Top Silicon Valley VC Laments – Startups Being Funded Are “Mostly Crap and Largely Worthless”

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Wall Street is counting its winnings from seven years of easy money.

The results represent a clear victory for Wall Street over Main Street, according to the team of Michael Hartnett, BofA’s chief investment strategist.

“Zero rates and asset purchases of central banks have, thus far, proved much more favorable to Wall Street, capitalists, shadow banks, ‘unicorns,’ and so on than it has for Main Street, workers, savers, banks and the jobs market,” the BofA team wrote.

– From the post: Bank of America Admits – Central Bank Policy Enriched Wall Street While “Steamrolling” Main Street

Recently, Vanity Fair sat down with well known venture capitalist Chamath Palihapitiya to get his take on the state of affairs in unicorn land.

Here’s some of what he had to say:

Palihapitiya’s firm, Social Capital, has backed numerous tech companies with valuations in the billions, such as Slack, Box, and SurveyMonkey. But that doesn’t mean that he is bullish on unicorn culture. Here, Palihapitiya speaks about Mark Zuckerberg’s secret sauce, which start-ups are going to make it, and the saga between Apple and the F.B.I., among other topics.

Funding is slowing down, both in seed rounds and mega-rounds. There have been fewer tech I.P.O.s recently, more companies are raising down rounds. Are we in a downturn?

I think we’re in a phase where we’re realizing that the people who have been allocating capital thus far have done a horrendous job. Most people’s inherent reaction is to make sure they never lose their job, and so they become risk-averse. I think what we’ve had is a handful of investors who have extreme vision who make great investments in things that are amazing businesses: Facebook, Google, Uber. And then everybody else reacts to that success by trying to do the thing that most approximates the thing that’s working. As a result, most of those businesses are fundamentally not good, they’re poorly run, and they never should have been invested in in the first place. But the capital came in because the person who had control of the capital was able to justify it intellectually to themselves versus something else that could have become the next Facebook or Google. 

The reality is, great companies can go public in any market. When we talk about the I.P.O. slowdowns what we’re really saying is that there really just aren’t that many good companies being built. We need to divorce ourselves from venture capital as an occupation and focus on using capital as a way to take really big bets on things that just seem totally audacious. Right now we haven’t done enough of that, and the result is that most of the things we’ve funded are mostly crap and largely worthless.

What advice are you giving Social Capital’s portfolio companies in the event of a tech bubble burst or correction?

We’re trying to coach our C.E.O.s that the window dressing is both expensive from a cash perspective and tremendously expensive from a culture perspective. It distracts the team from building what they need to build. Don’t waste money on things that get away from your mission, which confuse employees about why they’re actually there. Meaning, the quality of the office and the quality of the food are all part and parcel of a lack of discipline, which speaks to the fact that the mission isn’t compelling enough. Because I can tell you what it was like at early Facebook: the food was terrible; we’d ship in lunch and probably two to three times a week the lunch had maggots in it. But we were there because we believed, and it didn’t matter. 

A number of V.C.s have been calling on mature, late-stage companies to go public. There’s even been somewhat of a quiet rally in the public tech stocks recently. Is now the time for big, late-stage companies to go public, or does it make sense for companies to stay private longer?

Any company that is making its decision based on external timing is probably not in control of their own destiny and should probably not go public. Facebook could have gone public whenever it wanted. We decided the right time was 2012. It could have easily been 2010 or 2014. When you hear the call for these companies to go public and there’s pushback and they don’t, what’s really happening is the realization that the structural strength of their business is not yet in place. So they’re worried about how the public market will react once they have to transparently demonstrate what their business will look like. The great companies can always go public whenever they want; every other company is trying for some window of time where there’s essentially some combination of intellectual laziness and greed in the public markets that will allow them to exploit a window.

Not that any of this is particularly surprising, but it’s noteworthy nonetheless. It’s also why…

The New “Middle Class” – Making $250,000 a Year in Palo Alto Qualifies for Housing Subsidies

For related articles, see:

Bank of America Admits – Central Bank Policy Enriched Wall Street While “Steamrolling” Main Street

The Military Industrial Complex Unicorn – Former NSA Chief Raises $32.5 Million for Startup Company

Meet “Groundwork” – Google Chairman Eric Schmidt’s Stealth Startup Working to Make Hillary Clinton President

In Liberty,
Michael Krieger

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3 thoughts on “Top Silicon Valley VC Laments – Startups Being Funded Are “Mostly Crap and Largely Worthless””

  1. Chancellor: Lessons from the Mississippi Bubble
    By Edward Chancellor
    March 23, 2016

    The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

    This year marks the 300th anniversary of the start of an economic project in France which posterity knows as the Mississippi Bubble. The brainchild of an expatriate Scot, John Law, this scheme has been hailed as the most ambitious economic experiment prior to the establishment of the Soviet Union in 1917. Like Lenin’s creation, the short-lived Mississippi Bubble burst in spectacular fashion. Central bankers around the world are currently embarked on a mission not altogether different from Law’s, making lessons revealed by his failure particularly relevant today.

