I have blogged extensively about big raises haunting companies at some point in the future and I think we will soon see this really haunt companies as they are unable to find people to lead additional financings at valuations anywhere near what the last round was at. As Sequoia has indicated, and has been blogged about extensively, there will now be a rush to profitability as people realize you can no longer ride the VC wave.
Wait, companies have no profits and lived off the fat of VC investments? That sounds just like the last bubble! What went wrong here.
Here is my analysis: The theoretical difference between this round of site development and the last was that the last had very little hope of creating real ad-based revenue streams. After the success of Google, Advertising.com, and others in building a monetization vehicle for ad inventory, it has been supposed that people could build popular web sites and they would be able to monetize them at any point by slapping ads on them.
The problem with this theory is that it is true, but really only at super scale. If you are getting billions of impressions per day, then the fact that ad networks have low, low, low cpms can be overcome by volume. Without massive scale, then you suddenly need you own sales force out hawking your site. While the market is more comfortable buying online ad inventory than previously, you are still acutely vulnerable to a downturn and it still requires massive investment to build an effective salesforce and gain share of madison avenue mind.
As start-ups built increasingly niche-y sites with less and less obvious advertising monetization opportunities, the fact that there was a lot of traffic and the fact that they were able to build the 1.0 for $300,000 before hiring 150 people and raising $50 million became immaterial. Today there are many companies that have raised a ton of money, are nowhere near profitable, and scaling them back down to three person zombie companies is impractical for investors. Remember, pets.com was not a completely stupid idea. Petmeds has a bang-up business today. It is all about how you execute it. Now that people cannot “focus on growing the site traffic”, they will find that being forced to rapidly build revenue streams is trickier than they probably hoped.
Just like last time.