Chris Dixon

One case that comes specifically to mind is Weebly… at the ycombinator meetup in NYC last year they showed a chart of how it took them 3 years to finally reach that hockey stick. I think you’re right and we’ll see fewer investors willing to be that patient.

Hey Chris, great post. This may be a bit off topic, but your point on velocity made me think about company focus as well — could some people have considered these startups building “features” on social networks vs new businesses.  I remember Fred Wilson posting a while back about being careful what you build on Twitter for instance, and yet here Instagram in a simple way could have been considered “Facebook Photos Mobile,” or at least how it should have been.
Granted Instagram had enhanced features with the filters and sharing, and was becoming its own social network in a way, but it is interesting to see what this acquisition will inspire in others.Curious as to your thoughts on this, because it seems that if you can find a niche that is important to one of the consumer giants out there, they’ll almost be forced to acquire you as a price of alternative R&D for their platform.

these companies need to find revenues and profits. 1 bn for a company with 12 employees and no revenue……35 million users, the majority of whom were on fb anyway and are probably drowning in debt like the rest of the world……

i assume it was largely a purchase made with stock, so at least fb investors are just passing the bubble on…..but anyway, same as it ever was, only those companies that get to self-sustaining profitabilty will come out alive after the party’s over and the VCs turned daytraders (which is what you are if you flip shares in a week) run out of folks to sell to. clock’s ticking. 

In a world of increasing velocity of user growth and commensurate valuations, might there be a case to question where the rotational attention is coming from? Though you’ve explained who, from an investment perspective, is losing velocity, who is losing velocity in the attention economy to sustain this meteoric growth stories? Who is hit hardest by a hockeysticking Instagram, Pinterest, Tumblr and OMGPOP? Might it be Facebook, Amazon, Google and Zynga respectively, or the supernumerous fast followers and sleepy incumbents? And, in a world of of accelerated growth, might this volatility turn against any of these high flyers just as quickly if not faster?

Do you think any VC firms are investing in expensive seed rounds as a way of generating more better dealflow? There is some value for a less well-known VC being able to say “we were in on hot-startup early”, regardless of how poor the terms were. There could be other benefits to investing in companies that other founders see as early successes with crazy traction.

Do you think that nowadays you can succeed without funding though? Pinterest didn’t get any funding till they took off. Even that company that made Draw Something had most of their games not taking off and Draw something was a game that could be made by 2-3 good devs without multi-million funding.

Is the increasing velocity such that what took 3 years even in the very recent past, may only take 1.5 now? And, is it so bad, if a company fails, and the good people (who you really invested in) start over?
Someone mentioned Weebly. I like Weebly. I think I used it when they were still in YC or just after. But, if they had failed, would someone not have created a similar product, and would the founders not have started something else and ultimately become successful? 
I’ve only seen a bunch online, but I concede that these YC companies are so impressive and potentially disruptive that 10M may be a good price. I thought these uncapped notes are just for option value and negative EV in isolation, but now I think otherwise. Investing in the entire batch of YC at 10M cap will probably yield a nice return. Do you think that these networks are becoming so strong, that companies in YC, TS, 500, have a massive advantage over others? How much of an availability bias is there? (In VC as a whole) How do we start more companies? Are you recommending bootstrapping as long as possible? (Which seems almost always good) or perhaps raising money in smaller increments. I need 100k to get to this milestone. I need X to get here. Sell off small pieces as time goes on. Work with Angels who add value. Crowdfund from your customers?I agree that depending on switching costs, network effects are such that just as fast as some companies rise, they can fall. (You are suggesting that the larger the company, the smaller the P/E should be and we aren’t seeing this)  But, what about the valuations of non tech incumbents. These people are in real trouble as well.  I guess I’m less worried because the ecosystem is rapidly evolving, so it’s not clear what’s optimal, and I believe that good companies/people will rise again. 

Edit: And that Value is created regardless of success or failure.

I think what you are saying is that beta is increased. That implies a wider distribution of startup outcomes, which increases startup valuations (viewing all startup investments as options and pricing them by Black-Scholes); it also implies that large tech company valuations should come down (if you believe in the CAPM). The problem is not that investors are making a rational decision to pay more for a startup on the basis of the velocity theory, but merely miscalculating the velocity (beta) based on a misperception of overnight success by Pinterest, OMGPOP et al; it’s much more prosaic than that. As with any hot asset class – dot-coms, MBS/CDOs, tulips – investors and capital are flooding into seed stage startups in volumes beyond what the asset class can handle, even if the velocity theory is true. A shift in the fundamentals of venture –  new highs in acceleration of growth – may have created some increase in startup values – but more of the increase in valuations is because there is more money than there are good companies to invest in. This time is not different.