    Law was born in 1671, the son of an Edinburgh goldsmith. In adulthood, he became by turns a dandy, gambler, murderer, entrepreneur (“projector” in the parlance of his day), economist, central banker and finance minister. At the height of what he called his “System,” Law was the richest and most powerful man in Europe. His Mississippi Company incorporated all of France’s overseas trading companies – one of which claimed title to half the landmass of what is now the United States, along with monopolies for tax collection, tobacco, and coinage.

    In early 1720, this company was merged with Law’s other creation, the Banque Royale, in effect France’s central bank. During its heyday, the Mississippi Company’s stock surged some 20-fold in value in the open-air stock market of Paris’s Rue Quincampoix. This early case of “irrational exuberance” didn’t come out of nowhere, however. Rather it was the consequence of Law’s monetary policy.

    To understand the origins of the bubble it’s critical to grasp the Scotsman’s original purpose. As an economist, Law was a monetarist, an early forerunner of the late Milton Friedman.

    Law was effectively suggesting that the central bank should expand its balance sheet to lower interest rates, which in turn would help over-leveraged borrowers, boost economic growth and employment and stimulate inflation, while simultaneously reducing the cost of servicing government debt. He sounds much like a modern central banker. Law’s belief that too little money constrained economic activity, while too much stimulated inflation, reflected “the (same) essential principle underlying the decisions by the U.S. Federal Reserve today”, writes economist William Goetzmann in his forthcoming history of finance, “Money Changes Everything”.

    The scheme commenced in May 1716 with the foundation of the Banque Générale, the forerunner of France’s first central bank. Over the next four years, Law enjoyed remarkable success – the Mississippi stock soared, the entire French national debt was absorbed by the company and interest rates fell to 2 percent. Paris bustled with newly coined (or rather, printed) millionaires. Within four years, however, Law’s System had exploded – the stock-market bubble burst, confidence in bank notes evaporated and the French currency collapsed. In late 1720, Law was forced into exile. He died nine years later and was buried in a pauper’s tomb in Venice’s San Moise.

    Why did Law fail? For a start, he was over-ambitious and over-hasty. Law’s aim was to replace gold and silver with a paper currency. This plan was forced upon the French public – Law decreed that all large financial transactions were to be conducted in bank notes. The holding of bullion was declared illegal – even jewelry was confiscated. As one 19th-century commentator observed, Law showed a “incapacity to recognize the difference between confidence and obedience. He overestimated the power of despotic authority, and underrated the influence … of public opinion in money matters”.
    http://blogs.reuters.com/breakingviews/2016/03/23/chancellor-lessons-from-the-mississippi-bubble/

    Du calme, du calme. Adieu.

    Reply
  2. mike do i sense some jealousy, this kind of article is on hackernews or other type websites that might link to pando daily ( which has become utter trash since it was sold, like so many ‘successes’) and usually not on political websites. obviously, everything is connected , and the disconnected political fantasy land inhabitted by the rarified silicon valley rock star game is connected to economics, ——-but this kind of article doesn’t seem in your typical repetoir wheelhouse.

    mike, i’ve been to your website for years now. i love it. ive seen the deterioration of websites like mike shedlocks, and others. i’ve seen stockmans blog flounder despite his very very strong writeups, he’s not runnign his blog to become a go-to source.

    i think everyone has seen zerohedge explode.

    you need to focus on your audience at least anyways—–maybe a link to something like this is good, but a whole writeup?
    everyone knows silicon valley is running on its last fumes right now, but this angle isn’t very interesting to most of your audience i think, an audience you’ve cultivated on liberty issues , empire, bernaysian persuasion, and eCONomics.

    in any case, this is all written highly respectfully, and still in awe of your diligence curiousity and writing skills. much respect. teslark.

    im only writing because i do think you can be easily bigger than stockman or yves smith (i’m not a big fan of her but her site has huge readership) ,

    Reply
    • Couple of things:

      1) I have nothing be jealous of. If you knew me well enough, you’d know that. I have a very blessed life.

      2) This isn’t a “political website.” Never has been and isn’t now. It’s a website that covers all things I find interesting. If readers don’t find certain articles interesting, you don’t have to read.

      3) This story is out there as a link between insane central bank policies and worthless mal-investments. You may not find that interesting, but based on the traffic I see, many readers do.

      4) If I become a much bigger website, great. If not, that’s ok too. I write about what I want, when I want to. You aren’t going to love every post, and I think we can both be mature enough to just accept that.

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