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Tuesday, September 16, 2014 11:50 PM

Venture Capital Risk Taking and Cash Burn Rates Unprecedented Since 1999; 47% of Nasdaq in Bear Market

Venture capital risktaking and burn rates on cash are at levels that exceed the technology bubble in 1999. Companies that haven't made a dime, and perhaps never will, have valuations of $10 billion more.

Curiously, it' venture capitalist Bill Gurley who Sounds Alarm on Startup Investing in an interview with the Wall Street Journal.

WSJ: Mr. Gurley, who often voices his opinions on his blog, Above the Crowd, sat down with The Wall Street Journal as part of a Journal event series called "Tech Under the Hood." The investor in Uber, Zillow, OpenTable and other Web startups spoke on a wide range of topics. What follows is an edited excerpt of a conversation specifically about potential cracks in the tech-startup investing scene.

Mr. Gurley: Every incremental day that goes past I have this feeling a little bit more. I think that Silicon Valley as a whole or that the venture-capital community or startup community is taking on an excessive amount of risk right now. Unprecedented since ‘'99. In some ways less silly than '99 and in other ways more silly than in '99. I love the Buffett quote ["Be fearful when others are greedy and greedy when others are fearful"]  because it lays it out.

And I guarantee you two things: One, the average burn rate at the average venture-backed company in Silicon Valley is at an all-time high since '99 and maybe in many industries higher than in '99. And two, more humans in Silicon Valley are working for money-losing companies than have been in 15 years, and that's a form of discounted risk.

In '01 or '09, you just wouldn't go take a job at a company that's burning $4 million a month. Today everyone does it without thinking. 
Bubble Risk

The Guardian picks up on the story in Leading tech investors warn of bubble risk 'unprecedented since 1999'.
Two of the world’s leading tech investors have warned the new wave of tech companies and their backers are taking on risk and burning through cash at rates unseen since 1999 when the “dotcom bubble” burst.

Bill Gurley, partner at Silicon Valley-based investor Benchmark, sounded the horn of doom on Monday warning that “Silicon Valley as a whole or that the venture-capital community or startup community is taking on an excessive amount of risk right now.”

His comments were backed up Tuesday by Fred Wilson, the New York-based co-founder of Union Square Ventures who has backed companies including Twitter, Tumblr and Zynga.

Burn rates – the amount of money a startup is spending – are “sky high all over the US startup sector right now”, he wrote in a blog post [Burn Baby Burn].

“We have multiple portfolio companies burning multiple millions of dollars a month. Thankfully its not our entire portfolio. But it is more than I’d like and more than I’m personally comfortable with,” he wrote.

The comments come after a new generation of tech companies have attracted record levels of investments at levels that give the profitless businesses eye-watering valuations.

In August Snapchat, the social messaging service, was valued at $10bn after a new round of funding. The free service’s fans send 500m self-deleting messages a day, but Snapchat has yet to declare how it intends to make money. Among the other big tech valuations in recent months are Uber, the taxi app service, which was valued at $18bn after its last round of funding in June, and Airbnb, the short term rentals service, which was valued at $10bn in April.
Record S&P 500 Masks 47% of Nasdaq Mired in Bear Market

Speculation is running rampant. But just as in 2000 when market breadth turned sour, and profitless companies died before the rest, Bloomberg reported yesterday 47% of Nasdaq Mired in Bear Market.
About 47 percent of stocks in the Nasdaq Composite (CCMP) Index are down at least 20 percent from their peak in the last 12 months while more than 40 percent have fallen that much in the Russell 2000 Index and the Bloomberg IPO Index. That contrasts with the Standard & Poor’s 500 Index (SPX), which has closed at new highs 33 times in 2014 and where less than 6 percent of companies are in bear markets, data compiled by Bloomberg show.

