The warning signs are flashing faster and more furiously now and investors are increasingly urging their startups to take notice.
With the Dow Jones Industrial Average enduring a Christmas Eve rout of historic proportions and other indices entering bear market territory, the long-predicted end of the latest bull market is upon the technology industry.
While tech companies managed to escape the worst parts of the great recession in 2008, increasing regulatory scrutiny coupled with a broader set of economic risk factors (including a trade war with China, flagging domestic industrial spending, and — perhaps most worrying — the $9 trillion in debt sitting on corporate balance sheets) may offset projected growth in information technology outlays from companies to create a scenario where the roaring teens of the tech industry’s millennial years head into the terrible twenties of the new century.
That means venture capital investors are once again breaking out the RIP Good Times slide deck from Sequoia Capital and cautioning their portfolio companies about what comes next.
“In the course of preparing plans for 2019, most of our mature companies have internalized the risk for a downturn, but I think it’s hard to really model what the impact will be,” wrote Founder Collective managing partner David Frankel in an email. “You could imagine a slowdown in capital markets due to a rise in interest rates, that might hurt some companies that are overly dependent on VC, but leave the strong companies largely unscathed. It’s also easy to imagine a more systemic correction that decimates the verticals that were (& this will be easy with hindsight of course) ‘vitamins’ not painkillers.”
For some startups that means making hay while the sun shines and raising more capital now. As Joshua Hoffman, the chief executive of synthetic biology startup Zymergen, explained to Bloomberg when discussing his recent $400 million round led by SoftBank Vision Fund, “We wanted to have some fat on our bones for sure… The time to raise money is when people are giving it to you.” (Even if that money is tied to the dismemberment-and-beheading-happy Saudi Arabian government.)
For some, the times look very similar to the early 2000s when the dot-com bubble burst. In 2000, venture investors put around $99 billion into venture backed startups. Eighteen years later that number is roughly $96 billion.
In the first year of the new millennium a Japanese firm called SoftBank had established a worldwide network of funds to invest hundreds of millions of dollars into startup companies that were going to revolutionize the technology industry. Now, SoftBank is once again the firm throwing millions (hundreds of millions) against the proverbial wall in hopes that billions will come bouncing back.
Venture firms are expected to raise around $45 billion this year, while back in 2000 funds were sitting on about $80 billion in capital, according to a 2005 study from University of Western Ontario professor Milford Green.
There are important differences between the early part of the millennium and today’s technology and venture capital markets. Business models for technology companies are far more mature (Apple, Amazon, Alphabet, Facebook, and Microsoft are among the world’s most valuable companies) and the replacement of “eyeballs” with ad dollars can’t be overstated as an engine for economic growth and value.
At the same time, the fact that an entire generation of entrepreneurs have not experienced an economic down cycle is a sign of concern for some investors.
“There’s a large cohort of founders who haven’t seen a down economy and that’s a risk to the ecosystem,” Frankel writes. “Many founders believe that in a weak economy, that they might have to accept a down round, but few have grappled with the reality that capital markets don’t soften, they seize and capital just can’t be had, at almost any price, for months or more.”
So investors like Lux Capital’s Bilal Zuberi has begun advising portfolio companies to start preparing for times they’ve never seen. Winter… is indeed coming.
In a direct message Zuberi wrote:
“Yes, for all obvious reasons we do believe startups should be thinking hard about their capital needs going into 2019 and beyond, and how to not get caught in a firestorm. (a) the amount of money flowing in SV startups has meant startup teams and investors are not used to being frugal. Consider this, many junior partners at VC firms have never seen an economic downturn — and they are sitting on Boards of startups spending tons of money, (b) raising money sooner than later, but not increasing burn is a prudent thing to do for companies that have access to more capital, (c) when downturn hits there will be special situations opportunities to invest in good companies but at lower valuations. All VC firms know…But I wouldn’t want any of my companies to become a ‘special situation’. So fighting hard now to reach escape velocity is also prudent. And (d) you are seeing VC firms bulk up their own funds, raise debt funds, and so on…this should be a signal to startups that where capital flows from upstream is starting to worry. Smart founders should take that as a signal, and prepare accordingly.”
