Lot of talk around the good ‘ole web these days about whether there is a startup bubble, or a valuation bubble, or even if society has developed a fetish for startups. While people have considered these issues for a while (or maybe just since Groupon turned down a multi-billion dollar offer from Google), the real tipping point in the conversation seemed to be when Yuri Milner and Ron Conway offered all Y Combinator startups $150,000 on generous terms (convertible, no cap, no discount). This stood as evidence to many that the startup/VC ecosystem has gone out of whack, and the dreaded word “bubble” started to creep into the conversation.
There’s a great piece profiling Milner on Forbes.com right now, and it generally summarizes Milner’s basic strategy. [http://bit.ly/fVJ8CJ]. In case you couldn’t guess from his multiple, near-blind investments in Y Combinator companies, Milner is taking a bunch of stabs at low-cost high-risk bets. I think it makes a lot of sense that rich investors want to go to startups through VCs and, more increasingly, as angels. As the stock market has yielded bad to really bad returns, why not move in on cheap lottery ticket investments? With about 40 Y Combinator startups, it’s only a $6 million investment for potentially 5-10% in any of the companies that raise money in a venture round. With better systems for moving private stock developing over the last few years, Milner doesn’t even need to see profit from any of the companies to have his bet pay off: if one company is overvalued he can probably get out and recover at least a solid chunk of his investment, and if one of the companies turns into a lolapps or a playfish or an admob, he makes a great return. But that’s only half the story with Milner. He just made friends with the CEOs of 40 hot young companies, a pretty solid friend list for a guy who sits around watching multiple TVs as a means of gathering information about the US economy like Ozymandias so he can make smart internet investments (see the Forbes article, detailing his obsessive research habits). That’s probably worth the $6 million to him alone.
You could argue that Milner isn’t overvaluing these businesses, he is just counting on the market to overvalue them. Is that a bubble? Maybe. But more likely he is just counting on the information he can glean from these 40 companies to make him profit elsewhere, such as helping him decide what to do with the 10-20% he owns in Facebook, Twitter, Zynga, and Groupon through DST. Or think about it this way: if seeing these generous terms in seed funding pushes investors to want proven entities rather than offer deals on Milner’s generous terms, won’t that just drive up the price of stock in companies Milner already owns?
danielmarkmiller.net 