Are We In A Startup Bubble?

Recently, Marc Andreessen took to Twitter to explain why he agrees with Bill Gurley’s statement that Silicon Valley is taking on too much risk when it comes to investing in startups.

Gurley told the Wall Street Journal that the amount is “unprecedented since ‘99.” He was referring to the dotcom bubble, and Andreessen subsequently posted 18 consecutive tweets where he explained how new startup founders have only been in environments where money was easy to raise at higher valuations in the past decade.

While neither Gurley nor Andreessen specifically said whether they thought there is a bubble in the current startup sector, Benzinga took a poll of 20 entrepreneurs and people who work closely with the startup space to get their opinion on the current state of things.

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A Rose By Any Other Name

Most entrepreneurs agreed with Andreessen's comments, even if they also shied from the word “bubble.”

A disproportionate amount of funding is going toward companies that aren’t working on innovation, especially in Silicon Valley, according to Silicon Valley-based serial entrepreneur Anthony Gioeli.

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“Basically, too many startups that do not add any economic value are being funded at exceedingly high valuations,” Gioeli said.

Andrew Yang is the founder and CEO of Venture for America, a nonprofit organization that places college graduates at startups in emerging communities around the country. He said that historically, the cost of capital has been lot higher than it is right now.

“People are investing in an environment where the inflation-adjusted risk-free rate of return is negative. That's not normal. It's causing investors to seek returns wherever they can,” he told Benzinga. “That suggests that there will be a turn in valuations at some point. No one knows the timing or catalyst -- just that it's likely to happen.”

Even professionals who aren’t entrepreneurs but work within and around the startup space seem to think there is a bubble.

David Sorin is the head of venture capital and early stage/emerging companies practice at the law firm McCarter & English. Sorin represents started and venture investors, and he told Benzinga that he agrees with Andreessen’s comments.

“Venture investors expect entrepreneurs to spend investment dollars wisely and in ways that will bring optimum benefit to the growth of the company. That means a lean startup model,” he explained. “ In many instances, the startup community has gotten away from all that.”

Edmunds Chief Analytics Officer Paddy Hannon worked in the technology space during the dotcom bubble.

He told Benzinga that he thinks this is a little different than that bubble, which involved a flurry of investments in a number of off-the-wall ideas that generated a huge amount of “novel approaches.”

“At the same time, I remember my father was a real estate broker during the real estate bubble, saying ’This isn’t a bubble. Interest rates are low. There is a historic shortage in housing. There is no way this is a bubble,’” Hannon said. “He is still struggling to come back from all that. So, when you are in it, I think it is kind of hard to see it.”

Location, Location, Location

Other investors and entrepreneurs pointed out that what may be true for startups in Silicon Valley might not necessarily reflect the rest of the country.

Take Ted Serbinski, for example. A managing partner with Detroit Venture Partners, Serbinski thinks that Andressen’s comments are highly tailored to Silicon Valley and Silicon Alley areas.

He said that startups in the Midwest, on the other hand, must be very sound business models since there are fewer resources for them to utilize.  

Brian Meece is a co-founder of RocketHub, an online crowdfunding platform. He witnesses a breed of startups that are born and funded entirely on the Internet and never see Silicon Valley.

“I'm seeing the rise of the lifestyle startup, and it’s not really beholden to big money,” he said. “It’s folks that are starting sustainable businesses that are meaningful to them.”

True Value And Room For Growth

There are entrepreneurs who don’t think there is a startup bubble. Vusay Founder Wendell Brown told Benzinga that many startups today are generating real revenue and true value for businesses and individual customers with “innovation, imagination and greater function to the growing mobile device market.”

Wendell said he expects to see continued growth in the startup sector as mobile device usage increases.

There are people who do agree that there is somewhat of a bubble in the startup sector, but say that it’s not such a bad thing. Aspiriant Director of Wealth Management Lorraine Fox works with Silicon Valley entrepreneurs to help establish goals and benchmark against them. With more than two decades of experience in the tech industry, Fox experienced the conditions of the dotcom bubble.

Even if the bubble burst and funding for private companies from public entities and other investors came to a halt, she told Benzinga that downturns usually result in the creation of great, lean startups companies.

“Historically, companies like Cisco, Microsoft and Apple were all funded during economic slowdowns,” she said.

Digital Entertainment Ventures Founder and Managing Director Alan McGlade told Benzinga that while there is truth to what Andresseen says, it’s not all bad news.

“The volume of startups and angel investors appears to be growing exponentially,” he said. “You know you’ve hit a tipping point once there is a 30-minute TV comedy about startup culture.”

Only time will tell if and when a bubble in the startup industry will burst.

Keep an eye out for part two of this series.

Image Credit: Serge Melki, Flickr