For Zuberi, preparation means a few things. Founders need to think about their financing plans beyond the next 12 to 18 months, and raise capital only if that cost of capital is low. Preparation also means keeping tabs on burn rates and financials in general, and begin planning on how to move aggressively should competitors start becoming “special situations” that investors may look to offload.
Of course, there’s still the possibility that all of this worrying will be for nothing. Bill Gurley warned about a culling of the unicorn herd in 2015, and there have been rumblings about a startup crash since the Brexit vote went through.
At this point though, the parallels are beginning to look more than eerie and it may behoove founders to take the warnings as more than just another instance of investors crying wolf — if only because it seems that the wolf is indeed at the door.
Today’s Wordle Answer #537 – December 8, 2022 Solution And Hints
The solution to today’s Wordle puzzle (#537 – December 8, 2022) is infer. It’s from Middle French “inferer,” itself from Latin inferre, which literally means “to carry or bring into” (via Merriam-Webster).
Like yesterday, we were lucky enough to solve the puzzle in only three tries today. Our opening guess, banjo, beat down the number of possible answers from the standard 2,315 to 174. The next guess, inked, further shrunk the pool to just six possible answers, and after that, we made a lucky third guess.
WordleBot solved the puzzle in just as many tries, although its approach was slightly different: as usual, its first guess was the recommended starting word, slate. It followed that with the word diner, and then it hit the home run on the third try. We hope you have even better luck, but if you don’t find this article early enough to solve the puzzle on time, here are other games like Wordle to try.
Amazon Sued Over Allegedly Stealing Tips From Delivery Drivers
Per AG Racine, in 2016 Amazon instituted a new payment strategy whereby, rather than adding customer tips to a Flex driver’s overall compensation, the company used it to pay wages the driver had already earned. That allowed Amazon, in effect, to pocket the difference, treating the tips as company profits and using them to drive down costs rather than giving workers what they’d earned.
That’s only the prosecutorial side of the story, of course. At the same time, Amazon definitely has a difficult position going into the case – they quietly reimbursed drivers for tips stolen in this manner as part of a settlement with the FTC (via FTC). AG Racine’s allegation, therefore, is less whether Amazon did or did not stiff its Flex drivers – as a matter of record, they did. The issue is whether they have unlawfully escaped punishment for doing so.
That said, past failings do not equal present wrongdoing. The question of what penalties the world’s largest retailer should suffer for its failures and who is entitled to enforce them depends on the legal system, and the legal system has not yet rendered a verdict.
For now, Amazon itself has remained silent on AG Racine’s accusation, as it generally has in cases where the facts are not absolutely damning. As the case proceeds, Amazon’s legal team will no doubt have a great deal to say.
A Beautiful But Shallow Next-Gen Racer
While “Heat” took place in a coastal Miami-like city, “Unbound” moves to Lakeshore, an obvious proxy for Chicago. The downtown area of the map looks gorgeous, especially at night. Lit skyscrapers make up your horizon, and painted lanterns add characteristic flavor to the Chinatown area.
Occasionally, you’ll catch a beautiful sunset over Lakeshore’s harbor. It all blends perfectly with the Frostbite engine’s advanced lighting, and the presentation is wonderful. Forested areas, rock quarries, and driveable rain gutters add some more variety to the city’s outskirts.
In a gameplay context, the Lakeshore map isn’t very large, and this isn’t necessarily a problem. For instance, Criterion’s own “Burnout Paradise” crams a ton of action into its Paradise City map which would be considered tiny nowadays. However, Lakeshore doesn’t live up to that standard. Despite being small, it lacks variance in gameplay, and fairly recent titles like “The Crew 2” manage to outclass it in both map size and density.
There’s very little verticality while driving. I would’ve liked to see some under-construction skyscrapers that allow the player to drive up and through them, plus more opportunities for jumps. The rain gutter areas are some of the only places it felt like the designers really got creative. The environment in Unbound is one of the most beautiful I’ve seen, but the gameplay underneath is actually quite bland and by the numbers. It’s like cutting into an expensive multi-tiered cake only to realize that the batter underneath is dry and unflavored.
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