A VC: Storm Clouds

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.

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?

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)

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.

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.

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.

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.

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?

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.

"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?

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.

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

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.