I am writing to share some reactions to Claire Cain Miller’s piece in the New York Times, “Silicon Valley Booms but Worries About a New Bust.”
I met Claire at the Founder Showcase event she mentions in her article and thought her to be an inquisitive and thoughtful person.
I have four primary reactions:
- I do not believe it is “easy to come by” money in Silicon Valley.
- I do not believe startups are wasting money on “lavishly” decorated and “holier than thou” offices.
- I believe we are seeing a new generation of smarter, more efficient startups.
- I was quoted out of context.
I do not believe it is “easy to come by” money in Silicon Valley.
Claire writes, “… for anyone with a decent idea and the drive to start a company, $100,000 to get it off the ground is easy to come by.”
I have direct experience fundraising within the time period this article covers, having helped Cabulous present to raise over $500k and fundraising for the company I co-founded, VidCaster. My 50+ fellow peers in the highly competitive 500 Startups accelerator program have direct experience fundraising right at this moment. My wider network of peers includes those in programs such as Y Combinator, TechStars and of course those entrepreneurs branching out without an accelerator behind their back.
None of these entrepreneurs would ever say $100,000 is easy to come by.
All 100+ investors I have met with while fundraising for VidCaster and Cabulous, whether angel, “super-angel” or VC, are cautious, thoughtful and thorough in the examination of any investment.
Most notable is the attention toward solid and sustainable revenue. We did not pursue funding for VidCaster until we were absolutely sure that our business had created a scalable and sustainable revenue stream, proven simply by looking at our books.
Companies that raise funding from investors whom I encounter are almost universally deserving of capital to expand what is already a successful business.
I do not believe startups are wasting money on offices.
Even as we approach levels of tech sector employment not seen since the late 90’s, use of space is extremely efficient — twice as efficient to be exact.
SFGate article from earlier this year:
“…as tech jobs have multiplied, their real estate footprint has fallen. Where tech companies occupied 18.3 percent of San Francisco office space in 2000, they occupy just 9.3 percent today, according to Yasukochi, who based his estimates on data from the California Economic Development Department, Moody’s Economy.com and his firm.
That’s one reason so many offices in San Francisco remain vacant. At the end of 2010, 17.1 percent of the city’s office space sat vacant, according to Jones Lang LaSalle, up from 14.7 percent in the first quarter of 2009.”
Fellow entrepreneurs I know shy away from investing in traditional, lavish office spaces reminiscent of the 90’s. In fact, most startup companies growing today look to share space in San Francisco or the Peninsula with other software companies doing similar work. I have been a longtime member of Parisoma co-working space in San Francisco and as our company grows we are partnering with other startups to lease shared facilities in San Francisco.
I believe we are seeing a new generation of smarter, more efficient startups.
In San Francisco and Silicon Valley we are witnessing a slow motion revolution in the way that companies are formed and ideas are monetized.
The next generation of startups focus on functional products that earn revenue. They reach a point of significant recurring revenue before seeking funding. They are conservative with cash and go to great lengths to minimize expenditures, especially those “legacy” expenditures from the previous generation of startups such as lavish offices or physical server infrastructure.
In fact, I went so far as to remind Claire during all of our email communications of my core belief that this next generation of startups is very different.
A quote from a recent email exchange with Claire yesterday afternoon:
I’ll share again since it’s a strong belief of mine: I think our startup (VidCaster) is a great example of what I believe to be a wider trend in this generation of startups — focusing on a product that earns real revenue, pursuing funding only when the company is showing real traction.
I am disappointed to have been quoted out of context in this excerpt from the article:
Soon came VidCaster, a service for Web sites to add video; it was started by Kieran Farr, a taxi driver turned chief executive. He said his service had absolute stickiness — meaning that it lures Internet users to stick around for a long time.
“What’s the gross margin of the business look like?” asked George Zachary of Charles River Ventures.
“What does that mean?” Mr. Farr said.
“That’s a problem.”
Unfortunately, this is where the article stops quoting.
I’ll admit I was taken aback by George’s question, but I wasn’t the only one — other audience members told me they were confused why he asked this as well.
To understand why, here’s a quick bit of accounting background: gross margin for software-as-a-service companies is an irrelevant metric, it approaches 100% if we are doing our job right and running a functional software business.
George asked this question because he thought we were a service business in video production — an industry where margins are closely monitored — which our slides and my verbal presentation clearly stated we were not. He later apologized for his misunderstanding and ended up giving VidCaster the highest score of the panel.
I respect Claire, her writing and her intent to provide a behind-the-scenes look at one of the only bright lights in our nation’s economy, however I do not agree with the perception that the sky is falling over Silicon Valley.