For the first time in two years, venture capitalists who invest in tech startups have expressed declining confidence in their business.
Don’t panic — it’s not a sign that the boom has suddenly come to an end.
But it is another signal, in a series of recent signals, that thinkers within Silicon Valley are beginning to wonder how long this extraordinary growth period will last.
This signal should be taken seriously: VCs are the people funding th tech boom we’re in right now. When they express doubts about what they’re doing, that’s a sign the boom may be ending.
And it is a boom: Valuations of private tech companies are stratospheric. The record, of course, is held by Facebook’s acquisition of WhatsApp for around $US22 billion — even though the company had little revenue and was disinterested in creating further revenue growth from advertising, the usual way tech companies monetise their user data.
Yesterday we saw Airbnb valued at $US13 billion as it takes on new investors via a sale of existing employee stock. And Uber is valued at $US17 billion. All those companies have at least some revenue coming in and obvious ways they could increase those cash flows.
But there is also a class of $US1 billion-plus companies that have never made significant revenues: Snapchat being the most obvious and, until very recently, Tumblr. And there are a few outliers, too. Ello just raised $US5.5 million in investment funding even though it has explicitly promised to never show advertising or sell its users’ data. It’s not clear how those investors ever expect to Ello to turn into a real business, based on that promise.
A survey of tech VCs by Prof. Mark Cannice of the University of San Francisco showed they were moderating their enthusiasm:
On a five-point scale, with five being the most confident, 33 VCs registered an average of 3.89 — lower than the second-quarter reading of 4.02. The survey, which Cannice conducts each quarter, is hardly scientific and includes only a small sampling of VCs. But it showed the first decline in two years.
This year, VC firms are set to raise another post-2007 record in new funding, the WSJ noted.
Many of those VCs have publicly warned that the tech sector is getting head of itself:
- Marc Andreessen has said that “When the market turns, and it will turn, we will find out who has been swimming without trunks on. Many high burn rate companies will VAPORIZE.”
- Fred Wilson expressed similar doubts about companies that burn cash without moving toward a self-sustaining business model: “”We have multiple portfolio companies burning multiple millions of dollars a month. Thankfully its not our entire portfolio. But it is more than I’d like and more than I’m personally comfortable with. … I’ve been grumpy for months, possibly for longer than that, about this … At some point you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital, and start producing value the old fashioned way.”
- Wilson also says, “Everywhere I go, everywhere I speak, I get asked this question. Are we in a bubble? I’ve been getting asked that question for at least four years now. It’s hard to sustain a bubble for four years. But we are also not in a normal valuation environment for high growth tech companies and we have not been in one for a while.”
- Bill Gurley is another: “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.”
- Gurley previously worried about that the way so many Silicon Valley workers were happy to be employed by venture-funded companies that aren’t profitable because it looks like they don’t understand risk: “An employee’s decision to work for a company that is losing money is an implicit decision to discount risk. If the macro environment changes, that company is under much greater stress than one that is profitable. Yet many individuals are making just such a decision today.”
But all these VCs — and the new data from San Francisco — all add the same caveat: That while the market is certainly at a high, there’s no explicit sign that it’s about to collapse. It’s a boom, not a bubble — most companies actually have real revenue from real customers. They just haven’t matured to profitability.
Nonetheless, it’s interesting that insiders are talking so much about the timing of a downturn, even if they can’t yet see it coming.