Yesterday, Federal Reserve Chair Janet Yellen told lawmakers that she’s not ready to hold interest rates low for much longer, but she isn’t raising them right now. Afterward, we talked about the news and what it might augur for startups with Venky Ganesan, a managing director at Menlo Ventures, the early-stage firm that led Uber’s Series B round (among its many other investments). Part of that chat, edited for length, follows.
TC: Are we wrong or does it sound from Yellen’s testimony like the money is going to keep rushing into Silicon Valley?
VG: Yes, though it’s not about when the Fed raises interest rates; it’s when [the Fed] tells the market they’re going to do it. There’s a sea of liquidity that gets pushed out when interest rates are low and gets pulled back fast when people think they’re going to rise. Remember, the slowdown in the market happened in the third quarter and fourth quarter of last year, when the Fed said it planned to raise interest rates in Q1. Then they backed down. Then they said the same in Q3 and they didn’t [raise rates].
TC: Is that good news or bad news for the startup ecosystem?
VG: My sense is that you’re going to see an uptick in financings. The money is still flowing in. I don’t think it’s going to go back to where it was in early 2013, but you’re going to see some big financings get announced in Q4.
TC: What are implications of that? Are there enough good companies to fund?
VG: There’s enough big change in the word that people want to invest behind it. Are there enough good companies? No. But let’s say I told you there’s a treasure chest, and there are hundreds of balls in the chest and inside five of them, there’s a diamond ring worth a lot of money. The others are worth a dollar. You can either opt out of the game or you can try to buy all the balls, knowing you’re going to get a diamond. That’s [the mindset of investors]. They don’t know which companies will be the next Facebook or Uber, so they’re investing in everything. And you have to keep investing because what if the next one was Uber and you missed it?
Basically, I think you’ll have this dynamic where the private markets will get back to valuing companies at a billion-plus dollars again but IPOs will be down rounds.
TC: Menlo led Uber’s Series B round. Bill Gurley, whose firm, Benchmark, led its A round, suggested in a recent podcast that once Uber is public, it will have to be profitable and that meanwhile, still-private, deep-pocketed competitors will likely try and undercut it on price and steal its market share. Uber is one of your diamond rings, so how big a concern is that for you?
VG: Amazon isn’t profitable, and public market investors seem to understand and appreciate what Amazon is doing. I think some companies are given a pass.
In general, my feeling is companies are staying public because they can raise the money privately and if you can do that – with less disclosures, fewer hassles, and not having to focus on stock price, which is a report card on your performance every day – why wouldn’t you?
TC: But they do have to exit at some point. And as you just said, a lot of these will be on the public markets, where their valuations take a hit. Isn’t someone getting hurt here?
VG: I think the late-stage investors get hurt. And common shareholders get hurt, because you overcapitalize the company and when you do that, you take a good company that can have a good outcome and turn it into a good company with a bad outcome, including for employees. Like Good Technology — when it was sold to Blackberry, the common shareholders made nothing, and there were probably opportunities all along the way where they could have made some money. But [Good] wanted to go for the home run. And when you go for the home run, you also strike out a lot, and that’s a lot more painful for common shareholders and management teams. Not every company is going to be Uber.
TC: This is so different than the last tech boom; it’s hard to imagine what happens next.
VG: The last time [in 2000] all of this happened on the public market, so it was like you had a train wreck in slow motion on TV and all of us could watch it. Now, it might be a train wreck, but it’ll be private and no one can see it, which also means you aren’t going to feel it.
Glam Media raised more than $200 million. It went away, but you didn’t see it. No one has a visceral reaction to that news.