If you’re looking for an unfiltered perspective on the exuberance within the tech ecosystem in recent years, there are few people better to talk to than Benchmark’s Bill Gurley, who crashed this since 2015 forecast.
We talked last week over a cup of coffee. I wasn’t planning on interviewing Gurley while I was in Austin. After all, I hadn’t even realized that he had sold his house in San Francisco and moved here about a year and a half ago. But when I found out, he agreed to tell me why he and his wife ended up in Texas. And we also talk about a host of other things: what music venues he frequents, how he was influenced by Steve Martin’s book Rise up born, Uber, AI, and his new COVID hobby guitar. (You can read all about it here.)
But I couldn’t help but ask Gurley, who has been outspoken in predicting that the tech bubble would burst for nearly a decade, how this private market crash would ultimately shake out. Gurley isn’t making new investments these days because he stepped down from Benchmark’s tenth fund a few years ago, but he still sits on 10 boards, attends Benchmark meetings and has skin in the game. He also has more than two decades of experience, with a front-row seat to how this mess can end, and how too much capital can lead to founders losing some discipline.
“I became convinced that the industry is structurally flawed and will always boom and bust,” Gurley tells me. “They have very low barriers to entry and really high barriers to exit, with the old Michael Porter stuff. And so, in this day and age, you’ve ended up with just a flood of new entrants … They’re collecting all this stuff, and eventually just supply and demand will lead to it being a wreck. It’s always a matter of time.”
Benchmark is known for keeping its funds small. The tenth fund (the first that Gurley is not a part of since he joined the company), is $420 million, across the likes of Andreessen Horowitz, Kleiner Perkins, Khosla Ventures, or Sequoia Capital. In recent years, even some brand new funds, such as Katie Haun’s crypto company, managed to raise more than $1 billion for their first fund. When venture capital firms offered huge checks to get into the most promising startups, valuations soared, the IPO market boomed, returns were fabulous, and endowments, sovereign wealth funds, pensions and foundations clamored for exposure.
“I mean, for the past five years, everybody told us we were crazy: Why don’t you raise a billion dollar fund? Of course we could and then our management fees would have been five times bigger,” says Gurley. But Gurley was at Benchmark when the company lost focus during the Dot Com Boom. “We overextended in 1999 to 2001,” he says, noting that Benchmark had a $1 billion fund at the time it was six or seven years commitment. “We went global. And we didn’t succeed.”
“What we’ve been through, we’ve always said that good judgment comes from experience, and (experience) comes from bad judgment,” he adds.
So what happens now? “It’s always a matter of time,” Gurley says. “I thought it would happen five years before it did, but once it happens, it’s usually catastrophic … it doesn’t end well.”
Gurley ran his finger along the table to visualize what he was saying, how he used to think venture was cyclical, like a sine wave, but how he’s now convinced it’s like a sawtooth wave. It goes up slowly, slow as a roller coaster, and then it crashes. And then it goes up again. And people take risks very slowly and gradually, and then suddenly become risk averse.
“This went on for so long (since) ’09. There were tons of people in the ecosystem — founders and investors — they didn’t know any other way. They just thought this is how it’s going to be forever. And then it crashed .And it’s wild to see,” he says, noting that, due to all the capital that has been invested in these companies, it may take a few years before all the bankruptcies come out.
Something to watch: Whether venture firms start returning capital to LPs, as several did in 2001.
“People assume it was the act of being gracious — I think it was an act of greed,” Gurley says. He points out that many venture companies have a term in LP agreements called a “lookback”, where you have to pay limited partners back a part of your carry should a deal not reach an agreed return. “When you terminate a fund and raise new funds, they don’t have that retrospective. So I think a lot of these companies close these funds early so they can start with new capital and not be exposed to that risk.
The exception to this market destruction, Gurley can’t help but point out, is AI
“Now AI is just an interesting randomizer. Everyone wants to finance them (startups) at any price, but you still – that won’t help all this stuff,” he says.
Greg Becker speaks out…In his first appearance since the devastating and sudden collapse of Silicon Valley Bank, former CEO Greg Becker testified during yesterday’s Senate banking hearing, and was quick to blame the bank run, rising interest rates and media attention – instead of himself. Lucy Brewster has the story here.
until next time,
Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.
VENTURE DEALS
– Gradienta Woburn, Mass.-based provider of water and wastewater treatment solutions, has raised $225 million in its first Series D funding close led by The trading volume of BoltRock Holdings and Centaurus Capital city.
