One of Silicon Valley's top investors just eviscerated the 'subprime unicorn' boom in tech

Sequoia Capital's Michael MoritzSequoia Capital/ScreengrabSequoia Capital’s Michael Moritz.

Revered Silicon Valley venture capitalist Michael Moritz has published a brutal takedown of the recent boom in “unicorn” tech businesses worth over $US1 billion, saying many are “subprime.”

In an opinion piece in the Financial Times published late on Friday, Moritz, a partner at Sequoia Capital, says that many startups recently valued at $US1 billion (£650 million) or above “seem the flimsiest of edifices.”

When Moritz talks, people sit up and listen. The “Welsh wizard” is one of the most famous and successful VCs in America. He was an early investor in Google, YouTube, Yahoo!, and PayPal. He currently sits on the board of companies including Stripe and LinkedIn. He’s proved his chops.

Mortiz calling bullsh*t on many of the valuations in tech comes at a time when investors in Silicon Valley are starting to get sweaty palms about whether or not they have become trapped in a bubble they have inflated.

Chronically low interest rates have driven more and more money into venture capital investment, pushing valuations higher and higher. Fortune’s Dan Primack wrote recently that “the sentiment is fear” in Silicon Valley right now.

Moritz makes pretty clear he thinks we are in a bubble — the choice of “subprime” to describe the investments should set alarm bells ringing for the 2008 property crisis that engulfed the US.

Here is Moritz’s most eye-wateringly brutal passage on the faux-boom:

But there is also a false sense of security provided by the private markets at a time when interest rates are negligible and many investors, particularly those who are either new to technology or have short memories, are all too willing to back start-ups whose premises house several baristas and where a dozen blends of tea (not to mention the sea-salt flavoured chocolate bars and bio-dynamically raised Anjou pears) are de rigueur.

It is easier to conceal weaknesses, present an aura of invincibility and confound investors as a private company that can escape by making few disclosures than as a publicly traded one.

You can practically see the scorn oozing off the screen. Moritz says investors are being too easy on many private companies and many founders themselves are “deluded.”

Moritz singles out Theranos for particular criticism. The startup, valued at $US9 billion (£5.8 billion) for its “revolutionary” blood testing device, was the subject of a damning investigation by the Wall Street Journal this week that questioned the extent to which the company is actually carrying out the tests it trumpets so much.

Moritz, who was a journalist before becoming a VC, writes:

Theranos contests these [the Wall Street Journal’s] suggestions of scientific trickery and legerdemain. However, if they turn out to be true, the company could be mortally wounded — a development that might make technology investors sit up straight and be less credulous as they scrutinise investments.

You can read the full op-ed in all its blistering glory here.

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