I still have those Sun tshirts proudly proclaiming our red hot dotness. I wear them on the weekends when I take out the trash. The kids snigger and say "dot in dot com...wtf ?" and I realize...yeah, wtf were we thinking.

Re: Fred Wilson's response to "Paul Graham's Letter to YC Companies"

#38

Post by dchuk » Tue, Jun 05, 2012, 3:07 PM UTC

arturadib wrote: post #30

eykanal wrote: post #4

From what I understand, Facebook's main problem is a lack of a stable income source. It's becoming more and more apparent that advertising is not going to be the panacea that it was thought to be, what with numerous studies showing poor facebook ad performance and companies like GM pulling their facebook ad campaigns altogether. Sure, they booked $1B last quarter, but annualizing that number requires some confidence…

As much as I think FB's valuation was high, they have the advantage of having a Product That People Really Want. This means that they have a lot of room to adjust their business model (so long as they don't screw up the UX/product while at it). Contrast this with GroupOn, whose product IS the business model...

Facebook's product is ultimately their users via their ad platform. Their users don't really make them any money, it's the advertisers who are paying FB.

In terms of having a Product That People Really Want (ads), it appears there's mixed emotions about that currently.

Re: Fred Wilson's response to "Paul Graham's Letter to YC Companies"

#39

Post by bilbo0s » Tue, Jun 05, 2012, 3:08 PM UTC

jopt wrote: post #34

arturadib wrote: post #30

Earlier quoted context omitted.

As much as I think FB's valuation was high, they have the advantage of having a Product That People Really Want. This means that they have a lot of room to adjust their business model (so long as they don't screw up the UX/product while at it). Contrast this with GroupOn, whose product IS the business model...

I doubt the product itself (UX etc.) is why users are on facebook; rather, the user-base is their competitive advantage.

You're both right.

I think arturadib was talking about the user-base BEING Facebook's product.

You are correct as well, when you say that the user-base is their competitive advantage. It is a competitive advantage in the production of their product... a centralized pool of users.

You are mistaken, however, to categorize the UX as the product. The UX is simply a clever widget used to build the product... again, a centralized pool of users.

Re: Fred Wilson's response to "Paul Graham's Letter to YC Companies"

#40

Post by SonicSoul » Tue, Jun 05, 2012, 3:21 PM UTC

arturadib wrote: post #30

eykanal wrote: post #4

From what I understand, Facebook's main problem is a lack of a stable income source. It's becoming more and more apparent that advertising is not going to be the panacea that it was thought to be, what with numerous studies showing poor facebook ad performance and companies like GM pulling their facebook ad campaigns altogether. Sure, they booked $1B last quarter, but annualizing that number requires some confidence…

As much as I think FB's valuation was high, they have the advantage of having a Product That People Really Want. This means that they have a lot of room to adjust their business model (so long as they don't screw up the UX/product while at it). Contrast this with GroupOn, whose product IS the business model...

Their valuation assumes that they will be doubling income many times over.

Most people (such as your post) completely ignore that, and focus on a good brand that is Facebook, and how the internet revolves around this company now.

with a P/E ratio of 85 it is priced as HIGH GROWTH stock. this means that you are paying $85 for $1 of profits.

Meanwhile FB is having hard time continuing its growth because everyone is already signed up (1 for every 8 people in the world), so they try to increase revenue by attempting to keep users on longer, making the service more intrusive and annoying to a portion of its inhabitants.

I'm no financial analyst, but I don't see above as sufficient to multiply its revenue and live up to the hype that is it's stock price. They would need to make some really breakthrough moves to do this.