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VC Bill Gurley Tries to Bust the Bubble

A prominent Silicon Valley VC argues that tech startups are overvalued, profits are underrated, and a bust is coming.
November 23, 2015

Since last year, Bill Gurley—a partner at the venture capital firm Benchmark, known for early investments in Uber, OpenTable, and Zillow—has stood out from his VC counterparts for his insistence that there’s a bubble in tech startup valuations. In particular, he says “unicorns”—startups valued at $1 billion or more—are the most visible sign of an explosion in valuations that he thinks will end in a bust just as surely as previous bubbles did.

Nonetheless, Gurley told contributing editor Robert Hof he remains optimistic that entrepreneurs will keep innovating even in a downturn. He highlighted innovations in his own field, such as Internet-­driven crowdfunding and early-stage startup incubators, that are opening entrepreneurship to more people.

You’ve complained for more than a year that we’re in a tech-startup investment bubble. Why does that concern you so much?

Great entrepreneurs are relatively disadvantaged in these markets where so much capital is available. In a market where capital is hard to come by, they can still raise money. In this market, they can raise a ton of money, but so can a lot of [less capable] competitors that wouldn’t be in business otherwise.

Many investors say seemingly excessive valuations of startups are actually justified because they have real revenues and growth prospects.

Imagine two companies. One is told, “I want you to get to $100 million in revenue and you have to be profitable when you get there.” The other is told, “I want you to get to $100 million in revenue and I don’t care if you lose $40 million getting there.” Which of those two exercises is harder, and by how much? I would argue it’s at least 10 times harder to do the first.

Until you can prove that you can generate cash flow, you don’t have a sustainable business. No matter which of these unicorn boardrooms you walk into, everybody thinks it’s perfectly okay to burn tons of money.

Amazon was losing lots of money years ago but managed to create a huge, sustainable business.

Look what they had to go through. The stock went from $106 [in December 1999] to $6 [in October 2001], a 94 percent reduction in market value. They had to lay off 1,300 people, 15 percent of the head count. I don’t think there’s a single unicorn out there that’s thought in their mind, “Wow, what if my market cap goes down by 94 percent?”

But if you don’t join the race, you can’t win it, right?

Once your competitor raises $400 million, you don’t get to choose whether you’re in that game or not. But I’ve lived through crashes and it sucks. When these markets correct, they correct hard. There’s no soft landing in Silicon Valley.

Despite your warnings, startups continue to get big funding. Do you wonder if you’re still right?

No. There have been some signs very recently of a shift in the winds. You’ve got the stock market down dramatically for the year. You’ve got contraction of multiples [valuations that are a smaller multiple of annual sales than they were a few months ago] in most of the tech startups. I’ve seen venture companies that normally would keep all the deals for themselves start soliciting other people’s money to help fill up new rounds.

Would a bust cool spending on innovation?

Good companies are started in all parts of the cycle. Capital is cyclical, but I don’t think innovation has ever not happened in Silicon Valley.

How has venture capital changed in the face of alternatives such as incubators, super-angel investors that put small amounts of money into early-stage startups, and crowdfunding?

Six or seven years ago all of our limited partners got scared because there was this notion that the super-angel was going to get rid of the venture capitalist. It didn’t play out that way. Only a handful have proven themselves.

If you’re an inventor, the crowdfunding thing is cool because you probably couldn’t have gotten an [initial round of venture capital] and you might succeed [with crowdfunding]. I think that’s great. Y Combinator is also an innovation. Venture is a business that is not really prone to systemization. [Benchmark co-founder] Bob Kagle used to call it a shoe-leather business. So anyone who builds a new type of system is interesting. But we do have a fundamental belief that company building is an art, not a science.

Where would you like to see more investment?

Health care. The tools like the smartphone that have disrupted other industries should be so useful in solving the health-care problem. But most of the startups we find have basically discovered some opportunity to help one of the incumbents maximize their value extraction in the system. They use the technology to make the system worse as a whole rather than better.

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