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Originally published December 8, 2013 at 8:01 PM | Page modified December 9, 2013 at 10:43 AM

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Confidence overflowing in Silicon Valley

One venture capitalist thinks it’s feeling like 1999 again, when no wild idea was too risky. But there’s a downside when boom times go bust.


The New York Times

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PALO ALTO, Calif. — These are fabulous times in Silicon Valley.

Mere youths, who in another era would be just graduating from college or wondering what to make of their lives, are turning down deals that would make them and their great-grandchildren wealthy beyond imagining. They are confident that even better deals await.

“Man, it feels more and more like 1999 every day,” tweeted Bill Gurley, one of the valley’s leading venture capitalists. “Risk is being discounted tremendously.”

That was in May, shortly after his firm, Benchmark, led a $13.5 million investment in Snapchat, the disappearing-photo site that has millions of adolescent users but no revenue. Snapchat, all of 2 years old, just turned down a multibillion-dollar deal from Facebook and, perhaps, an even bigger deal from Google. On paper, that would mean a 40-fold return on Benchmark’s investment in less than a year.

Benchmark is the venture-capital darling of the moment, a backer not only of Snapchat but the photo-sharing app Instagram (sold for $1 billion to Facebook), the ride-sharing service Uber (valued at $3.5 billion) and Twitter ($22 billion), among many others. Ten of its companies have gone public in the past two years, with another half-dozen on the way. Benchmark seems to have a golden touch.

That is generating a huge amount of attention and an undercurrent of concern. In Silicon Valley, it may not be 1999 yet, but that fateful year — a moment when no one thought there was any risk to the wildest idea — can be seen on the horizon, drifting closer.

No one here would really mind another 1999, of course. As a legendary Silicon Valley bumper sticker has it, “Please God, just one more bubble.” But booms are inevitably followed by busts.

“All business activity is driven by either fear or greed, and in Silicon Valley we’re in a cycle where greed may be on the rise,” said Josh Green, a venture capitalist who is chairman of the National Venture Capital Association.

For Benchmark, that means walking a narrow line between hyping the future — second nature to everyone in Silicon Valley — and overhyping it.

Opinions differ here about what stage of exuberance the valley is in.

“Everyone feels like the valley has been in a boom cycle for quite some time,” said Jeremy Stoppelman, the chief executive of Yelp. “That makes people nervous.”

John Backus, a founding partner with New Atlantic Ventures, says he believes it’s more like 1996: Things are just ramping up.

The numbers back him up. In 2000, just as the dot-com party was ending, a record number of venture capitalists invested a record amount of money in a record number of deals. Entrepreneurs received more than $100 billion, a 10-fold rise in dollars deployed in just four years.

Much the money disappeared. So, eventually, did many of the entrepreneurs and most of the venture capitalists.

Recovery was fitful. Even with the stock market soaring since the recession, venture money invested fell in 2012 from 2011, and then fell again in the first half of this year. Predictions of the death of venture capital have been plentiful.

For one thing, it takes a lot less money to start a company now than it did in 1999. When apps like Instagram and Snapchat catch on, they do so in a matter of months. Venture capitalists are no longer quite as essential, and they know it.

Just last month, Tim Draper, a third-generation venture capitalist with Draper Fisher Jurvetson, said he was skipping the next fund to devote his time to his academy for young entrepreneurs.

But there are signs of life. Funding in the third quarter suddenly popped, up 17 percent from 2012.

“I think this is the best time we’ve seen since 1999 to be a venture capitalist,” Backus said.

He expects the returns on venture capital, which have been miserable since the bust, to improve this year.

“Everyone talks about the mega-win — who was in Facebook, Twitter, Pinterest,” he said. “But the bread and butter of venture firms is not those multibillion exits but the $200 million deals, and there are a lot of those.”

Benchmark is putting together a new investment fund. Given its recent track record, it could easily raise $1 billion from its limited partners. Instead, it will keep the fund to its usual size, $425 million. That is a hallmark of the discipline that has attended Benchmark since its founding in 1995. While other venture capital firms have bulked up, Benchmark has stayed lean.

Its founding partners did not put their name on the door, a way of stressing that all were equal and would share in the profits equally.

Now the partners are mostly different, but the one-for-all and all-for-one philosophy is the same, and the hits have kept coming.

When the Snapchat news was breaking, Benchmark’s Gurley did not post another reference to 1999, the year the venture-capital industry went crazy and valuations of revenue-less companies like Snapchat rose to incredible levels.

Instead, he promoted the service, noting that “many adults still don’t understand the draw of Snapchat.”

Half of Silicon Valley argues that Snapchat is a flash in the pan, which means its fate will be revelatory as well as entertaining to watch. Perhaps it will indeed rank with the likes of Google or Yahoo. Or perhaps it is Pets.com.



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