Let’s face it. The startup world is exploding, and right in the heart of it lies the Silicon Valley, it’s huge VC’s, and a giant storm of hype and buzz. Everyday in the news, you can find a new article on the “next biggest thing!” that will take the world by storm. A few days later, you forgot all about it. What’s worse (better?) is how these companies are wildly “successful” in some sense or another.
In a blog post, Jason Cohen, founder of WP Engine & Smart Bear Software, questions this terming of “successful.” Specifically, he points to a former flop in “Color” which raised $41 million for a new mobile app, before launch and immediately failed. Now, it remains as a flagship for the failed startup world. The issue here is two-fold:
- VCs (even if they believe the product/company is bad), can fund it and sell it off still getting the returns they want.
- The trend of startups getting tons of funding and falling flat on their face is becoming all too common (Tech bubble..?)
VCs Fattening the Pig
It’s an old theory of the greatest fool. VCs funding these types of dead end companies ARE acting rationally. They’re able to stay, cash out, and then see the business models they had previously fueled come crashing down at someone else’s expense. As Cohen illustrates, Bill’s other companies have an interesting track record of success?:
- Freeloader – $3m invested, sold for $38m in 1996
- Support.com – $2.5m invested, IPO’ed for $32/share
- OneBox.com – $60m invested, sold for $850m in 18 months
- Lala – $35m invested, sold for $80m
Damn! This guy’s a boss! Let me fill in the information following the successful sales and IPOs:
- Freeloader – $3m invested, sold for $38m in 1996, shut down in 1997
- Support.com – $2.5m invested, IPO’ed for $32/share, current share price is $2
- OneBox.com – $60m invested, sold for $850m in 18 months, parent company fails and market crashes
- Lala – $35m invested, sold for $80m, shut down in June this year
Ah… Maybe not as great as we thought. The fundamental economic flaw though is that VCs are cashing out for funding these fundamentally flawed companies. One cannot help but ponder if VCs perhaps initially see these companies as potential successes, only to later learn that they’re fundamentally flawed, quickly turning their investment from a shared legitimate desire for their success to the stuffing of the pig before selling it for a higher price. Fundamentally, is this appropriate?
Your gut has to say no. This essentially is a large-scale scam that hurts those at the end of the chain. (As a parallel, think about the housing bubble and how toxic assets were propagated… The underlying similarities are quite shocking). If this is viewed as terrible economically for the country as a whole, then how does one go about discouraging or dis-incentivizing it? Is it possible to overcome this morally deceptive trick when you can make so much money off of it?
Admittedly, there has been a lot of discussion toward this topic specifically relating to how easy it is to get millions in funding. You can look at the bottom of CrunchBase and find millions in recent funding from the day to companies you will probably never hear of again.
What if, as mentioned in the previous example, people wisen up to the startups that are hoaxes? What if VCs get stuck with these “toxic assets” of companies they’ve invested millions in without being able to retain any value? The good thing is that unlike banks, VCs are not so directly connected to us as consumers. However, when these companies hit Wall Street, that’s a whole new story… (If you are interested in, look into the Tech Bubble 2.0, where profitability isn’t important for a business).
This prompts a few general opinions I have regarding startups:
The startup world is vicious.
Behind it’s facade of great culture, youthful energy, and the millions of dollars lies a sneaky and deceitful world. Be careful of being on the wrong-side of a relationship where one is taken advantage of for their talent with hardly any credit or direction. Don’t be a victim of the startup scam.
As a brief example, there was not too long ago a lot of buzz generated around Ark. Boasting 1 billion+ people search and find old contacts, new people, and maintain contact with friends, it was thought to be a Facebook killer if not at least a competitor. Sounds awesome.
But I heard through a little birdy and some engineers hired at Ark a few surprising things that the rest of the world doesn’t know. The 1 billion? A lie. It’s team/leader? Shady. I don’t want to go into details and jeopardize anyone still at the company, but these types of stories springing up scare me. The scariest thing of all is truthfully no one knows about it. However hearing the stories through their engineers paints the obvious truth that this a company doomed for failure. Despite this, it earned $5m in seed round funding from Andreessen Horowitz, Greylock Partners, and other goliath VCs, and a very overpriced (this isn’t public released, but I have heard a large number…) acquisition offer. Again, Scary.
The startup world is a trap for bad practice (coding-wise)?
Yes, you can learn a lot at a startup. Engineers will be able to bust out “industry-ready” code really freakin’ fast. But be wary and cognizant of what is taught in class with good coding practice, building scalable features, etc. Being trusted as an engineer at a start up means only a few people may look over your code. For a recent college grad, this is exciting, but also intimidating. How do you really know what you’re making is that great? Perhaps I am a pessimist, but I think it helps to have a solid foundation that mentorship via a large company can bring.
But please don’t get me wrong. At the end of the day, startups are great. They promote innovation and a new culture that pushes bureaucratic issues aside, perfect for an engineer looking to make an impact in the world, fast. But this approach as with everything has to be taken with a grain of salt. To help hammer this point home (and loosen up the tone), check out this light-hearted mockery of the startup world, created by Vooza.