Top Silicon Valley angel: 'It might not be a bubble, but sure as hell the rent is too high'

Dave McClure, one of Silicon Valley’s top small or “angel” investors, just chimed in via Twitter on the debate whether we’re in a tech bubble.

His verdict?

“It might not be a bubble, but sure as hell the rent is too high.”

He’s complaining that founders at very young startups, like the ones his company 500 Startups invests in, expect ridiculous valuations.

Then they balk at terms that are meant to protect small investors in case of an early exit.

This means higher risk for small investors like him.

Here’s the Twitter stream, complete with McClure’s typically colourful language.


In a phone call with Business Insider, McClure explained further that some founders are expecting companies with no revenue to be valued at $US5 to $US10 million, and they’re not agreeing to clauses that guarantee a 2X return on debt-based investments in case of an early exit.

Those clauses protect investors like McClure in case of an early “acqui-hire” type acquisition where a company buys a startup mainly for its founding team. In those cases, the acquiring company often tries to steer more money to the founders to keep them around for a while, and early investors can end up with no return.

“We’ve seen it multiple times,” says McClure. “The founders have a half-million payday in compensation or in stock. It’s a sweet deal for founders, but it’s not a meaningful return at all for investors.”

(Note that this is different from a “super liquidation preference,” which some bigger investors insist on. In those cases, equity investors insist on a guaranteed 2x return in case of an exit — so, for instance, if they invested $US10 million, they would get $US20 million upon a sale, even if the company only sold for $US20 million. Founders are generally advised to avoid such deals if possible, as it can leave them with nothing from a big exit.)

The long and short of it is that McClure sees increased risk for small investors.

“Across the board, people are coming in with higher cap valuations, raising at the top end of the range. A lot of people are raising above 5 million caps with no metrics…. I don’t think that’s a healthy environment. You’re gonna lose money.”

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