It’s not just that Saudi Arabia recently announced plans to dump money into the laps of invest with Silicon Valley’s venture capital community.
It’s that silly investments are again attracting money, exactly like the dotcom boom heyday.
Spot the Fake Investment
a) Yo: A smartphone app that sends a one-word message (Yo) to your smartphone contacts
b) FishingBooker.com: An app for booking a fishing trip. Airbnb for fishing enthusiasts
c) Vurb: An app that chooses the best app for whatever you need to do. Let Vurb do your app surfing for you!
d) PineFurniture.com: A one-stop destination for the multi-billion dollar global pine furniture market
Answer: PineFurniture.com is fake. (Unless you want to underwrite me, in which case it’s very real. Let’s do lunch and talk about it, and you should hurry before I go big and take the whole idea to Kickstarter.)
Yo received $1.5M in funding and is currently valued at $10M.
FishingBooker won the Audience Choice award at TechCrunch Disrupt SF. The judges were a who’s-who of Silicon Valley elite: Salesforce.com CEO Benioff, Yahoo’s Mayer and more.
Vurb received $8M in funding. Actually, with thousands and thousands of apps, an app to find an app might not be a bad idea.
Let the Good Times Roll for Venture Capitalists
Venture capitalists (VCs) are hustlers of the highest order. They used to provide excellent and much needed guidance. I have worked with many start-ups and wannabes and most of them were a bunch of engineers who wanted to leave a company. They had been shielded from the demands of the full product lifecycle and the demands of running a company. They could write code but had no concept of getting the product done and into users’ hands.
So VCs used to provide missing ingredients. They groomed the company for success and brought them to the attention of established players.
If you watched the hit show Entourage, then VCs played the role of agent. They spot talent, build a team around them, find the right opportunities and hustle to get them signed.
Naturally this takes money, which the venture capital firm provides. Except it really isn’t their money. They operate like a hedge fund and use other people’s money (OPM). Then they charge a management fee, like a hedge fund.
However VCs have evolved to be less like Entourage and more like a real estate show about flipping homes. The typical deal isn’t about creating a long-lasting company that will eventually go public. No, most VCs have a three-year window in which they want the product developed and then employ an exit strategy that is typically selling to another, bigger company. Get in, get it up, get out.
Today, venture capital is flipping ideas and companies like real estate ‘investors’ were in 2006, or maybe 2007.
There’s Always a Customer
An example may help clarify things. A friend of mine at a top VC is seriously being wooed by a start-up.
The Premise: Large companies are bleeding money because vendors are overcharging. Specifically, companies agree to terms with vendors but the policing of those contracts is either non-existent or disconnected because companies are too big. So a supplier might charge $120 for a hammer that should have been $100 per the contract.
The Solution: Software that tracks billing and contract terms, paid annually.
My Response: The problem is behavioral and organizational. If a company has decided that the time has come to manage the problem, why not just spend a few thousand to create a single data warehouse? Why spend tens of thousands annually?
Her Response: Companies are stupid and if they are stupid enough to have this problem they will pay money to outsource their solution (not an exact quote, but close).
Sign of a Market Top
There is a lot of money out there, and it has a very big risk appetite. It bears the hallmarks of previous market tops when everyone had money and were chasing yield. Fast money is driving up valuations and taking on investments that lack a certain quality. We’ve been here before, in 2000 and 2006.
History has a funny, sometimes cruel way of repeating itself.