a16z Podcast: Good Bubbles, Bad Bubbles -- and Where Unicorns Come from
May 11, 2015
auto_awesome
Bill Janeway, an early venture capitalist and author from Warburg Pincus, shares insights on the evolution of the VC industry. He discusses the phenomenon of unicorns in tech and highlights the crucial role of cash flow and control for startups in today's market. Janeway also delves into the dual nature of financial bubbles, explaining how they can either hinder or foster innovation while navigating the complexities of IPOs and private valuations. His unique perspective on merging theory and practice offers a compelling view of modern entrepreneurship.
The transformation of information technology has made launching startups easier, leading to high entrepreneurial activity but increased failure rates.
Venture capital strategies are shifting to prioritize cash flow and control amid high uncertainty and declining startup IPO opportunities.
Deep dives
The Evolution of Information Technology
Information technology is undergoing a transformation where the perspective of users is becoming increasingly detached from the complexities of the underlying systems, similar to how electricity became more user-friendly in the 1920s. The advent of open source software and cloud services has drastically reduced the costs and barriers associated with launching new services, leading to a proliferation of startups. This reduction in friction allows for a surge in entrepreneurial activity, although most of these new ventures are likely to fail quickly. The current environment, characterized by low interest rates and abundant capital, contributes to a unique dynamic in which investors are inclined to fund numerous private companies without the urgent requirement for profitability.
The Changing Landscape of IPOs
The traditional initial public offering (IPO) market has become increasingly challenging for venture-backed tech companies, leading to a significant decline in the number of venture-backed IPOs. The correlation between venture capital returns and the state of public markets highlights the difficulties faced by startups in reaching public status under current conditions. Additionally, many recent IPOs have been driven predominantly by biotech and life sciences firms, while tech companies struggle to meet the necessary valuation thresholds. This trend reflects a greater issue of the diminishing absorptive capacity among large public companies for acquiring and nurturing innovative startups, exacerbating the challenges of successfully entering the market.
Navigating Uncertainty and Venture Capital Strategies
In an environment of high uncertainty, the strategies employed by venture capitalists must adapt, emphasizing the importance of cash and control as mechanisms to weather potential failures. As companies rely on ample capital without the immediate need for profitability, the culture of quick exits through acquisitions is becoming a rational consideration for startups. This shift leads to a growing trend in mergers and acquisitions, reflecting the limited number of viable IPO opportunities. Ultimately, while the influx of investment allows for rapid experimentation, it also raises questions about long-term sustainability and the criteria for evaluating startup quality in a landscape fraught with risks.
Venture capital and investing in startups is the (modern) classic case of decision making under uncertainty. As new players and sources of capital enter the market, however, how do we hedge against that uncertainty? For one thing, startups have more reasons than ever to focus on "the 2 Cs": cash (flow), and control.
Or so argues Bill Janeway, an early venture capitalist and partner at Warburg Pincus, visiting lecturer in economics at Cambridge, and author of one of the definitive books on the history and evolution of the VC industry. In this segment of the a16z Podcast, Janeway -- who can best be described as a “theorist practitioner of financial economics” -- offers his insights on where unicorns come from (hint: it has to do with IT "disappearing"); how big companies need "absorptive capacity" when acquiring new tech; and why bubbles are "banal" -- including the difference between "good" bubbles and "bad" bubbles.
Get the Snipd podcast app
Unlock the knowledge in podcasts with the podcast player of the future.
AI-powered podcast player
Listen to all your favourite podcasts with AI-powered features
Discover highlights
Listen to the best highlights from the podcasts you love and dive into the full episode
Save any moment
Hear something you like? Tap your headphones to save it with AI-generated key takeaways
Share & Export
Send highlights to Twitter, WhatsApp or export them to Notion, Readwise & more
AI-powered podcast player
Listen to all your favourite podcasts with AI-powered features
Discover highlights
Listen to the best highlights from the podcasts you love and dive into the full episode