After going through the VC bubble of 1999-2000, I feel like we’re in the midst of another one — and it’s going to burst sometime this year.
There are a growing number of signs that, when added up, make talk of a bubble compelling. Today, Fenwick & West released a survey showing that valuations rose over 70% in Q2, the second highest rate since it started doing the VC survey in 2002. Then you have VCs making investments that feel more like acts of desperation than really sound deals — like the 35+ social networking investments done this year. A couple of long-time VCs — Sevin Rosen Funds and Northwest Venture Associates — say they won’t raise new funds because valuations are out of control and too many of the deals they are seeing are “me too.”
Now add in the subprime mortage mess. When that worsens — and it will, even if the Fed cuts interest rates — you’re going to see a downturn in the overall economy and a lot of the current investments being made by VCs go south, just like they did in the aftermath of the first tech bubble.
So what should VCs do right now? Dial back.
If I’m right, they will have conserved some cash to fund their companies through a downturn. If I’m wrong, then they will have at least avoided participating in over-valued deals. Yes, there is a chance that they could miss out on the next Google while sitting on the sidelines, but I think that’s a long shot.