
A VC: Storm Clouds - bjonathan
http://www.avc.com/a_vc/2010/11/storm-clouds.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+AVc+%28A+VC%29
======
JimboOmega
The thing that troubles me most about this article is that I'm not in the
valley at the moment. I'm not reaping multi-million dollar bonuses for not
quitting, I'm not getting money for my startup with no due diligence...

To me this isn't a warning, it's an opportunity - now is the time, we are
almost at the peak of the bubble, get in now. (Get in on the entrepreneurial
side where values are high; get out on the VC side where values are low - but
I'm on the former side))

There is a lot of money floating around in the US economy right now courtesy
of Quantitative Easing. Yields on most asset classes (especially safe ones)
are low, and the stock market is lackluster... so it wouldn't surprise me to
hear a lot of money is flowing into the entrepreneurial side of the economy -
isn't that about the best possible outcome?

I don't see this bubble bursting as hard. Most companies involved (Google, at
least) have solid incomes, and are not running on hopes, dreams and borrowed
money. VCs might find they paid too much, and Google might wind up with a
slightly too expensive (but quite possibly rationally priced) employee base.

But a VC that paid too much gets a haircut, the fund gives bad returns... so
what? New funds spring up. It is not that bad.

~~~
jdp23
as you say, it's an opportunity -- no matter where you are. but to the extent
it's a bubble, people who get in this late in the game rarely come out very
far ahead. i wouldn't lose too much sleep about not being in the valley right
now. if it's a bubble, that's the last place you want to be; if it's
sustainable, it'll continue to be an option.

~~~
JimboOmega
As for it being a bubble - would you rather get in now, when (if you assume
it's a bubble) VCs and angels are throwing money at people in an unsustainable
way - or wait a few years until things have died down and they don't have
money to throw?

With almost any financial transaction, there are ways to bet both sides. With
this one, you get in as an entrepreneur - you do a VC round, you tell Google
Facebook made you an offer. Now is the time. Next year Google might be happy
to let people go to Facebook.

With stock market bubbles, it's selling short. With the real estate bubble, it
was buying default swaps against the mortgage bonds.

As VC is by definition a private market, it's much harder to short; instead,
if it's overheated, you need to be selling assets into it (which is what
taking a VC round is), assets you have to be creating.

If you wait for the bubble to burst (and it is a bubble), you might be locked
out for years.

------
leelin
Fred's Storm Clouds are not just about higher valuations and investor
competition, but about the unsustainable speculative behavior, with "investing
without due diligence" as a prime example.

That suggests startup land is filled with a few fake gold rushes, and in any
gold rush, those who deal in oxen and wagons tend to do well. Maybe the oxen
dealer here is Google Adwords, StumbleUpon, and anyone else that allows you to
buy your traffic to temporarily juice Alexa / Compete results (I've heard
enough anecdotes to know plenty of people advocate this tactic).

I wonder which startup will turn out to be the big Madoff Startup?

~~~
jim-greer
While there may be some unsustainable speculative behavior going on, I doubt
any startup with reputable VCs on the board would do anything close to what
Madoff did. Even the dot com crash was mostly about bubbly ad revenue and
selling to the bigger fool, not massive fraud.

------
AlexMuir
Fred talks about a five/six year timespan having been good. That's about the
lifespan of a VC fund.

The burst will be caused by a tightening in VC spending, and I think poor
returns on funds raised five years ago will cause this.

This makes sense - IPOs have been slim, and LPs must be getting edgy. I partly
wonder if the 'rise of the superangel' is in fact the 'departure of the VC'
(from certain types of deal)

------
tav
I can only really see this coming to an end after a Facebook IPO hits the
market. Until then, it does feel like a period of "irrational exuberance" all
over again.

~~~
jdp23
Fred's article highlights the risk to Facebook if there's a bubble and it
bursts. As well as looking at some serious security/privacy challenges at the
platform level and a hard-to-sustain engineering pace, they also need to worry
about how long irrational exuberance continue. If they IPO at $10-$20B,
that'll be a sign of air leaking out of the bubble. If they hit the wall
before IPO, or crash badly in the first six months out of the gate, it'll be a
lot more dramatic.

