I increasingly feel as if many VCs are smelling an implicit “put” option in the current technology takeout fever. Every time a revenue-less del.icio.us, or equivalent, is taken out by Google-Yahoo-Microsoft (GYM), it emboldens venture investors, especially first-tier sorts, to think that the lower bound for the return on their investment is $25mm-ish (which is The Number, apparently, when it comes to such things). The upper bound, of course, is an IPO, the market for which a truly disheartening number of venture folks think will return in 2006 (and it won’t, but I’m digressing to a subsequent post).
Anyway, I’ve written before on the subject of giving put options to venture investors, but it bears repeating: Giving money and put protection to venture capitalists is like giving whiskey and car keys to teenagers. After all, remember what happened the last time VCs felt like they had implicit put protection for wonky investments:
“What risk? If the company doesn’t work out, we’ll sell it for $150 million. If the company kind of works out, we’ll sell it for $500 million, and if it really works out, it’ll be worth between $2 billion and $10 billion. Tell me how that’s risk.”
– Geoff Yang, Redpoint (Fortune; 12/06/99, Vol. 140 Issue 11, p177-188)
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Ah yes — the GYM put. Reminds me of the “Greenspan put” that kept the stock market climbing for so long despite a raft of bearish indicators. That kind of thing tends to create a “moral hazard,” as I recall — the belief that no matter how much trouble you get into it won’t matter, because GYM (or Greenspan) will bail you out. Sounds about right
both the greenspan “put” and the GYM “put” are real, and sadly enough, can be banked on. the reality is that the online space has pretty much dead-ended with regards to real advances that truly benefit consumers. if you want more you’re just going to have to wait for *real* broadband to get to the US (read: 100mbps and up at your house).
so these firms do some buying to keep the momentum investors happy, creating an impression that something really is happening here, that there is some master plan that it all adds up to.
i have no idea why people continue to overcapitalize these firms.
The number of people looking for a fast buck always exceeds the number of fast bucks. The extent to which this is unrealized is your bubble quotient. Fasten your seat belts it’s gonna be a bumpy ride.
The Greenspan put is the (eventual) source of the GYM put. This is what the Fed’s “reflation” has achieved.