The divergence shows the appetite for risk is narrowing as the Federal Reserve reins in economic stimulus after a five-year rally that added almost $16 trillion to equity values. It’s been three years since investors saw a 10 percent decline in the S&P 500 and they’re starting to avoid companies that will suffer the most when the market stumbles, said Skip Aylesworth, a portfolio manager for Hennessy Funds in Boston.
Expect the rot to spread. It starts the same way every every time.

Mike "Mish" Shedlock

9:50 PM

One Thing You Can Always Count On

Congratulations (of sorts) go to French prime minister Manuel Valls for being able to count sheep properly.

Valls staged a vote of confidence in French parliament even though polls show 62% of voters would like president Francois Hollande to step down now.

In spite of what the public wants, Valls was certain of the outcome in advance.

Why? Because a vote of no confidence would have triggered new elections and leftist parties would have gotten clobbered.

Count on This

One thing that is always safe to count on is politicians won't vote themselves out of office.

Sure enough, Valls wins confidence vote and vows to press on with France reform.

France’s prime minister on Tuesday vowed to continue his reformist drive as he won a crucial confidence vote to strengthen his hand in efforts to restart the country’s faltering economy.

Manuel Valls said restoring competitiveness was “indispensable” for reigniting growth yet he stopped short of touching the 35-hour working week or other closely held symbols of his Socialist party’s left.

Well then - by all means let's have reform ... as long as it does not touch anything socialists want.

Did this strengthen Valls' hand? Hardly.

This staged maneuver will upset socialists who do not want any reform at all as well as conservatives who want real reforms.

The favorable rating for Hollande is 13%, a new record low. Barring some miraculous turn around in the French economy, expect support for Valls to plunge to new lows as well.

Mike "Mish" Shedlock

12:53 PM

Counting Sheep: French Government Faces Second No Confidence Vote in Six Months

Second No Confidence Vote in Six Months

In spite of the fact the Socialist party holds a majority of just 1 in the 577-seat lower house, French prime minister Manual Valls hopes to stabilize things with a Second No Confidence Vote in Six Months.

Mr Valls could see a narrowing of his majority compared with the vote when he was first appointed prime minister at the end of March after a big socialist loss in local elections. Then he won by a margin of 306 votes to 239 against, with 26 abstentions.

“Valls is politically and economically archaic. He is taking solutions from (Tony) Blair and (Gerhard) Schroeder that don’t work any more,” Pascal Cherki, a leftwinger who abstained in the previous confidence vote in April, told RMC radio.

But the government has support from within other leftwing parties. Mr Valls is also betting that socialist rebels would not want to cause the downfall of the government, as this would trigger legislative elections and almost certain defeat for the socialists.

A win for the government would also not erase uncertainty as it will be closely followed by the presentation of the 2015 budget to parliament next month, which economists are concerned could face a delay in approval amid political upheaval.

Opinion polls underscore the sense of leadership crisis in the eurozone’s second-largest economy. One last week showed 62 per cent of electors wanted Mr Hollande to step down before his term ends in 2017.
Counting Sheep

Given that Valls needs support from other left-wing parties to survive, he would not voluntarily call for the vote unless he was pretty certain of the outcome. Surprises can happen, but I suspect Valls counted the sheep properly.

Can the vote really inspire confidence in the government as Valls hopes?

Of course not. The fact that 62% of the electorate hopes Hollande will step down as president is not very inspiring, and it's certainly nothing a vote of confidence can fix.

That such a stunt is even needed shows weakness.

Assuming the government survives the vote, the only reason will be fear of Marine Le Pen's Front National Party picking up more seats at socialist expense in a new election.

For more on Front National please see Marine Le Pen Ahead of Hollande in France Presidential Poll; Le Pen Blames EU for Crisis in Ukraine 

Looking Ahead to 2017

The next scheduled national election is in 2017. Will Hollande even survive that long? Perhaps not if socialists decide to take their lumps sooner rather than later.

Mike "Mish" Shedlock

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