Two of the world’s leading tech investors have warned the new wave of tech companies and their backers are taking on risk and burning through cash at rates unseen since 1999 when the “dotcom bubble” burst.
Bill Gurley, partner at Silicon Valley-based investor Benchmark, sounded the horn of doom on Monday warning 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.”
In an interview with the Wall Street Journal Gurley, whose investments include OpenTable, Uber and Zillow, said startups were taking on risks in a way “unprecedented since 99”.
Gurley said that “more humans in Silicon Valley are working for money-losing companies than have been in 15 years”, and they’re burning through huge piles of cash.
“In 01 or 09, you just wouldn’t go take a job at a company that’s burning $4m a month. Today everyone does it without thinking,” he said.
His comments were backed up Tuesday by Fred Wilson, the New York-based co-founder of Union Square Ventures who has backed companies including Twitter, Tumblr and Zynga.
Burn rates – the amount of money a startup is spending – are “sky high all over the US startup sector right now”, he wrote in a blog post.
“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,” he wrote.
“I’ve been grumpy for months, possibly for longer than that, about this. I’ve pushed back on long term leases that I thought were outrageous, I’ve pushed back on spending plans that I thought were too aggressive and too risky, I’ve made myself a pain in the ass to more than a few CEOs.”’
The comments come after a new generation of tech companies have attracted record levels of investments at levels that give the profitless businesses eye-watering valuations.
In August Snapchat, the social messaging service, was valued at $10bn after a new round of funding. The free service’s fans send 500m self-deleting messages a day, but Snapchat has yet to declare how it intends to make money. Among the other big tech valuations in recent months are Uber, the taxi app service, which was valued at $18bn after its last round of funding in June, and Airbnb, the short term rentals service, which was valued at $10bn in April.
But the valuations are not the immediate issue, according to the sceptical tech investors. “Valuations can be fixed. You can do a down round (investing at a lower valuation), or three or four flat ones, until you get the price right,” writes Wilson. “But burn rates are exactly that. Burning cash. Losing money. Emphasis on the losing.”
Asked if investors, and the people working for the companies, were distracted by the potential for reward, Gurley said: “Yeah, it’s a whole bunch of things. But you just slowly forget, and half of the entrepreneurs today, or maybe more – 60% or 70% – weren’t around in ‘99, so they have no muscle memory whatsoever.”
