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Venture capitalists heed lesson of the boiled frog

A prominent venture capitalist cited the frog that can be slowly boiled alive as a lesson to follow in tech investment.
A prominent venture capitalist cited the frog that can be slowly boiled alive as a lesson to follow in tech investment.

Private, venture-backed start-ups are dominating the conversation in Silicon Valley right now. Not because of what their products do, but more significantly, what they might be actually worth.

It’s now called the “$10 billion Plus Club.” In the rarefied air of high flying tech start-ups with valuations above $10 billion today, you will find Airbnb, Dropbox, Uber and Xiaomi (a smartphone maker in China). It was reported this week that Snapchat may also have joined the club thanks to an investment from Alibaba. This is ironic, because big spender Facebook, was willing to pay “only” $4 billion for Snapchat a few months ago.

When you have staggering amounts of money attached to companies with more users than profits, you have the possibility of a speculative “bubble.” At the just concluded two-day Silicon Valley Innovation Summit, organized by AlwaysOn, a number of highly-regarded venture capitalists and technology analysts were reluctant to declare a bubble in this potentially overheated market. But they all described the current climate as “frothy,” which is presumably what you see just before a real bubble emerges.

Perhaps the most intriguing viewpoint came from Bill Gurley, a partner with Benchmark and a speaker at this week’s conference. His venture capital firm has been an early-stage investor in such noteworthy companies as eBay, Twitter, Yelp, Instagram, and Zillow. But it has been Gurley’s steadfast support of Uber that has drawn the most attention.

Gurley and Benchmark were early investors in the car service firm that has become a disruptive force in the taxi and limousine industry. Uber’s rapid growth has led Gurley to place a value on the company in excess of $17 billion. This drew a much-discussed response in the past few weeks from an NYU professor who disputed Gurley’s reasoning and placed a much lower value (less than $6 billion) on the company.

On Tuesday, Gurley carried a mixed message to the stage in his conversation with AlwaysOn’s Tony Perkins. While Gurley vigorously defended his pricey valuation of Uber, he was noticeably more pessimistic about avoiding a bubble in the tech sector that may soon burst. As evidence, he cited the rising number of companies who were signing ten year leases on office space in San Francisco (the single biggest drag on earnings in the last downturn), and the growing number of employees who were working for profitless companies. “Companies are being founded on minor variants of something else versus something that is truly new,” Gurley warned.

A separate discussion at this week’s Summit focused on the market for wearable technology, which is also attracting sizable investment. Visiongain has estimated that the value of this market will exceed $5 billion just in 2014. But several of those who either work for or follow the wearables industry closely were harsh in their criticism. “Wearable 1.0 was a huge failure,” said Francine Hardaway of Stealthmode Partners. “It was not ready for prime time.”

The challenge is for wearable tech companies to strike a balance in software and hardware expertise, while designing a product that will be fashionable and attract a wide audience. “Customers are looking for a very personalized experience,” admitted Myriam Joire, Chief Evangelist for Pebble.

Yet, there was also a feeling that the next generation of wearable products will be more purposeful, thus driving use and building a bigger market. Greg Biggers, Chief Product Officer for SenseLabs, showcased a pair of headphones that provides “brain training for athletes.”

Risk has always been a part of the Silicon Valley mindset, and at a conference such as this week’s AlwaysOn Summit, venture capitalists know that this is just a part of the game. Gurley recognized this in his remarks with a bit of Texas homespun philosophy about the notion of a frog that will jump out of boiling water, but will do nothing if the temperature is gradually raised. “We’re getting comfortable with risk because we discount it over time, like a boiled frog,” said Gurley. The value of fledgling tech companies continues to grow, the pot is starting to boil, and a room full of smart people can see bubbles rising to the surface.

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