Thursday, April 21, 2016

The Summary Version Of Bill Gurley's Warning To Silicon Valley

Following up on this morning's Venture Capitalist Bill Gurley: "Why the Unicorn Financing Market Just Became Dangerous…For All Involved" is this less-than-felicitously titled offering from re/code which is, after you get past the headline, actually quite good:

We read Bill Gurley’s big warning about Silicon Valley’s big money troubles so you don’t have to
Last night, Benchmark VC Bill Gurley posted a 5,700-word piece sounding the alarm about the state of over-funded Silicon Valley companies and the investors who over-funded them. It’s going to be the talk of the tech world today, so if you haven’t read it yet, you’d better get started ASAP.
What’s that? You have a day job? You don’t have time to read a 5,700-word piece? Even if it’s only 5,681 words?
No worries. Part of my day job involves summarizing 5,681-word pieces. Here you go.

What’s the big picture?
Gurley says too many Silicon Valley companies have raised too much money, and now they’re in trouble. The same goes for the investors who gave them all that money. “Times are changing,” he tweets.

That sounds familiar.
That’s because Gurley has been saying too many Silicon Valley companies have raised too much money, and will be in trouble, for a couple of years now. And every time he says it, it generates a lot of attention.

Okay. So what’s new here?
If you are cynical, you might argue that it’s Gurley’s victory lap. A less cynical take: Many investors have come around to Gurley’s point of view and are less likely to pour money into tech companies at any valuation.

So what does that mean for the tech company I work at or invested in?
This is the most important part of Gurley’s essay: He sketches out a scenario in which companies that have gotten used to easy money but have yet to build a business that makes money, find that they need to raise more money — and that the easy money is gone.

Now, they may have to raise money at valuations below their previous marks — the “down rounds” you’ve heard whispers about for some time. A worse option would be raising money via “dirty term sheets,” which come with all kinds of ugly-sounding mechanisms like “ratchets” and “superior preferences.”

What’s wrong with those mechanisms?
You’ve seen movies where people borrow money from loan sharks, right?...MORE