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Bubble 2.0? Moneybags VC Andreessen warns profit-free startups: 'You will be VAPORIZED'
Cash-burning, post-revenue Valley upstarts told to worry – 'the market will turn'
When it comes to the internet age, Marc Andreessen was in there right from the start. Now, when he talks, people listen.
So when the geek-turned-venture-capitalist today warned there'll soon be a bloodbath unless startups start making bank, we imagine there were a few spilled soy lattes in the Valley.
Andreessen took to Twitter to broadcast his views in a string of 18 tweets over the course of Thursday afternoon, California time. In them, he expounded on growing fears that we're in the middle of another tech bubble – albeit without mentioning the B word.
3/New founders in last 10 years have ONLY been in environment where money is always easy to raise at higher valuations. THAT WILL NOT LAST.— Marc Andreessen (@pmarca) September 25, 2014
He said the inspiration for the rant came from fellow venture capitalist Bill Gurley's interview with The Wall Street Journal earlier this month in which the VC warned we were approaching 1999 levels of startup silliness.
"The average burn rate at the average venture-backed company in Silicon Valley is at an all-time high since '99 and maybe in many industries higher than in '99," Gurley said.
"And two, more humans in Silicon Valley are working for money-losing companies than have been in 15 years, and that's a form of discounted risk."
Andreessen agrees, saying that people who have started companies in the last ten years have never been in an environment where VC cash is hard to find, and this has led to attitudes and actions that are unhealthy.
"When the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rate co's will VAPORIZE," he tweeted.
The rate at which companies burn through cash is important, he said, because it makes startups grow too big too fast. Staffing gets bloated, managers get used to hiring their way out of trouble, and costs go up and up he opined.
"Raising new money becomes harder & harder. You have bigger bulldog to feed, need more and more $ at higher and higher valuations," he said. "Therefore you take on escalating risk of a catastrophic down round. High-cash-burn startups almost never survive down rounds. VAPORIZE."
Getting hold of so much cheap cash effectively means that companies can run a long time without actually making a profit, he said. A case in point is Andreessen's choice of communications media: Twitter. It has a market cap of over $30bn, but has yet to make a profit.
While Twitter has managed to go public, there are many firms that still aren't in that position. Andreessen warned that when things get worse, and the VC money stops flowing, a lot of firms are going to be left with nothing but an office full of fancy furniture and a massive wage bill not backed by a reliable revenue stream.
"Finally, there are exceptions to all this. But if you're reading this, you're almost certainly not one. They are few and far between," he said. "Worry." ®