It is no secret that tech venture capital funds are using a rifleshot approach as far as their funding decisions. It is very hard to see run of the mill tech startups getting the mammoth funding companies like lyft, uber, airbnb, and a select few are getting.
Unlike the late 1990s, most VC funds are going to ‘shared economy’ or cloud computing startups. There’s little of the ‘if it has something to do with the Internet, it gets funded’ mindset in today’s steely-eyed VC crowd. They appear to be more careful with their precious funds. You’d think this is a good thing. You’d think this is all part of a more sober and success-oriented funding paradigm.
Well, according to at least one critic, VC fund head honcho Bill Gurley, the current investment paradigm of picking ‘best of breed’ startups isn’t good enough. In fact, he predicts that many of the ‘unicorns’ VC funds, both big and small, have been so in love with, will end up dead as early as this year.
What’s a unicorn? A unicorn is a startup that has amassed a valuation of at least $1 Billion when raising money. So far, there are 78 unicorns and the number is rising. This is a clear indication that some of the irrational investing euphoria of Dot Com Crash 1.0 is alive and well. The only difference is that these investors are investing in a handful of companies. Same mania, different tulip bulbs.
Gurley believes that unicorns will start dying this year. He said that Silicon Valley is currently suffering from a ‘risk bubble’ where startups’ valuations far outstripped their revenues. In fact, some don’t have revenue models yet or just rolled out their revenue model. The poster child of this phenomenon, of course, is Snapchat. It’s worth $15 billion but is still trying to figure out how to monetize its traffic.
Apparently, Gurley thinks many startups’ valuations have gone way ahead of the companies’ revenue potential. According to him, this year is when some of these unicorns will run out of cash due to their heavy burn rates.
