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

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

#51

Post by heretohelp »

mrshoe wrote: post #48

Personally I love to see Facebook's stock languish. Not because I dislike Facebook, but because it's great to see the market react rationally to an over-hyped tech stock. FB is arguably the most hyped IPO in history. There was a blockbuster movie made about it. If ever there was a positive sign that we are not in a bubble, the poor performance of FB on the open market is it. It's great to not be in a bubble. That mea…

I said the exact same thing to a friend of mine yesterday, when we were discussing the news surrounding their IPO.

So as long as the market punishes this kind of hubris and rationally prices companies relative to real revenue and potential, I feel better about us not having a bubble.

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

#52

Post by crazycanuck »

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…

Further to this and dcaranda, EBITDA is used for valuations because it describes the cash flow the business has available to pay various stakeholders before any financial structures are taken into account. There are three people who have a claim on the cash a company generates after paying operating expenses: debt holders, the government, and shareholders. Their claims on the money go roughly in that order, so in other words the shareholders get what's left (directly via dividends or stock buybacks or indirectly via an increase in the equity value) after the debt holders and the man are paid.

The thing is, however, how much you owe the government is affected by how much debt you have (i.e. your financial structure), because the debt interest is deductible. It's largely because of this that EBITDA is the preferred thing to use, as opposed to say earnings or cash flow, because it enables you to compare companies at a fundamental level unaffected by whatever financial structure they might currently have. One of the things PE guys like to do is fiddle with the financial structure (aka load it up with debt ;-), so it's important to understand the value ex whatever impact the current structure might have. But even if that's not your motive, it's a useful measure for the same underlying reasons.

It's also true that EBITDA is a useful number for PE because it tells you the amount of money available to service debt, as dcaranda points out.

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

#53

Post by georgemcbay »

"But even at half those numbers there are fantastic returns for investors and entreprenuers to be had."

What about at 0.1% of those numbers?

Facebook (while it obviously has a ways to go on direct customer monetization), is an extreme outlier whose numbers across virtually any metric are far more extreme than most startups will ever come close to. IMO it is their outlier status combined with the lackluster performance relative to that status that is the killer.

Trying to anchor other startups to Facebook's numbers at something like "half" or even a "quarter" is kind of handwavey because a startup would have to be improbably, insanely successful just to get a small fraction of the userbase Facebook enjoys.

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

#54

Post by startupfounder »

rgrieselhuber wrote: post #33
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.

"Jessica and I had dinner recently with a prominent investor. He seemed sure the bad performance of the Facebook IPO will hurt the funding market for earlier stage startups." - PG

What part of this is unclear? PG was sure enough to write a letter to the startups warning of the oncoming contraction. I am guessing the VC was someone of the caliber of Ron Conway.

I do not have data as data is a historical record (in this context), not a prediction of the future. This is why it is a warning of thing will come, but the question is HOW MUCH will the market contract, not IF if will contract.

"I think it's still too early to see if there is a material impact."

I believe this should read, "I think it's still too early to know the extent of the impact."

EDIT: I don't have any hard data, I am using PG and AVC to assert that what they say is true based on the information they know.

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

#55

Post by specialist »

dxbydt wrote: post #47
AznHisoka wrote: post #43

Earlier quoted context omitted.

Well our country and economy is already over inflated with debt, so it wouldn't be such a bad thing if discretionary spending halted. really, would that be such a bad thing to the overall economy? People tightening their spending, instead of recklessly borrowing debt, and buying nice things that ultimately aren't necessary? I guess if you're a company that targets discretionary spenders, you're doomed.

> guess if you're a company that targets discretionary spenders, you're doomed. other than food clothes & shelter, everything in the world is by definition discretionary spending.

My medications are not optional.

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

#56

Post by pnathan »

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,…

It's also important to think of the market outside of tech: it's been intensely downsliding in the last month or two. The "European Question" is kind of a Big Deal.

A draining tide sinks all ships.

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

#57

Post by startupfounder »

pnathan wrote: post #56
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,…

It's also important to think of the market outside of tech: it's been intensely downsliding in the last month or two. The "European Question" is kind of a Big Deal. A draining tide sinks all ships.

Very true, but the Facebook IPO was the signal for the tech industry of the coming contraction for early stage startups regardless of the "outside tech" market.

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

#58

Post by rgrieselhuber »

startupfounder wrote: post #54
rgrieselhuber wrote: post #33

Earlier quoted context omitted.

> 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.

"Jessica and I had dinner recently with a prominent investor. He seemed sure the bad performance of the Facebook IPO will hurt the funding market for earlier stage startups." - PG What part of this is unclear? PG was sure enough to write a letter to the startups warning of the oncoming contraction. I am guessing the VC was someone of the caliber of Ron Conway. I do not have data as data is a historical record (in thi…

"He seemed sure" is not data.

You said "late stage and secondary markets is drying up." You need actual data (even if it is a few months old) to back that up.

What actually happened in the case of Facebook is that the price was run up so high on the secondary markets that the public markets missed out. That's not the same thing as drying up. It could lead to that in the future but I think it's still premature to say it is happening now (especially with no data).

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

#59

Post by startupfounder »

samstave wrote: post #32
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…

I am saying that the bubble saw its reflection in the mirror with the Facebook IPO and is contracting to "reflect" that understanding of self.

What this means for early stage startups is that they will have to be built upon solid small business cash flow business models while the market is contracting.

If they do this and are dependent of investment they will likely attract the attention of investors.

This contracting will filter out the startups that lack a business model that works in the "real world" (aka small business).

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

#60

Post by patmccarthy »

Like many things, it's not so black and white. Fred Wilson and Paul Graham are probably both right.

Paul Graham is right that the Facebook IPO being seen as negative (whether that's correct or not) could reduce larger startup valuations which trickles down to early-stage startups as well. The advice in his email is sound regardless of whether the IPO does trigger any type of "downturn" in startup investing.

Fred Wilson also makes great points that Facebook still has an insane multiple while providing a huge win for all its investors and employees, which will bring more money and hope into the startup ecosystem. Not to mention more acquisitions made by Facebook, etc.

Chances are both are partially right and partially wrong, and a number of other factors from macroeconomics to small things in startup world could prove one of them to be "more right" over time.

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