Gurley warns that higher valuations create higher expectations where slight missteps put companies underwater.
“Valuations represent discounted future expectations. So the higher the valuation you take, the more is expected of you and the slight misstep and you could be way underneath.”
Gurley says venture capital is getting more risk seeking due to belief in power laws.
“the venture capital community as a whole is is getting more risk seeking and taking on more risk because of their knowledge of how things have played out in the past.”
Gurley says he is seeing the most risk seeking venture capital behavior he has ever seen in his entire life.
“You would have a hard time convincing me that risk capital is in shortage in America right now. I'm seeing the most risk seeking venture capital behavior I've ever seen in my entire life.”
Gurley explains asymmetric risk: funding failures lose 1x while missing big wins loses 10,000x your money.
“If you fund something that doesn't work, you lose one times your money. If you miss this big thing, you lose, you know, 10,000 extra money.”
Gurley says venture firms incrementally adopted risk like boiled frog before reaching iBuying extremes
“And so people adopt incremental risk with the whole boiled frog metaphor without kinda realizing they're doing it.”
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 says in the recent boom every venture firm started multiple funds, slowly piling up risk unknowingly.
“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. It's like the roller coaster goes, nink, nink, nink, nink, nink.”
Gurley says in the recent boom every venture firm started multiple funds, piling up risk unnoticed.
“And you're taking more and more risk and you don't know it because everyone around you is taking the same amount of risk.”
Gurley calls FTX the perfect pinnacle of the recent bubble where legendary investors ignored risk.
“And maybe FTX is the perfect pinnacle of this past one where a bunch of legendary investors just ignored risk. You know, and they wouldn't have done that in 2009.”
Gurley notes SVB stock traded at $260 on March 8, arguing Wall Street misjudged risk too.
“So on March 8, the stock was trading at $260 a share. So there are people that want to put this on risk taking in Silicon Valley, but Wall Street got it wrong too.”
Gurley describes venture cycles as sawtooth patterns rather than sine curves, with gradual risk-on and abrupt risk-off.
“it doesn't happen like a sine curve which is what we all imagine when we think of a cyclical business, it's more like a sawtooth.”
All-In Podcast
“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 argues current risk bubble differs from 1999 because investors now put hundreds of millions into four-year-old private companies.
“But you didn't have a situation where people were putting $102,103 $104,109 $1,001,000,000,000 dollars into a private company who might only be four years old. These companies just haven't had the time to mature.”
Gurley observes there is a complete absence of fear in Silicon Valley right now, which typically leads to problems.
“And while I'm I'm not here to accuse people of being greedy, there is no fear in Silicon Valley right now, a complete absence of fear.”