Netscape cofounder and Andreessen Horowitz partner Marc Andreessen sounded the alarm in the tech world on Thursday. He explained on Twitter that too many startups are burning dangerous amounts of cash and that many of them will “vaporize” when the market turns.
He’s not the first investor to say this. Earlier, Benchmark’s Bill Gurley stated there’s too much “risk” in Silicon Valley right now. Union Square Ventures’ Fred Wilson agreed, stating: “We have multiple portfolio companies burning multiple millions of dollars a month.”
One person on Twitter criticised Andreessen and said his comments were “hypocritical,” stating that venture capitalists have been “over-funding reckless founders at out of control startups.”
Andreessen agrees some funding rounds are reckless. But he explains why startups sometimes need gobs of money from investors.
According to Andreessen, it’s “irresponsible” for venture capitalists not to invest in companies that could become the top contender in a big new market, like Uber or Lyft in the on-demand space. Startups that are bloated with cash can implode, but startups that are underfunded can also fail, and that’s a risk investors have to weigh.
“In tech-driven markets,” Andreessen writes, “overwhelming economic returns tend to go to the company with the highest market share.” And the “winning company,” one that can afford to invest in research and development and build advance products, gets “the prize.”
He encourages startups to find just the right amount of funding necessary to become the top player in a market, then stop raising. When startups get the formula right, it’s great for the job market and the economy.
Here’s Andreessen’s full 13-tweet tweet storm, below:
Disclosure: Marc Andreessen is an investor in Business Insider.