If you’re looking for an unfiltered perspective on the exuberance within the tech ecosystem in recent years, there are few people better to speak to than Benchmark’s Bill Gurley, who has been predicting this crash since 2015.
The two of us talked over a cup of coffee last week. I hadn’t been planning to interview Gurley while I was in Austin. After all, I hadn’t even realized he had sold his home in San Francisco and moved here about a year and a half ago. But when I found out, he agreed to tell me why he and his wife ended up in Texas. And we talked about a host of other things, too: Which music venues he is frequenting, how he was influenced by Steve Martin’s book Born Standing Up, Uber, A.I., and his new COVID hobby—guitar. (You can read all about that here.)
But I couldn’t help but ask Gurley, who was outspoken in predicting that the tech bubble would burst for nearly a decade, how this private market crash would ultimately shake out. Gurley is not making new investments these days, as he stepped back from Benchmark’s tenth fund a few years ago, but he still sits on 10 boards, attends Benchmark meetings, and has skin in the game. He also has more than two decades of experience, with a front-row seat to how this mess might end, and how too much capital can lead to founders losing some discipline.
“I became convinced that the industry is structurally flawed and is always going to boom and bust,” Gurley tells me. “They have very low barriers to entry and actually high barriers to exit, using the old Michael Porter stuff. And so, during this time, you ended up with just a flood of new entrants…They amass all this stuff, and eventually just supply and demand are going to lead to that being a wreck. It's always a matter of time.”
Benchmark is well-known for keeping its funds small. Its tenth fund (the first that Gurley isn’t part of since he joined the firm), is $420 million, dwarfed by the likes of Andreessen Horowitz, Kleiner Perkins, Khosla Ventures, or Sequoia Capital. In the last few years, even some brand-new funds, such as Katie Haun’s crypto firm, managed to raise more than $1 billion for their very first fund. As venture capital firms offered huge checks to get into the most promising startups, valuations soared, the IPO market boomed, returns were fabulous, and endowments, sovereign wealth funds, pensions, and foundations were clamoring for exposure.
“I mean, for the past five years, everyone told us we were crazy: Why aren't you raising a billion-dollar fund? We certainly could have and then our management fees would have been five times as big,” Gurley says. But Gurley was at Benchmark when the firm lost focus during the Dot Com Boom. “We did over-expand in 1999 to 2001,” he says, pointing out that Benchmark had a $1 billion fund at the time that it deployed for six or seven years. “We went global. And it didn’t work for us.”
“Having been through that, we've always said that good judgment comes from experience, and [experience] comes from bad judgment,” he adds.
So what happens now? “It's always a matter of time,” Gurley says. “I thought it was going to happen five years before it did, but once it does, it's usually catastrophic…it doesn't end well.”
Gurley traced his finger along the table to visualize what he was saying, how he used to think venture was cyclical, like a sine wave, but how he’s now convinced it's like a sawtooth wave. It goes up slowly, slowly like a roller coaster, and then crashes. And then it goes up again. And people take on risks very slowly and incrementally, and then suddenly become risk averse.
“This went so long [since] ‘09. There were tons of people in the ecosystem—founders and investors—they didn't know any other way. They just thought this is how it will be forever. And then it crashed. And it's wild to see,” he says, noting that, due to all the capital sloshing around in these companies, it may take several years before all the bankruptcies come to fruition.
Something to watch out for: whether venture firms start returning capital to LPs as several did in 2001.
“People presume that it was the act of being gracious—I think it was an act of greed,” Gurley says. He points out that many venture firms have a term in LP agreements called a “lookback,” where you have to pay limited partners back some of your carry should a deal not reach an agreed return. “If you terminate a fund and raise new funds, they don't have that lookback liability. So I think a lot of these firms shut these funds down early so they can start with fresh capital and not be exposed to that risk.”
The exception to this market havoc, Gurley can’t help but point out, is A.I.
“Now A.I. is just an interesting randomizer. Everybody wants to fund those [startups] at any price, but you still—that's not gonna help all this stuff,” he says.
Greg Becker speaks out...In his first appearance since the devastating and sudden collapse of Silicon Valley Bank, former CEO Greg Becker testified during yesterday's Senate banking hearing, and was quick to blame the bank run, rising interest rates, and media attention—rather than himself. Lucy Brewster has the story here.
Until next time,
Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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