(Founder Stories) Fred Wilson On Frothy Valuations

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With acquisition feelers out to Twitter for a reported $8 billion to $10 billion, bubble talk is once again the topic of discussion. It’s a recurring theme, and on this episode of Founder Stories venture capitalist Fred Wilson talks to Chris Dixon about the frothy valuations in Techland. Wilson is careful not to use the word “bubble,” but this is familiar ground for him. He he has been vocal about signs that he finds disturbing, such as investors chasing returns and startups with little more than three founders in a garage getting bid up for no reason. In the video he specifically calls out Quora and its instant $86 million valuation as troubling. Yet by the end of the clip he also concludes that Facebook is going to be worth a lot more than $50 billion.

Wilson’s firm Union Square Ventures is an investor in Twitter (although this show was taped before the current deal talk rumors came out), as well as Zynga, Tumblr, Etsy, and Foursquare. So he’s seen a lot of the rising valuations first-hand, and is benefiting from his early investments in these companies. But it is getting harder and harder, and he is honest about the fact that sometimes he is getting outbid by other VC firms like Sequoia. Dixon, who in addition to running Hunch is a very active angel investor through Founder Collective argues that there isn’t a bubble at all because the fundamentals of Internet companies are so much stronger now and creating real revenues.

Wilson lived through the last bubble in the 1990s and subsequent bust. In the video below, he talks about that experience and how his previous VC firm, Flatiron Partners, “essentially folded” after the market blew up. He says that put “a chip on my shoulder” to prove himself again with Union Square Ventures, which raised its first fund in the dark days of 2004 when many people were convinced the Internet was a “scam.” But he and his partners were investing in Web applications when nobody else would touch them. Dixon compares it to the financial crisis of 2008 and 2009, when Sequoia’s R.I.P slides were being passed around, and how that is turning out to be the time when he made his best investments. Now things are much more competitive.

Update: Watch Part II.

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