Monthly Archives: May 2016

Fledgling Tech Companies Prepare for Change

In terms of young tech startups enjoying almost immediate, enormous, and global success, you can’t find a much better example than Slack. Only two years old, Slack has already secured for itself a mind-boggling $2.8 billion dollar valuation, hundreds of thousands of users, and a break-neck growth rate that is extremely competitive by even Silicon Valley standards.

Slack recently raised $160 million as a result of its $2.8 billion valuation in April. It’s founder, Stewart Butterfield, said that he did so not because the company actually needed the money, but purely because it was possible.

slack“This is the best time to raise money ever,” he told the New York Times. “It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians.”

This quote is not necessarily an indicator that the young startup founder expects long term prosperity in a gravy-train market. Butterfield may be expressing a “make hay while the sun shines” type philosophy that if anything, indicates an understanding that more difficult times may be ahead.

He and many other successful tech company founders are likely making an intelligent decision to raise as much money as possible now. According to many analysts, they may be riding the inflation of a tech bubble for all its worth and collecting as much “bubble insurance” as possible before that bubble implodes and times get a little tougher for venture capitalists and the private tech companies that they’ve invested in.

“The advice you always get from more seasoned entrepreneurs is to take the hors d’oeuvres when they’re passed,” explained Marco Zappacosta, CEO of Thumbtack. In other words, raise money when you can, because if you wait until you need it, it might not be out there waiting for you to grab it. Thumbtack is a local services platform that managed to raise $100 billion from Google Capital and other investors in August of 2014.

Whether this economic downturn is worth preparing for is becoming an increasingly irrelevant question; people are actively waiting for the bubble to burst, and mitigating the potential results before they’re a reality is one of the most effective ways to avoid total failure when disaster hits.

That said, riding out a couple years’ worth of market crash with stored money isn’t without its risks. “You’ll have to make the numbers to justify your valuation at some point, so you’re raising the hurdle on yourself.”

google clioudThe paradox is that the ability of even the most successful tech moguls like Facebook to make those numbers has become increasingly in dispute, and that’s the reason people are suspicious of there being a bubble in the first place. AirBnb was valued at 50x its actual profits, and Uber was valued at 100x. Investors have backed up these valuations with the logic that, for startups that show promise, there’s no good reason to cap their potential.

“All of the growth in venture capital has been in the seed market,” explained Scott Kupor, a managing partner at Andreessen Horowitz. Cloud computing and other innovations have made starting up a tech company cheaper than ever, which means more seed companies hit the market ever year. That said, cheaper to start doesn’t mean cheaper to bring into fruition, and at some point, that truth will be written in red dollar signs.