NY venture capitalist Fred Wilson wrote a rather gloomy blog post this morning about the state of the tech industry.
Wilson thinks the mounting competition to fund early stage startups has led to a big decline in how carefully VCs are considering their investments.
In particular, I think the competition for “hot” deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I’d be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.
Peter Kafka tweeted about the story: “Investor in “hot” deal asked me if we’re in a bubble. What do I know? But @fredwilson says yes, it’s bubbletime.”
Betaworks Andy Weissman chimed in, “@pkafka I am not sure I agree that @fredwilson said we are in a bubble.”
Not so fast, replied Wilson. “@aweissman @pkafka I intentionally avoided that word. There are troubling indicators in the market.”
So no bubble yet, although the substance of Wilson’s post could be interpreted that way. On the rise of rapid, high value deals and the escalating bidding war between Facebook and Google for top engineering talent, Wilson wrote,
“But I think both of these situations are unsustainable. And anything that is unsustainable will eventually stop happening. And when it stops happening, there will be a dislocation event that will cause people to change their behavior.”
It ain’t a bubble, but it still might pop. And when it does, watch out.
Roger Ehrenberg of IA Ventures weighed on his blog. “Sitting where I sit, which is largely away from Silicon Valley-based consumer web plays, the investment environment is far more rational and reasonable across every dimension.”
Ehrenberg concedes, however, that this may have more to do with his approach, investing in big data projects that lack the sex appeal and press coverage of consumer facing startups. “A lack of heat can scare many away who find comfort in the warmth of the herd…But it is scary to stand alone. Cold. Exposed. With the potential for looking like a singular idiot with nowhere to hide. Much better to be part of a group of idiots, right?”
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