– Ray Therapeuticsa San Francisco-based optogenetics company, raised $100 million in Series A funding. The trading volume of Novo Holdings lead the round and was joined Deerfield Management, Norwest Venture Partners, Platanus, MRL Ventures Fundand 4BIO capitalization.
– Noveon Magneticsa manufacturer of neodymium durable rare earth magnets based in San Marcos, Texas, has raised $75 million in Series B funding led by NGP and Aventurine Partners.
– Hippocratic AIa Palo Alto-based major language model for the healthcare industry, has raised $50 million in seed funding led by General Catalyst and Andreessen Horowitz.
– Spiffa Salt Lake City-based sales commission software company, raised $50 million in Series C funding. Salesforce Ventures lead the round and was joined Lightspeed, Norway, Kickstart Fund, Albumand others.
– Levela London-based B2B marketplace for diamonds and jewelry, has raised $11 million in Series A funding led by Head.
– TidalSensea Cambridge, UK-based respiratory intelligence healthcare company, raised £7.5 million ($9.39 million) in funding led by BGF and Downing.
– Quilta Redwood City, Calif.-based ductless heat pump system development company, brought in $9 million in seed funding. Lower Carbon Capital and Gradient Ventures co-led the round and were joined by Incite Ventures, MCJ Collective, Garage Capital, Climate Capitaland Space cadet.
– Noria London-based operating system for hospitality companies, raised €7 million ($7.6 million) in seed funding. Triple Point Ventures and Samaipata VC co-led the round and attended Playfair Capital, Cavalry VCand Circlerock Capital.
– Somethingsa New York-based teen mentorship platform, has raised $3.2 million in seed funding led by General Catalyst.
– Asymmetry Financea protocol for liquid staking tokens based in New York, has raised $3 million in seed funding led by Here is the capital.
– Pear Suitea Honolulu-based digital health company, has raised $2.5 million in seed funding. Mucker Capital, Impact Engine, American Heart Association, Sweater Venturesand Attention Capital co-led the round and attended Techstars, Open Venture Capital, Intensely Ventures, Lair East Labs, Start Up Healthand Third Act Ventures.
– WrangleA Durham, NC-based developer of productivity tools for remote workers has raised $2 million in seed funding. Accomplices lead the round and was joined Bloomberg Beta, Eniac Venturesand the Triangle Tweener Fund.
– Minus worksa Long Island, NY-based manufacturer of sustainable packaging, raised $1.8 million in seed funding from Emil Capital Partners and others.
PRIVATE PROPERTY
– Entrepreneurial Equity Partners received a majority stake in Furlani Foods, a Mississauga, Canada-based garlic spreads and purees company. Financial terms were not disclosed.
– Foremark Performance Chemicalsan SK Capital Partners portfolio company, acquired NexGen Chemical Technologiesa Houston-based alternative natural gas sweetening solution provider, of Black Bay Energy Capital. Financial terms were not disclosed.
– Nexbelta TEAM Partners portfolio company, acquired Lion of California, a Corona, Calif.-based leather belts and accessories manufacturer. Financial terms were not disclosed.
– Paper flysupported by Damnedacquired Keepeek, a Paris-based digital asset management company. Financial terms were not disclosed.
– Tendit Groupan Osceola Capital portfolio company, acquired Clean D Windows, a Tempe, Ariz.-based commercial window cleaning company. Financial terms were not disclosed.
OTHER
– Endred acquired Reward Gatewaya London-based employee engagement company, from funds managed by Abry Partners and Castik Capital for £1.15 billion ($1.44 billion).
– ArisGlobal acquired SPORIFY, a Dublin-based SPOR data integration platform. Financial terms were not disclosed.
IPOS
– Atmus Filtration Technologiesthe Nashville-based filtration company of Cumminsplans to raise up to $296.6 million through the sale of 14.1 million shares priced between $18-21.
Funds + Funds Funds
– Illumen Capitalan Oakland-based impact fund of funds, raised $168 million for a fund focused on education, health and wellness, climate and sustainability, and financial inclusion.
PEOPLE
– Apollo Global Managementa New York-based investment firm, called Jason Schier as cohead of Apollo’s Hybrid Value business.
– K50 Venturesa New York-based venture capital firm, hired Nick Talwar as a senior partner.
– Narrative strategiesa Washington, DC-based communications firm, hired Chris Ullman as a senior advisor. Earlier he was with the Carlyle Group.
– Sofinnova Investmentsa Menlo Park, Calif.-based investment firm, hired Jacob Dupont as managing partner. Earlier he was with Atara Biotherapeutics.
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