Gurley argues that during risk expansion periods, average entrepreneur quality declines as easy capital attracts people from banking and consulting.
“And I think you actually, that entire time that risk is increasing, the quality of your average entrepreneur that's getting funded is actually going down.”
Gurley argues that entrepreneur quality declines during boom times and improves when risk appetite falls.
“I think you actually, that entire time that risk is increasing, the quality of your average entrepreneur that's getting funded is actually going down.”
“And then risk off tends to be very abrupt and we've seen that here, right? This this cycle, risk on was from o nine. That's well said. To five months ago.”
Gurley finds post-correction windows the calmest period with least anxiety as people behave more rationally and pragmatically.
“The window after the correction is the calmest, where there's least anxiety for me at least. Like, everything slows down, people talk rationally, people aren't doing silly things.”
Gurley explains venture firms must maximize upside because IRR depends on hot cycle performance, which may accelerate collapses.
“And that's where we came up with this phrase that the best way to protect yourself against the downside is to enjoy every last bit of the upside.”
Gurley says the abrupt nature of risk-off cycles requires rapid mental adjustment, creating structural problems for cap tables.
“And the thing that's really tough about that is it requires a mental adjustment very quickly.”
Gurley says venture cycles don't follow a sine curve as imagined but rather a different pattern of rise and crash.
“And one thing that I realized coming out of that is that it doesn't happen like a sine curve, which is what we all imagine when we think of a cyclical business.”
Gurley tells entrepreneurs the 2020-21 boom was a fantasy, not normal, and current conditions are reality.
“Then I'm not the only one, there's other VC's getting, this is normal dude. Like that was a fantasy you were in and you need to forget it fast, but you can't.”
Gurley says during booms every firm started multiple funds, piling up money and slowly taking on unrecognized risk.
“So when things boom, everyone starts a venture firm. Right? And in this past boom, in addition to everyone starting a venture firm, every venture firm started multiple venture firms and growth firms, and all that money gets piled up and you're slowly taking on risk and you don't realize it.”
Gurley cites adage that protecting against downside in venture requires capturing full upside during bubbles.
“Unfortunately, and this ties into the cyclicality thing, there's a saying which is the best way to protect yourself against the downside is to enjoy every last bit of the upside.”
Gurley claims venture's outperformance depends entirely on tiny frothy windows; without peak years it's an uninteresting asset class.
“And if you don't, if you aren't around for that part, you know, you strip those years out a forty year assessment, it's actually not that interesting an asset class,”
Gurley says venture capital's outperformance comes from tiny windows of frothy markets according to longtime LPs.
“I went and talked to some LPs that have been in the business for a very long period of time and a vast majority of the reason Venture outperforms other asset classes has to do with these tiny windows when you have a super frothing market.”
Gurley says venture firms should exit at peaks but instead become most confident about holding forever at those exact moments.
“Yes, right when we are at the peak is when people get the most brazen, the most confident and they start talking about how we're going to hold forever.”
Gurley says the venture industry is highly cyclical, rising slowly but crashing immediately across three bubbles.
“I've lived through three different bubbles and bursts in this industry, and unfortunately, it's highly cyclical. And when you and and it tends to go up slowly, and it tends to crash immediately.”
Gurley observes venture markets rise slowly but crash immediately, based on experiencing three bubble cycles.
“Yeah. Look, I've lived through three different bubbles and bursts in this industry, and unfortunately, it's highly cyclical. And when you and and it tends to go up slowly, and it tends to crash immediately.”
Gurley observes tech valuations rise slowly but crash immediately, and he has now seen this pattern three times.
“it tends to go up slowly, and it tends to crash immediately. And so this is the third time I've seen valuations crash,”