"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before . . .”
- Charles Dickens, from A Tale of Two Cities
- Charles Dickens, from A Tale of Two Cities
“Be fearful when others are greedy and greedy when others are fearful” is an oft-quoted phrase by Warren Buffet. Benchmark’s Bill Gurley takes this sentiment to heart and wrote in his Blog in late 2014 that Silicon Valley startups are taking on too much risk, “unprecedented since ’99.”
During 2001 to 2002 and from 2009 to 2010, few job seekers evaluating startup companies would take a job at a company that was burning cash at rates of $4 million a month. Gurley is concerned that “today, everyone does it without thinking.” There is no fear out there, even though the warning signs are all over the place. Silicon Valley is milking the low interest rate environment for the very low cost of capital. “If the environment were to change dramatically,” Gurley says, “the types of gymnastics that it would require companies to readjust their spend is massive. So I worry about it constantly.”
At base is the principle that cash flow underpins a company’s value. Without that, many companies unable to generate cash will put themselves at risk; especially those small startups with high cash burn rates.
Capital markets are kind right now, but that can change in a year. Look at what happened to the telecom market segment in 2001, when first Lucent, then Nortel, and finally Cisco missed their earnings calls and collectively scrambled to find cash and slash jobs to curb spending. Gurley believes that difficult business lesson could repeat itself today.
During 2001 to 2002 and from 2009 to 2010, few job seekers evaluating startup companies would take a job at a company that was burning cash at rates of $4 million a month. Gurley is concerned that “today, everyone does it without thinking.” There is no fear out there, even though the warning signs are all over the place. Silicon Valley is milking the low interest rate environment for the very low cost of capital. “If the environment were to change dramatically,” Gurley says, “the types of gymnastics that it would require companies to readjust their spend is massive. So I worry about it constantly.”
At base is the principle that cash flow underpins a company’s value. Without that, many companies unable to generate cash will put themselves at risk; especially those small startups with high cash burn rates.
Capital markets are kind right now, but that can change in a year. Look at what happened to the telecom market segment in 2001, when first Lucent, then Nortel, and finally Cisco missed their earnings calls and collectively scrambled to find cash and slash jobs to curb spending. Gurley believes that difficult business lesson could repeat itself today.
He could point to the fact that these industry behemoths of their time even acted as bankers to loan money to customers with shaky balance sheets to buy their telecom equipment: a suspect business practice invoked to replace banks that would not make those loans.
Gurley adds, “I’ve come to believe that bad business behavior is coincidental with the best of times in our field . . . the crazier things get, the worse people execute.” Prior to the combined dot.com and telecom busts, it was indeed the best of times until greed and poor execution made it the worst of times for the telecom sector.
[1] BLOG inspired by: Investor: Silicon Valley Partying Like It’s 1999, Yoree Koh and Rolfe Winkler, Wall Street Journal, September 15, 2014, p.B1
[2] In my March 2015 BLOG, the Fed weighed in on our current "best of times:"
Gurley adds, “I’ve come to believe that bad business behavior is coincidental with the best of times in our field . . . the crazier things get, the worse people execute.” Prior to the combined dot.com and telecom busts, it was indeed the best of times until greed and poor execution made it the worst of times for the telecom sector.
[1] BLOG inspired by: Investor: Silicon Valley Partying Like It’s 1999, Yoree Koh and Rolfe Winkler, Wall Street Journal, September 15, 2014, p.B1
[2] In my March 2015 BLOG, the Fed weighed in on our current "best of times:"
[3] On November 23, 2015, a reporter for MIT Technology Review, wrote of Bill Gurley, “In particular, he says ‘unicorns’ – startups valued at $1 billion or more – are the most visible sign of an explosion in valuations that he thinks will end in a bust just as surely as previous bubbles did.” Furthermore, Gurley believes, “Until you can prove that you can generate cash flow, you don’t have a sustainable business.”