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- Legendary Silicon Valley investor Bill Gurley of Benchmark Capital warned that entrepreneurs aren't being properly held accountable any more.
- It's because low interest rates have made it easy for startups to raise money and reduced the power of investors to oversee them.
- He describes it as a "systematic problem in Silicon Valley."
- Gurley previously sat on the board of Uber — and describes the company's trouble-filled 2017 as "the least enjoyable experience of my life."
SAN FRANCISCO — There's a "systematic problem in Silicon Valley," legendary investor Bill Gurley has warned: There's so much easy money in the tech industry, entrepreneurs can afford not to be accountable to their investors. That "excessive amount of money," he says, can inflate a startup's valuation — even if they don't deserve it.
"Watch out, it’s a dangerous time," says Gurley.
Appearing at a Goldman Sachs technology conference in San Francisco on Wednesday, the Benchmark Capital partner spoke broadly about the challenges of corporate governance in the American technology industry.
Low interest rates and the accompanying flood of capital into the space have both reduced investors' oversight abilities and given founders easier access to capital — a potentially dangerous combination. The situation is, Gurley said, "unprecedented."
Bill Gurley has experience with acrimonious corporate governance: Benchmark was an early investor in Uber, and Gurley sat on the board of the transportation company. He battled to oust CEO Travis Kalanick amid the car-ride company's tumultous 2017, and ultimately left its board a day after Kalanick resigned. On Wednesday Gurley called his experience with Uber in 2017 "the least enjoyable experience of my life."
The root cause, according to Gurley: Historic low interest rates have led to fierce competition in the venture capital industry — meaning entrepreneurs can easily shop around for favorable investment terms.
"We're in an environment where if you're a successful company you're now being handed hundreds of millions of dollars pre-IPO," he said.
And because entrepreneurs hold the power in that relationship, it far harder for investors to oversee and exert influence over the companies in their portfolio. And Gurley should know: He sits on the board of companies like GrubHub, Nextdoor, OpenTable, and Stitch Fix.
There has in recent years been a clear trend towards more "founder friendly" terms in funding deals for entrepreneurs and founders. A prominent example: Snapchat's parent company Snap going publicly with an arrangement that wouldn't give investors any voting rights whatsoever. (Interestingly, Benchmark Capital was an early investor in Snap.)
There's no easy fix, says Gurley. Much of the current environment is driven by a fear from investors that if they don't accede to these terms, they'll miss out on what could become the next big blockbuster tech IPO.
"The venture capital board members are finding it harder and harder to speak up and find entrepreneurs responsible for financial performance," Gurley said. "The reason for this is our business has gotten super competitive and so what the venture capitalist is afraid of is losing the next big one."
He added: "If you get a reputation like that you won't win the next deal, and so what Silicon Valley board rooms have become is this," he said, making polite clapping noises.
There's a more systematic fix, he says — but it would come with consequences of its own.
"The easiest way to fix it is to have interest rates spike 10% and completely wipe out all this free capital." A significant rise in interest rates will have other major knock-on effects across the economy, of course — but "it'll fix [...] the fact you can raise so much money so easily."
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