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Is Party Time Over for the Venture Capital Community?

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Michael Brown

January 23, 2020

Shortly before the Thanksgiving holiday, the New York Times posted an article arguing that the recent hubris in Silicon Valley was starting to draw comparisons to 1999 and the waning years of the technology bubble. Bill Gurley (an investor in one of our portfolio companies, Sailthru) was quoted saying, “It feels more and more like 1999 every day, risk is being discounted tremendously”and with pre-revenue startups like SnapChat (another one of Bill’s investments) generating multi-billion dollar valuations, one can’t deny the waters are getting a bit muddy.

VCHowever, I think it’s a misstatement to say that we are on the heels of another bubble. The last two years have certainly been filled with a few head scratchers, but I believe most investors have learned to better understand what is a real company and what is a speculative investment. Looking back at the major technology exits over the last 24 months, companies like Twitter and Waze are the exception with a number of enterprise exits demonstrating sustainable revenue and profitability. While hedge funds and other non-traditional VC investors have moved further downstream to the startup world, the majority of the industry is still doing the blocking and tackling necessary to build great businesses.

Of course there are some valuations that may be inflated by these new investor entrants, but the best organizations still optimize for partner, not price. The industry is infinitely more transparent than it was a decade ago, which creates a better foundation to build great companies between investors and founders. As we look to the metrics that help determine whether an organization is going to be successful, the right investors are helping their companies build sustainable economics, rather than hype.

Enterprise businesses are benefitting from more sophisticated approaches to sales / marketing economics and a growing appetite for new technology solutions. While competition is fierce, it has gotten progressively cheaper and easier to start a technology company over the last decade, making the dynamics of achieving a successful investment exit easier and less risky. Looking toward exit opportunities (whether they be IPO or M&A), the playbook for building a company that investors and acquirers find attractive has become more defined, enabling more startups to emerge as viable investment opportunities.

I won’t deny that some of the enthusiasm in the technology world must be held in check, I remain confident that there are better days ahead of us. There will indeed be isolated examples of companies flopping after receiving tremendous valuations (as we saw in Cleantech a few years ago), but the overall macroeconomics of the technology market will continue to drive sustainable conditions for the industry to grow for both investors and entrepreneurs alike. As both parties look to participate in the growth, it has become more important than ever to build quality partnerships based on trust, rather than greed. The priority should be on the long-term prospect of building a successful company, sometimes that means moving on price to make sure both sides can be successful. It’s easy to get wrapped up in the hype of partying like it’s 1999, we need to remember it’s those that know how to keep an even keel, who will be celebrating in the end.