Irony Alert: Bubble-Making Venture Capitalists Start Popping Them
by Kara Swisher
Posted on October 9, 2008 at 1:47 AM PT
Is it just me or does the sudden prospect of venture capitalists–the very investors who fueled the Web 2.0 valuation insanity with their typically egregious overfunding of start-ups–lecturing about the bleak economy and the need to tighten belts seem just a tad ironic?
It’s kind of like Washington politicians who handed out-of-control bankers one deregulation after another in exchange for campaign donations now mounting their high horses and decrying Wall Street greed in the current economic meltdown.
And yet, just like that, Silicon Valley’s investors–who could spin you all the way to next Sunday about how Facebook was actually worth $15 billion, despite not having much revenue quite yet–are turning into penny-pinching accountant types.
As reported by Om Malik of GigaOm in a piece titled “Sequoia Rings the Alarm Bell: Silicon Valley Is in Trouble,” for example, Sequoia Capital–one of tech’s most powerful and successful VC firms–held a meeting where it told its portfolio companies that the downturn was quite serious and advised them to start cutting costs.
Apparently, there was even a picture of a gravestone with “R.I.P.: Good Times” displayed at the gathering, in case the start-ups did not get the sledgehammer message. (And here is an update on the meeting by Malik.)
The last time Sequoia did this was when the Web 1.0 bubble was popping in 2000.
The same communication was also sent out to entrepreneurs by angel investor Ron Conway then, and now yesterday again.
The typically jovial Conway (pictured here) sent out a grim email to the start-ups he is invested in, advising they lower their burn rate to get ready for the tough times ahead.
Wrote Conway: “Unfortunately history DOES repeat itself but I hope we can learn from history and prevent the turmoil from occurring again. The message is simple. Raising capital will be much more difficult now … the name of the game in this environment in some respects is survival–survival until conditions change.”
Now he tells us!
In all seriousness, these kinds of prescriptions should have been front and center when times were presumably good, especially after the first orgy of Internet frothiness ended with such a thud.
Instead, the all-trees-grow-to-heaven attitude, the massively inappropriate valuations, the revenue-what-revenue strategies have been pushed on entrepreneurs in this cycle by too many VCs, most of whom should have known better.
And, while it is right for Sequoia and Conway to sound the alarm, I expect all the VCs who touted loudly will now climb aboard this somber bandwagon.
Because, after handing over too much money to start-ups like drunken sailors on shore leave, it is apparently now Sunday morning and time for a little salvation.
But not completely, of course, since this is still an industry where the dreams of hitting it big never die.
After I jokingly called Conway “Oh voice of doom and gloom” after reading his email, he quickly wrote back: “NO WAY DOOM AND GLOOM. I think innovation in the Valley will continue to thrive and I will continue to invest.”
Of course, Conway will. It wouldn’t be Silicon Valley if he didn’t.
And to raise your spirits from these wet-blanket VCs, here’s a video of Mike Settle singing the classic “What Shall We Do With the Drunken Sailor”:
Comments
kara
that’s not really a fair criticism.
i’ve been warning about this for a while now. so have many other VCs.
anyone who lived through the last bubble saw this coming a while ago. the scars we have in our backs from 2000/2001 will never go away.
if you want the links, send me an email and i’ll happily provide them.
fred
Posted by fred wilson at October 9th, 2008 at 3:16 amI’m surprised their portfolio companies didn’t think about this months ago. We did and reached break even last month.
Posted by Frank Sinton at October 9th, 2008 at 9:09 amI used to go with my uncle to the KFC for an every-so-often chicken dinner at their house. He would think carefully about which “bucket” item on the menu was the best deal and we would always leave with an extra handful of napkins.
Back at the house, my aunt would carefully tear the napkins in two and pass out the halves.
This ritual was repeated in good times and bad. We didn’t want to hurt their feelings by saying anything about it.
As it turned out my aunt and uncle were quite well off.
It’s a mindset thing. And it might not be such a bad thing if more people behaved like my aunt and uncle. It’s just too bad that it takes a meltdown such as we are having to get people, individuals, VCs, governments to conserve.
Maybe, as happened with the Great Depression we will have a generation of people who conserve out of habit, even during the good times.
Posted by Mac Beach at October 9th, 2008 at 9:48 am@Mac Beach
Good point. Part of the problem here, and it has shown in the other market’s as well (real estate, equities, commodities) is ‘irrational exuberance’, to use greenspan-speak. Hyperbole and outsized expectations (in both directions) reign. Like in many of the other markets, smart money will continue to find good investments and put capital to work. Unfortunately, this atmosphere does dampen the VC enthusiasm for the movie/music industry ‘hit’ model whereby you invest in 20, hoping 1 or 2 will knock it out of the park.
Posted by darren cross at October 9th, 2008 at 10:04 am@Mac Beach & @Darren Cross,
Great points. During the dotcom bubble, I used to work with a VC firm that did investing for gas and electric utilities during the and learned a lot from their long history in the world of VC. One of the things they aruges is that, “Bubbles produce is Dumb Money.” These booms put a lot of cash in the hands of people that THINK they know enough to be a VC. The vast influx of Dumb Money is usually an important factor leading to the big busts.
These meetings and emails from Smart Money people, on the other hand, are really the equivalent of making kids in Drivers Ed watch “Mechanized Death,” Wheels of Tragedy,” “The Last Prom,” and other works from Highway Safety Films.
While scaring actual children may have gone out of pedagogical fashion, it appears that scaring the bejeezus out of the young, impressionable tech entrepreneur set has not. During the boom times mistakes in execution and management are easily masked, but during the busts…well, that’s when the fundamentals are so important.
http://blog.actonline.org/2008.....me-to.html
Posted by Mark Blafkin at October 9th, 2008 at 12:17 pm