------
ahi
Next they'll want 40 hour work weeks!

I get his point about VCs not doing due diligence, but the rest just seems to
be a capitalist complaining about those damn workers with their demands.
Pretty much the same gripes since the dawn of agriculture.

edit-add:

For too long management and investors have been skimming way too much off the
top. I think it's nice to see the nerds refuse to be taken advantage of.

~~~
fredwilson
i accept your point that talent may be finally getting valued fairly. i stated
as much in my post

but i don't think you can call what i did "complaining"

------
sdizdar
Actually, regarding engineering salaries, I think is this is very very good.

In recent years, we ended up in situation where it is widely believed that
technical knowledge / expertise is not needed to start a software startup or
run successful software company. In case of startups, the assumption was that
all technological challenges get solved by people founder hires (if you look
recent posts about what VC what they look in founders, technology is rarely
mentioned).

I hope this approach will spark innovation in hard problems such as data
stream management, data de-duplication across internet, new way of compressing
data, etc.

------
brudgers
The scale of valuations described in the first part don't apply to Facebook
and Google and in the case of Google, neither does the class of investors.

That's not to say Google is or isn't overvalued, but there are plenty of
scenarios in which Google's recent action make good business sense,
particularly when competing with a company on the scale of Facebook
potentially using the Microsoft model of IPO timing (12,000 millionaires) to
attract talent.

The only connection implied between the trend of increased valuations for
startups and the grant of restricted options to an engineer at Google is that
they are both signs of change.

In the case of the Google stock options, it appears that the real change is in
the way the press operates. Key employees have always received counter offers.

------
asmithmd1
So Fred admits he has been getting out sized returns investing in real
companies that have revenue but is worried about other investors jumping in
raising the valuation of companies and thus the salary of engineers. It sounds
to me like the free market in action. His rates of return will decline as more
investors jump in to the market. He does not give any reason why he thinks
this current trend is unsustainable; are companies getting funded that have no
chance of becoming profitable, stand-alone companies?

~~~
jnovek
"other investors jumping in raising the valuation of companies and thus the
salary of engineers"

That was one of the symptoms of the dot-com bubble.

"He does not give any reason why he thinks this current trend is
unsustainable"

Fred doesn't need to, because to him it's obvious: if people are making larger
investments and thinking less about the investments they are making, they have
a higher likelihood of throwing away money. If VCs invest poorly in their
current fund, they will have trouble raising their next one and may even go
out of business. Then there's less money in the ecosystem, fewer deals get
done, fewer engineers can be employed, etc.

~~~
asmithmd1
My point is that maybe a higher level of investment IS sustainable.

I don't know what his IRR is but he says "enjoyed an amazing run" which I am
guessing means something north of 25%. That rate of return will not stay that
high as more investors jump in who are willing to accept a lower return.

Hopefully we are coming up the "Slope of Enlightenment" this time:
[http://www.gartner.com/technology/research/methodologies/hyp...](http://www.gartner.com/technology/research/methodologies/hype-
cycle.jsp)

~~~
jdp23
similar arguments have been made in previous bubbles. there's always been an
element of truth in them -- as there is now -- but the reality always proves
different than the hype. maybe this time will be different but it's a mistake
to count on it.

------
maxklein
I agree, for me when I saw that people were seriously investing in instagram
and picplz, it confirms that there is some sort of mini-bubble happening.

~~~
iamelgringo
If you've met Dalton, you know why Andreesen/Horowitz pumped $5M into picplz.

~~~
maxklein
What's so great about Dalton? A lot of failed companies have brilliant people
at their helms.

~~~
pg
I don't understand your point These two sentences seem to contradict one
another. The first questions his ability. The second takes it for granted. The
only thing they have in common is that they're two variants of unthinking
dismissal. And while that similarity gives your comment the appearance of
having a connected argument, in fact they're incompatible.

