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Staring Down the Price of Exuberance In Venture Capital

Joe Horowitz | November 24, 2014

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VC Joe Horowitz says investors should dial back their excitement a few pegs.

As a 30-year veteran of the venture capital business in Silicon Valley, the cycle of our world has become all too familiar. During times of recession the economy is stimulated with low interest rates and once they get low enough, the yield on bonds and other fixed investments becomes so unattractive that money starts to flow into equities. Stocks begin to be described as bargains as CEOs of public companies scramble to trim costs and improve profitability.

Once the momentum of this flow of money gets into full speed, public fund managers search for ways to produce returns that are better than their peers, so the window begins to open for IPOs.  The quality of these offerings are often very high because there is a pent-up inventory of successful venture backed companies ready for these moments. This leads to some great IPOs (i.e. ServiceNow, Workday, Palo Alto Networks, Twitter, FireEye, etc.) and the light of Silicon Valley begins to shine more brightly. But as these stories become more pervasive venture capital attracts more capital. Limited partners invariably over invest in the asset-class; public market investors chase high priced private deals and newly hatched seed funds sprout up from every espresso bar in San Francisco.  Everyone is now a venture capitalist.  All you need is access to capital and to be buzz-word compliant.

So are we entering the bubble part of this cycle?  The answer is pretty clear from all the signs we are seeing; signs we have seen before. To [Benchmark partner] Bill Gurley’s credit he was the first to sound the alarm. There is little doubt that his recent comments about the pending risk of a bubble resonate with most experienced venture investors.  The vast number of start-ups receiving capital today from inexperienced investors combined with excessive levels of funding at over-optimized valuations sets the stage for significant investor disappointment which puts us all at risk.

So what can we do about it?  Well for openers, we can all take a deep breath. Though the forces of greed can be powerful, if we could all dial it back, even by 5% to 10%, it could make a big difference. If venture investors across the spectrum could pull back just a little – resist investing in that marginal deal, maybe not stretch quite as much on valuation or perhaps provide a little less capital to a financing (giving the entrepreneur a chance to build a business with more capital efficiency); it certainly would be of significant help.  I believe that if we all could collectively apply just a little more grounded thinking as investors and a little less exuberance…then perhaps we can avoid a story that would otherwise end badly.

Venture capital is a vital component to the growth engine for our economy.  Let’s work together to keep it as healthy as possible.

Joe Horowitz is the managing general partner of Icon Ventures, a venture capital firm based in Palo Alto, Calif he helped launch in 2003. Prior to Icon Ventures, Horowitz spent ten years investing at U.S. Venture Partners. Investments include Aster Data Systems, FireEye and Palo Alto Networks.

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