Back to Big Raise, Big Spend?

by Giff on March 31, 2011

Mark Suster has an important post on his blog today called “9 Women Can’t Make a Baby in a Month“. It may sound strange, but too much funding is just as dangerous if not more so than too little funding. Go read his post. I agree with so many of the things he warns against, and have unfortunately experienced quite a few the hard way.

The Web 1.0 bubble was a money arms race. Raise big and spend big. I hated the Web 1.0 bubble because it was a gross distortion of sound business practices, and because of the destruction it left in its wake. I’m hoping that our industry is not returning to those days.

Silicon Valley can be an echo chamber in the best of times, and all the talk right now — both warning and hopeful — of a new bubble is disturbing. Even Steve Blank seems to be arguing that we are in a golden age of entrepreneurship and implying that entrepreneurs should shift to bubble-era behavior. Steve certainly made his fortune in the bubble. Maybe that is why the experienced team at Color raised so much money when they should know better — they decided that bubble rules now apply.

People say “this time it is different” because startup costs are low and revenues are real. That is not entirely true. Building a prototype is fast but building real product takes time.  Developer talent now costs a fortune. Marketing still takes serious resources and may get even more difficult because noise levels have increased. While there are many more “real” Internet businesses out there now, there are also a ton of “hot” startups out there that do not have a concrete path to revenue and profitability.

I don’t think we are in a bubble yet, because to me a bubble isn’t just about the top of the funnel (i.e. startup creation and funding), but exits and getting money out the other end. You know you are in a bubble when unsound business practices get rewarded, and that is not happening yet.  Expectations have outpaced exits. The IPO markets are still conservative, I have a hard time seeing Second Market as a general savior without hitting serious regulatory issues, and M&A markets do not feel like they are exploding.

It is quite a gamble to assume that bubble-era exits are coming.  It certainly doesn’t feel that way here in New York, where investors remain considerably more conservative than what is going on in the Valley.