~~~
maxklein
I see what you mean. However, what I mean is "what's so great about a
brilliant person being in charge of a poor product". So I'm saying "Dalton is
a brilliant guy, but I am skeptical of if just a brilliant person makes that
great of a difference, when the product is not so extra-ordinary".

The first sentence could better be said: "What's so great about Dalton being
there?"

Yes, I am dismissing this company, and I know it's risky to publicly state
something like that, but I really feel that the product does not warrant the
investment of 5million in any way. It's a good product, and it will surely be
successful and have a number of users, but I doubt it will become any kind of
force.

Take a look at the download numbers, according to techcrunch they have had
100.000 downloads since MAY. So between may and october, they have 100k
downloads ([http://techcrunch.com/2010/10/13/picplz-launches-revamped-
mo...](http://techcrunch.com/2010/10/13/picplz-launches-revamped-mobile-apps-
for-iphone-and-android-with-free-effects/)).

With my crap apps, I have 15k downloads a day. So in a week, I'd have that
number of downloads. It's not hard to do that. That guy Kreci had 200k+
downloads on some weird apps on the android store also in a couple of months.

The product is not right. Even smart guys can have bad products, and from what
I read, those twitter dudes gave back the investment money on their original
product, so the investment is not just in the people, it's also in the
product.

So I feel that there is a bit of a bubble there, where people are just being
handed money based off reputation without proper diligence being paid to the
product.

~~~
iamelgringo
It's not really about the product, it's about the person. That's what is
getting funded. You can build a fart app, create a little drama around it and
get 100k downloads.

I've heard Dalton speak twice. The first was at "WorkataStartup". I had never
met him, or heard of him, but after hearing his pitch that day, I said to
myself, "I'd almost be willing to sign up with PicPlz just to work along side
Dalton". But, I have my own startup.

I heard Dalton speak at startup school, and what impressed me was his command
over the financial and legal ramifications of music startups. I've come across
a number of people doing music startups via Hackers and Founders, and I've
never met anyone so well versed or educated about the business end of music,
licensing, etc...

The, I met Dalton at this party at Andreesen Horowitz last month[1], and I
made a point of talking with Dalton for 15-20 minutes. Once again came away
quite impressed by the man. And, in the Q&A with Michael Ovitz[2], Dalton made
one of the best points about the future of the music industry and media
business that I've heard in a long time.

I think I have a halfway decent nose for founder talent. I run one of the
largest startup/tech meetups in Silicon Valley[3], and I've seen a lot of
founders come and go over the last 3 years. If I were a VC, I'd be tripping
over myself to have Dalton take money from me. If it's not photo sharing, it
will be something else, but either way, I'd lay money on Dalton having a good
exit on one of his startups.

ref:

[1]
[http://www.businessweek.com/magazine/content/10_46/b42030000...](http://www.businessweek.com/magazine/content/10_46/b4203000012271.htm)

[2] <http://en.wikipedia.org/wiki/Michael_Ovitz>

[3] <http://www.hackersandfounders.com>

------
pama
"So we will see this behavior and other troubling things continue to happen
for some time to come. When will it stop? Who knows? But be prepared for it to
end. And when it does, things will be different. And we should all be prepared
for that time"

What are the other troubling things? How will things be different? And how
should we all be prepared?

------
tomjen3
Ha, leave it to Silicon Valley to create a bubble in the middle of a deep
recession.

Actually that is properly the reason - it has become so cheap to start a
company that can exit for a large sum, that it is one of the few good
investments left in the country.

------
mrschwabe
Unfortunately the catalyst for his storm may be the collapse of the US dollar
(or a 'currency restructure' as it will be branded).

------
sabat
Regarding the newish talent drain: higher salary and equity packages for
engineers is not a threat to VC/angel-funded startups -- not yet. Salaries
have been depressed for the past 2+ years, and a little catch-up is in order.
Obviously that could go too far, but I really don't think we're there yet.

