Top Silicon Valley venture capitalist Bill Gurley published a massive 5,700-word post Wednesday evening that’s the talk of the tech circles today. You can read the entire piece here, but in short, Gurley warns founders and investors of “unicorn” startups — those valued at more than $1 billion — of a rapidly changing tech ecosystem that could result in some unfortunate financial outcomes.
From the post:
While not obvious on the surface, there has been a fundamental sea-change in the investment community that has made the incremental Unicorn investment a substantially more dangerous and complicated practice. All Unicorn participants — founders, company employees, venture investors and their limited partners (LPs) — are seeing their fortunes put at risk from the very nature of the Unicorn phenomenon itself. The pressures of lofty paper valuations, massive burn rates (and the subsequent need for more cash), and unprecedented low levels of IPOs and M&A, have created a complex and unique circumstance which many Unicorn CEOs and investors are ill-prepared to navigate.
Peter Kafka at Re/code also has a solid recap of Gurley’s blog post, noting how Gurley argues that these startups have raised too much money and how some, particularly those that have yet to build a profitable business, are now faced with difficult choices that include raising “down rounds” or via “dirty term sheets” (which Gurley argues against).
“As we move forward, it is important for all players in the ecosystem to realize that the game has changed,” Gurley wrote. “Equally important, each player must understand how the new rules apply to them specifically.”
Gurley, a partner at Benchmark Capital and investor in companies like Uber and Snapchat, also noted that venture capital firms are still fundraising even as venture capital deal flow is slowing, as a way to build up cash reserves in these uncertain economic conditions.
He also wrote about the lack of recent tech company IPOs, noting that it’s an option for entrepreneurs who “may face a situation where they cannot raise a clean incremental financing at a flat to up round.” From the post:
Go public. In the long run, the very best way for founders to look after their own ownership as well as that of their employees is to IPO. Until an IPO, common shares sit behind preferred shares. Most preferred shares have different types of control functions and most of them have a senior preference over common. If you really want to liberate your own common shares and those of your employees, then you want to convert the preferred to common and remove both the control and the liquidation preference over your shares. Many founders have been erroneously advised that IPOs are bad things and that the way to success is to “stay private longer.” Not only is an IPO better for your company (see Mark Zuckerburg and Marc Benioff on this subject), but an IPO is the best way to ensure the long-term value of your (and your employees’) shares.
That’s a similar sentiment shared by Expedia and Zillow co-founder Rich Barton, who spoke at Seattle University earlier this week to a group of 300 students.
Barton, a good friend of Gurley’s — both appeared on stage at the 2013 GeekWire Summit — and also a partner at Benchmark Capital, said that there is “pretty bad constipation in the IPO pipeline.” The veteran entrepreneur, who took both Zillow and Expedia public, added that there’s “a lot of value stuffed up in the system right now.”
“It doesn’t do anybody any good to have more and more money actually going in at the top of the funnel, and not a lot coming out of the bottom,” he said. “It’s creating a lot of indigestion and bad behavior that’s happening in the funnel.”
Barton said that there’s a problem in Silicon Valley and elsewhere that’s been created by a “myth” of entrepreneurs who don’t think they need to go public. He called it a “Silicon Valley machismo.”
“Some look at Mark Zuckerberg not going public and say they don’t need to,” Barton explained. “If you talk to Zuck now, he would he say he made a mistake and that he should have gone public a lot earlier. It’s been a fantastic thing for Facebook to be public.”
Barton added that, based on his successful IPOs with Expedia and Zillow, entrepreneurs should not think of an IPO as the end of the road for a company in its life cycle, but rather a decision that gives founders more strategic flexibility to grow their business.
“We saw it as a step along the way to achieve ultimate greatness,” Barton noted.