Thoughts on “R.I.P. Good Times, Part 2”

I don’t pretend to know much of anything about tech venture investing but there are several aspects to Paul Graham’s warning to his portfolio companies that are not passing the “smell test” for me. To whit:

  • A venture investor warning startups to “expect lower valuations” is like a truck driver warning a gas station to “expect lower gas prices”. Of course they want entrepreneurs to “expect lower valuations”; this is never not the case.
  • It’s an article of faith that Facebook’s declining stock price will depress startup investing, but I’m not clear on why. The Facebook IPO will actually unlock a large amount of free cash for Facebook employees which they will need to park somewhere. I’d read that more than 1,000 Facebook employees and ex-employees became millionaires on IPO day, and it’s safe to say that most of those folks will still be millionaires even if FB trades at 23. If only 10% of them start doing angel investing (which seems conservative), that means there will be 100 more angel investors in the valley than there were six months ago. You really think this is going to depress startup valuations?
  • The market bats last. No single investor or group of investors gets to determine what the correct market value for something should be. Investors barely get a vote, much less a veto. Anything else is guesswork.
  • The genesis for the original “R.I.P. Good Times” talk was a near-collapse of the U.S. banking system which led to the biggest recession in a century. But the sky didn’t actually fall back then; in the years following there has actually been a significant uptick in angel and venture investing and an increase in IPO activity. The genesis for PG’s warning, on the other hand, was a conversation between a couple of wealthy investors following a two-week decline in a widely-followed (and, arguably, overhyped and overpriced) IPO.
  • The VC model is horribly broken. Still. Investments in Silicon Valley today are mostly done through personal connections, political/business alliances, and one-hour pitch meetings that mostly favor entrepreneurial stereotypes (in essence, males in their 20s) over experience or business viability. If any other kind of Silicon Valley company did business on these principles, they’d be laughed off the playground.
  • The November election has a chance to have a significant affect on the economy; if the Democrats take back Congress and keep the White House (which I think is likely), it’s possible we’ll see the current Republican economic austerity strategy eased somewhat (or entirely abandoned) which could have positive macroeconomic effects that could kick in by Q2 2013. The end of the recession will have a strong positive effect on technology companies, both new and established, and it will cause new investors to emerge.
  • There is a decent chance that the playing board for seed round startups will be rearranged in January 2013, when the SEC rules pertaining to crowdfunding are in place and companies can start soliciting from non-qualified investors. I can’t help but wondering if this isn’t responsible at least a bit of the investor angst we’re seeing today.

At the end of the day, investors don’t express their displeasure with excessive corporate valuations by posting them on the internet. They do this by curtailing their investments.  So until you hear that Graham’s incubator is no longer accepting new companies, I’d say there’s not a lot to see here.