Feeds

Are Valley VCs playing hide-the-money?

How dot-com bubbles burst in hard times

Secure remote control for conventional and virtual desktops

Open... and Shut Nick Bilton has written a hard-hitting expose of an alleged trend in venture capital, accusing venture capitalists of encouraging portfolio companies to forgo sales to allow them to fabricate inflated valuations based on hype and a prayer. The only problem with the article is that it doesn't appear to be true.

While it is true that tech companies like Instagram continue to be valued at outsized valuations despite a shortage of revenues to back them up, it's also true a fair amount of substance has bubbled up over the years to make all the froth worthwhile.

In his New York Times piece, Bilton points to

...bizarre activity in the Valley [where] how some start-ups are advised by investors not to make money. This concept may sound ridiculous from a business standpoint, but for investors, it fuels the get-richer-quicker mentality that exists here.

"It serves the interest of the investors who can come up with whatever valuation they want when there are no revenues," explained Paul Kedrosky, a venture investor and entrepreneur. "Once there is no revenue, there is no science, and it all just becomes finger in the wind valuations."

On its face, this sounds somewhat evil. But to John Lilly, a partner with leading venture capital firm, Greylock, it also sounds like "a complete fabrication". Of course, in Bilton's view, this is exactly what a tech investor would say in order to prop up their hyped valuations.

Perhaps more troubling with Bilton's assertions is that they don't seem to be backed up by data.

For example, if Bilton is right we wouldn't expect the tech industry to be growing, given its alleged diet of specious start-ups. Cisco chief executive John Chambers, in a bid to stress the unusual staying power of Cisco, suggests that 87 per cent of the companies on the Fortune 500 list in 1995 are off the list in 2011. Some, like Sun Microsystems, have been swallowed up by bigger, more successful companies. Others, like Unisys, have fallen on hard times and no longer make the list.

But technology companies, generally, have fared quite well since 1995, with roughly 60 per cent more tech companies on the Fortune 500 list today than made the list in 1995. Of course, with the world's frenetic pace of technology adoption over the past two decades, this was bound to occur.

Maybe. But some of the companies on the list today - such as Google, Yahoo and Amazon - either didn't exist or were just barely born in 1995. Others, like Hewlett-Packard and IBM, were around but have grown significantly since 1995, in part by acquiring other tech companies that otherwise would make the Fortune 500 list today.

So not only has there been overall growth, but there has been an influx of new companies to the Fortune 500 list, either as standalone companies or as components of larger tech companies. And the new companies like Google have grown at a torrid pace.

All of this makes Lilly a bit annoyed by Bilton's article and its suggestion that "Silicon Valley has spawned no real companies over the past decade":

While I don't have any data on the total number of tech companies in 1995 versus 2012, I'd hazard a guess that there are dramatically more today than in 1995. So not only are we creating some high-quality ventures, but we're also creating more of them.

None of which is to suggest that tech isn't inordinately filled with faecal matter masquerading as real companies. One of the downsides to the low-cost start-up revolution that open source and AWS have spawned is that it's dramatically easier to start great companies as well as horrible ones, many of which get plenty of funding.

Are there investors who try to manipulate buyers into overpaying for their portfolio companies? Of course. But as Chris Dixon suggests: "No good venture investors invest in companies with the primary strategy being to flip them... because it is a bad strategy." In my own experience with open-source start-ups, companies like VMware and Salesforce have been happy to pay a premium for developer- or adoption-rich (and cash-poor) start-ups because these are assets they struggle to build, but figure they can monetize.

And, as Cloudera CEO Mike Olson articulates, while there may be pockets of insanity where revenues really aren't a goal for either investors or entrepreneurs, for some they remain critical:

After all, the only time bubble-headed business strategy makes sense is when you're in a bubble. When reality strikes, companies need to be making money or investors will drop them while bankruptcy lawyers pick them up. This happened before when the dot-com bubble burst, which is when Google, Yahoo!, and others really came into their own.

All of which is a long way of saying that while there are likely some investors playing the "mark-to-mystery" game wherein they attempt to bluff buyers into overpaying for worthless start-ups, in the long run tech has grown in a healthy, sustainable manner. ®

Matt Asay is senior vice president of business development at Nodeable, offering systems management for managing and analysing cloud-based data. He was formerly SVP of biz dev at HTML5 start-up Strobe and chief operating officer of Ubuntu commercial operation Canonical. With more than a decade spent in open source, Asay served as Alfresco's general manager for the Americas and vice president of business development, and he helped put Novell on its open source track. Asay is an emeritus board member of the Open Source Initiative (OSI). His column, Open...and Shut, appears three times a week on The Register.

Build a business case: developing custom apps

More from The Register

next story
Assange™: Hey world, I'M STILL HERE, ignore that Snowden guy
Press conference: ME ME ME ME ME ME ME (cont'd pg 94)
Premier League wants to PURGE ALL FOOTIE GIFs from social media
Not paying Murdoch? You're gonna get a right LEGALLING - thanks to automated software
Caught red-handed: UK cops, PCSOs, specials behaving badly… on social media
No Mr Fuzz, don't ask a crime victim to be your pal on Facebook
Online tat bazaar eBay coughs to YET ANOTHER outage
Web-based flea market struck dumb by size and scale of fail
Amazon takes swipe at PayPal, Square with card reader for mobes
Etailer plans to undercut rivals with low transaction fee offer
US regulators OK sale of IBM's x86 server biz to Lenovo
Now all that remains is for gov't offices to ban the boxes
XBOX One will learn to play media from USB and DLNA sources
Hang on? Aren't those file formats you hardly ever see outside torrents?
Class war! Wikipedia's workers revolt again
Bourgeois paper-shufflers have 'suspended democracy', sniff unpaid proles
prev story

Whitepapers

Endpoint data privacy in the cloud is easier than you think
Innovations in encryption and storage resolve issues of data privacy and key requirements for companies to look for in a solution.
Implementing global e-invoicing with guaranteed legal certainty
Explaining the role local tax compliance plays in successful supply chain management and e-business and how leading global brands are addressing this.
Top 8 considerations to enable and simplify mobility
In this whitepaper learn how to successfully add mobile capabilities simply and cost effectively.
Solving today's distributed Big Data backup challenges
Enable IT efficiency and allow a firm to access and reuse corporate information for competitive advantage, ultimately changing business outcomes.
Reg Reader Research: SaaS based Email and Office Productivity Tools
Read this Reg reader report which provides advice and guidance for SMBs towards the use of SaaS based email and Office productivity tools.