Respected venture capitalist Bill Gurley is sounding the alarm on the startup industry.
In an interview with the Wall Street Journal, Gurley says the current environment reminds him of the tech bubble that formed in the late 90’s.
Every incremental day that goes past I have this feeling a little bit more. I think that Silicon Valley as a whole or that the venture-capital community or startup community is taking on an excessive amount of risk right now. Unprecedented since ’99. In some ways less silly than ’99 and in other ways more silly than in ’99.
Gurley adds, “No one’s fearful, everyone’s greedy, and it will eventually end.”
Gurley is a partner at Benchmark. He’s invested in Uber, OpenTable, and Zillow. Benchmark has invested in Snapchat, Quip, Yelp, and many more.
Private companies are raising giant sums of money — $US200, $US400, or $US500 million, says Gurley. When you have that much money, you have to spend it, so companies are upping their “burn rate” or the amount of money they’re willing to lose in order to grow their business.
Gurley thinks the burn rate for companies is the highest it’s been since 1999. He also thinks that the number of people working at money losing companies is the highest it’s been since 1999. People think nothing of working at companies that are losing millions of dollars per year because there’s an overwhelming feeling of optimism right now.
If a downturn suddenly hits the startup world, Gurley thinks it’s going to take “massive” amounts of “gymnastics” for companies to readjust their businesses to cut down on the burn rate.
This is all being driven by the low cost of capital. It’s relatively easy for startups to raise money right now.
All the money sloshing around in the startup world is leading to secondary problems. Landlords in San Francisco are trying to lock in startups to 10-year leases. Gurley thinks this is a sign that landlords believe their rents are at a record high, and they want to lock in the rate. If landlords thought the price was going to be higher, they wouldn’t be asking for 10-year leases.
Gurley isn’t cutting back on his investment, though. He’s trying to be selective. He also says he’s trying to advise his companies to be smart with their money.
But there’s a problem with that. You can’t afford to be conservative when all this money is flying around:
That’s really difficult because if you have a competitor that’s going to double or triple down on sales and you just decide, “Oh, well I’m not going to execute bad business decisions, I’m just going to sit back,” you lose market share. So, choosing not to play the game on the field doesn’t work, so you’re left with trying to advise someone to be pragmatically aggressive with some type of conservative backdrop or alternative strategy in case the world shifts. But it’s hard.
For what it’s worth, this isn’t the first time an investor has sounded the alarm. Four years ago, venture investor Fred Wilson warned of storm clouds. Other people were concerned that we were in Bubble 2.0, then, too.
But things have been pretty good since then.
And earlier this year, when Box tried to IPO, but couldn’t make it to the public markets, some people wondered if the bubble was finally bursting. But it managed to raise money on the private markets. And then there’s Square, which seemed to be struggling, but has managed to raise another $US100 million.
A downturn is coming at some point, and companies should be prepared. But, figuring out timing of these things is nearly impossible.