Some tech startups add financing as downtown insurance
While Silicon Valley has more money than it knows what to do with these days, some entrepreneurs are remembering the 1990s dot-com bubble and stocking up on financing now while it’s plentiful.
The New York Times
In 1999, right before the dot-com bubble popped, Lawrence Coburn quit his corporate job and dived into the Internet gold rush, raising $600,000 from friends and family — including his grandmother — for a consumer-ratings site he founded called RateItAll.
At the time, virtually any idea, no matter how far-fetched, seemed to hold the promise of a highflying initial public offering, making it easy to attract financial backing.
But when technology stocks collapsed and venture capital dried up, RateItAll ran out of cash by 2001.
Today, Coburn, 45, who runs a startup in San Francisco called DoubleDutch (and who only managed to pay back his grandmother after her death — returning the money to her estate), fears that history may repeat itself.
Without an immediate need for more funding, he said concerns about a possible downturn factored into his decision to raise $19 million of equity and debt financing last month for DoubleDutch, which makes an app for organizing events. He readily received the money from some leading Silicon Valley investors, including Peter Thiel.
Silicon Valley has more money than it knows what to do with these days, leaving venture capitalists and other investors practically begging elite startups to take their cash. And the entrepreneurs are happy to oblige.
With young startups receiving lofty valuations — and with conflicts around the globe stoking fears of a market correction — some entrepreneurs say worries about a possible downturn are partly why they are stocking up on financing, essentially taking out insurance on the risk of lean times ahead.
“If you’ve been through those boom cycles, you’re looking for signs that the next one is coming, and you’re very fearful of that,” Coburn said. “You don’t want to be stuck out raising money when the curtain call comes.”
At a time when many consumer tech brands like Uber and Snapchat are bursting with financing that values them at $10 billion or more, lesser-known but promising firms are also attracting prominent investors. Even traditionally conservative investors like T. Rowe Price are competing for access to the hottest tech deals.
Some fear a return to the unreal economy of the late 1990s. And those voices are growing louder, stoking debate in the tech world. One prominent venture capitalist, George Zachary, a partner at Charles River Ventures, who was an early investor in Twitter, contends that Silicon Valley is in an expanding bubble, and he has been using his Twitter feed over the past year to cite evidence for that claim.
Keeping a close eye on the public markets, Zachary also projects that a geopolitical shock like the conflicts in Ukraine and Iraq could set off a market correction and, in turn, constrain financing for tech firms.
Many executives and investors are looking for indications that the Federal Reserve might raise interest rates.
Zachary said some venture people say his declarations are bad for business.
“My take is it’s better for the market to be less volatile than for it to ballistically go up and explode,” he responded.