There's a noteworthy pattern I've observed over the last 24 months.
I founded a design subscription service for startups [1]. Many founders are increasingly tapping into subscription based services, whether that’s for design, development, sales etc. to help them reach a certain level of scalability.
Historically we’d have a harder time getting clients, but for many startups having these plug & play teams makes the startup much more lean. You don’t have to provide a gazillion employee benefits or other cash draining things.
its nuts how so many startups just burn through their VC money buying things that do not directly impact their product and business.
A startup should do nothing except build something people love. To do so find more economic and effecient ways to get to product market fit asap. You can do all of the fun stuff later.
Because most of these startup ideas are rubbish and won't be viable in the marketplace. That's the real reason they can't raise money. Really, if the people with the startup put their own money into the product or took out loans in their own name then it would show it's serious. But most startups should just die.
If you need to raise money to stay afloat, you're not going to be successful (except in a very minority of cases like Airbnb and Uber but your startup will most likely not be at that level). Your startup should be profitable on a unit economic level and you should be using VC to scale that model, not to prop up a failing business.
Often VC is also for signaling to the market for valuation, as the Retool founder says:
> We actually didn't need the money (we're cashflow-positive). In fact, we haven't touched the money from our Series B (in 2020) nor our Series C (in 2021). But raising money is helpful because a) it gets prospective customers interested in the product (oh, X company raised, let me check out what their product does), b) it gets prospective employees interested, c) it allows people externally to see that the company is making progress rapidly (I wish we could post revenue metrics here, but I... think that's a bad idea?), and d) we sold very little in this round (1.4%, so there is minimal dilution to employees), for those advantages.
> TBH, fundraising is kind of like charades: it's a way to signal you are doing well, without telling people your private company metrics. I wish we never needed to fundraise, and could just focus on building great products and working with customers instead. :)
I have a lot of thoughts on this, so please bear with me.
I think it's interesting that the model we use to evaluate ideas and fund companies is so terrible.
Starting a company is always dangerous and risky and that's extremely sad. Why is starting a business so hard in 2023?
I think we need an "explicit demand signal" and I think it can be technological one and a semantic one. Kickstarter is the nearest to this I can think of but kickstarter is only a primitive marketplace - for example, I don't see services listed. But I want to see vector semantic models used to capture the meaning of business processes and identify weaknesses and match problems to imaginary products and synthesise products. Think automatic market understanding and differentiation. It would be indexed per organisation and across society.
There's a carrying capacity for every market. An average city can only support a certain number of coffee shops or X of kind of venue. So we have competition. A lot of people grinding their gears competing needlessly. It's such a waste.
One of my ideas was "attention camping", which is waiting for something to match your idea of something you find interesting or want to pay attention to. If I had a commitment to buy from a large number of people, then my business would be a lot safer, except I'm an unknown quantity.
Besides the reasons people have already stated on why recent start-ups failed, it seems to me that the world recently has at the same time become more complex AND also simpler: the complexity that each individual company/employee needs to handle has increased, while everyone seems to be engaging in the same types of complexity (every company uses a Slack, GSuite, driving online ads somehow, etc).
The economy is tight, requirements from customers are high and there are fewer niches. Any worthwhile product in these conditions (at least in tech) needs a lot of baking time, which actually only a company with pre-existing cash-flow can afford.
Unless VC actually develop some patience on returns, I can't see much innovation happening in the next few years.
Call me cynical, but I didn't find this recent wave of startups to be innovative. It was defined by a systemic deployment of playbook tactics, copying what worked elsewhere. Nothing new, just trying to capture industries/value. Perhaps with the deterioration of venture capital infrastructure we will see more innovation – that is wholly new solutions and paradigms.
I also think it is worth pointing out that historically (not recently) a lot of startups began not in order to make money but to provide real value to humans/society. I like to remind people that it is easier to make money when you first build something that people value than to build something that people value once you've made money.
As a long-time serial entrepreneur who has done startups in four different decades, some of which were quite successful: my opinion is that the large quantities of relatively easy money of the previous cycle wasn't generally a good thing.
Personally, I believe that for -most- software idea cases if I won't bootstrap it, then I don't believe in it enough, and/or can't get others to believe in it enough. I've been on the VC side and the boot side, spending your own money just hits different.
Is the problem really that there's no money, or that what money exists is busy chasing only a few product areas (like third-tier AI startups)? AFAICT funding for anything that wasn't the VCs' obsession du jour has been hard to find for quite a while. If it's also drying up for "target area" startups that have both questionable vision and questionable leadership (and many are worse in both dimensions) then that almost seems like a good thing.
I'm curious to see what the fallout will be for the VC industry.
Can somebody correct my wrong assumptions here...
They have a ton of funds that need to be deployed in an approx 4-5 year period.
If they don't deploy the funds, they don't get their carry, they also won't be able to raise another fund.
Will they end up throwing a large amount of money at a smaller number of start-ups?
More VCs will chase the best deals, raising the price of those start-ups. Then the 2nd tier companies will probably follow.
Or will VCs return funds to LPs? Give up on the being VCs and say "I always loved being an operator, so now I'm returning to that".
I think this is good for the tech industry long-term.
The SaaS companies that have been raising huge $$ don't need the dollars, and many weren't offering real value.
I think we're seeing more money flow into deep-tech, particularly energy, environment, and health.
I'd been working as a founding engineer with a startup for the past couple of years. It was my first experience actually trying to raise money, and I had no idea how hard it actually was. I hear stories about other companies with literally nothing more than a mockup get millions of dollars, and we had a full tech stack and couldn't get more than $20K. Crazy.
The notion that a pizza robot company was once valued at $2B is absolutely hilarious.
It’s myopic to reduce the startup extinction event to a loss of VC.
The point of VC is that some businesses (like LinkedIn, Google, Apple, etc.) require multiple rounds of capital to get to a sustainable business model.
But just stating that isn’t instructive.
What’s more important, esp. for founders, is why that is the case:
It’s because providing a better way isn’t a sustainable business practice.
Markets lock in the familiar vs. the effective.
So you quite literally have to create new markets to deliver new & better ways of creating value.
There are many ways to fail at that with honest effort, including due to factors outside your control.
Beloved products, that deliver real value & better social impact, die all the time.
I know it can seem from the outside that whipping up hype & raising money is a founder’s job.
But very few founders have or ever will win on such a narrow approach.
It’s smart to raise on the latest trend because it maximizes capital. But it won’t save you from the fact that buyer’s are not rational - B2B or otherwise - and markets reward incubants.
I would argue it's primarily psychological, rather than financial (interest rates) or economic (value creation).
IPOs, like shitcoins, have become simple pyramid schemes. Eventually, the mass bagholders get wise to as what's going on, and demand for such schemes falter. In a decade or so, amnesia will allow for the cycle to repeat.
“Most of the companies we are handling now frankly deserved to have gone out of business a year or two ago.” - liquidator.
- Making pizzas with an off the shelf industrial robot. (It's been done.)
- Auto loans. ("But our auto loans are different!")
Is the SPAC exit still a relevant strategy these days?
The market was frothy and some bad ideas that should have failed earlier didn't because of cheap money that has dried up. Startups that can make it right now are more likely to succeed long term. This is the natural cycle that weeds out the weak companies.
Add a slide about AI. Fixed.
A Spontaneous Disassembly Event? ... Has the Bubble...
Juicero raised $118.5m, the other shoe was bound to drop.
I don't think the current landscape of VC funds actually knows how to spot value even if it sat on their face and called them daddy. They're throwing darts at a board, basically.
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https://archive.is/ZRFkh