Red flags rising on tech spending

The San Francisco Chronicle reports:

There are rumblings in venture capital circles that pieces of the Bay Area’s favorite industry are, in the words of one prominent VC, about to get “vaporized.”

Excessive risk, unsustainable burn rates, irresponsible spending — seems as if we’re partying like it’s 1999. “No one’s fearful, everyone’s greedy, and it will eventually end,” Benchmark Capital partner Bill Gurley told the Wall Street Journal.

“More humans in Silicon Valley are working for money-losing companies than have been in 15 years,” said Gurley, who got the ball rolling last month in that interview. “I think there is a high likelihood that we’ll see some high-profile failures in the next year or two.”

Maybe yes, maybe no, but one thing is for sure: Silicon Valley is pouring money into anything that moves — witness Khosla Ventures-led $13 million investment this week in a purportedly mood-enhancing wearable startup in Los Gatos.

And at what many consider over-the-top valuations. According to Dow Jones VentureSource data, 49 nonpublic, VC-backed companies — a record — are valued over $1 billion. Top of the list: Uber, at $18.2 billion (worth more than Hertz), one of whose main investors is Benchmark Capital. This year alone, 20 VC-backed tech companies raised a first round of financing at a $1 billion-plus valuation, according to research firm CB Insights. That includes San Francisco mobile game developer Kabam and fintech startup Credit Karma.

A bigger concern is the burn rate. “Burning cash. Losing money. Emphasis on the losing. Sky high all over the US startup sector right now,” blogged Fred Wilson, managing partner at Union Square Ventures, in response to the Gurley interview. That includes some of Wilson’s portfolio companies, he said “burning multiple millions of dollars a month.” Like Tumblr, before its sale to Yahoo. “Tumblr’s annual burn was almost 50% of the size of our entire fund!!!” he wrote.

Meanwhile, the inimitable Marc Andreessen, coming in behind Gurley and Wilson, issued a torrent of tweets including eight burn-related reasons why a number of startups will “VAPORIZE.” For example, #4: “Lots of people, big shiny office, high expense base = Fake 'we’ve made it!’ feeling.” Once ther feeling has worn off, “we will find out who has been swimming without trunks on.”

An article well worth your time.