6 ms·

A VC: Storm Clouds

76 points by bjonathan 16y ago

tav 16y ago
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.
- thevivekpandey 16y ago
  As engineers the only thing we can do is to be prepared that demand for smart programmers may go down. Save the cash for the rainy day. And enjoy the ride till the rainy day.
- jdp23 16y ago
  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.
maxklein 16y ago
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 16y ago
  If you've met Dalton, you know why Andreesen/Horowitz pumped $5M into picplz.
  - maxklein 16y ago
    What's so great about Dalton? A lot of failed companies have brilliant people at their helms.
    - pg 16y ago
      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 16y ago
        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-mobile-apps-for-iphone-and-android-with-free-effects/ http://techcrunch.com/2010/10/13/picplz-launches-revamped-mo...). 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.
- deleted 16y ago
  [deleted]
AlexMuir 16y ago
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)
asmithmd1 16y ago
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 16y ago
  "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 16y ago
    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/hype-cycle.jsp http://www.gartner.com/technology/research/methodologies/hyp...
    - jdp23 16y ago
      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.
leelin 16y ago
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 16y ago
  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.
  - deleted 16y ago
    [deleted]
- j_baker 16y ago
  I would imagine that we'd actually be looking for the Madoff VC. What's more interesting to me is to figure out which company will be the new Lehman Brothers or Enron.
tomjen3 16y ago
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.
pama 16y ago
"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?
sdizdar 16y ago
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.
mrschwabe 16y ago
Unfortunately the catalyst for his storm may be the collapse of the US dollar (or a 'currency restructure' as it will be branded).
JimboOmega 16y ago
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 16y ago
  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 16y ago
    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.
sabat 16y ago
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.
brudgers 16y ago
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.
ahi 16y ago
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 16y ago
  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"

76 points by bjonathan 16y ago

tav 16y ago

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.

thevivekpandey 16y ago
As engineers the only thing we can do is to be prepared that demand for smart programmers may go down. Save the cash for the rainy day. And enjoy the ride till the rainy day.
jdp23 16y ago
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.

maxklein 16y ago

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 16y ago
If you've met Dalton, you know why Andreesen/Horowitz pumped $5M into picplz.
- maxklein 16y ago
  What's so great about Dalton? A lot of failed companies have brilliant people at their helms.
  - pg 16y ago
    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 16y ago
      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-mobile-apps-for-iphone-and-android-with-free-effects/ http://techcrunch.com/2010/10/13/picplz-launches-revamped-mo...). 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.
deleted 16y ago
[deleted]

AlexMuir 16y ago

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)

asmithmd1 16y ago

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 16y ago
"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 16y ago
  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/hype-cycle.jsp http://www.gartner.com/technology/research/methodologies/hyp...
  - jdp23 16y ago
    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.

leelin 16y ago

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 16y ago
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.
- deleted 16y ago
  [deleted]
j_baker 16y ago
I would imagine that we'd actually be looking for the Madoff VC. What's more interesting to me is to figure out which company will be the new Lehman Brothers or Enron.

tomjen3 16y ago

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.

pama 16y ago

"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?

sdizdar 16y ago

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.

mrschwabe 16y ago

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

JimboOmega 16y ago

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 16y ago
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 16y ago
  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.

sabat 16y ago

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.

brudgers 16y ago

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.

ahi 16y ago

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 16y ago
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"