Form: Quote Commentary

http://online.wsj.com/articles/venture-capitalist-sounds-alarm-on-silicon-valley-risk-1410740054GURLEY ON SILICON VALLEY BUST

—“Right now you’ve got private companies raising $200, $400, $500 million. If you’re in a competitive ecosystem and you raise that amount of money, the only way you use it—because these companies are all human-based, (they’re not, like, building stores)—is to take your burn up. … And I guarantee you two things: One, the average burn rate at the average venture-backed company in Silicon Valley is at an all-time high since ’99 and maybe in many industries higher than in ’99. And two, more humans in Silicon Valley are working for money-losing companies than have been in 15 years, and that’s a form of discounted risk. … In ’01 or ’09, you just wouldn’t go take a job at a company that’s burning $4 million a month. Today everyone does it without thinking.”—

Well, I have been through the 69, 73, 81, 91, 01, and 07 cycles as a youth through my business-owning parents, a young entrepreneur, and a mature entrepreneur. I have ‘muscle memory’ – I have not forgotten these experiences. And I am highly sensitive to the effect on businesses (my own included) of overheated markets, which, as Gurley states, drive up costs (rents in San Francisco), as well as the impact on myths (“Startups do this so we should too”).

Although as an Austrian (Hayekian, not Misesian), I also understand that some of these misallocations of capital distort the labor market in positive ways such as encouraging the education of and attracting engineers, while in other cases they are negative, such as attracting men to home construction (which is enjoyable but unskilled labor) instead of skilled labor which may be less enjoyable but is both independently sustainable, and internationally competitive. Once a man loses the opportunity to enter a field at a young age he can never recover it.

I am hoping to do a capital rase in 2015, and this overheated market is making me very nervous about selling into a cold investment cycle. On the other hand, I built a business wherein all I will ask of investors is to fund going to market, not research and development. And I have intentionally engineered the organization to operate on eastern european costs, rather than San Francisco costs. As such it will be impossible for us to burn money at San Francisco rates (the $4m a month number Gurley refers to). Human capital and physical plant costs are just not the same here, and the distribution of our product (as Atlassian has demonstrated) is not one that requires a large sales force. Yes, Oversing, for any large organization, may require some consultation, consisting mostly of configuration and training, but that is also a benefit, because services in the ERP space are highly profitable. It is hard to invest in service organizations but very easy to invest in combined product and service organizations. So hopefully, even if I have played the cycle poorly by expecting to be done with version one earlier than I thought, I think we should be fine. I mean, at the top end, we will burn in a year what a lot of startups are burning in a month, and our potential for success is reasonably ascertainable, and the exit strategy is obvious and controllable.