At the 16th Founder Showcase, audiences were treated to a special Q&A session between Chamath Palihapitiya, Founder and Managing Partner of The Social+Capital Partnership, and owner of the NBA's Golden State Warriors; and Jessica E. Lessin, Founder & Editor in Chief at The Information.
The Problem
In the discussion, Chamath touches upon the true impact of plummeting oil prices and predicts how the situation might impact the global startup ecosystem. Chamath believes that oil sitting at $40 per barrel will bring good impacts for consumers, but will also cause oil-rich countries across the world to panic and begin diversifying their assets. He predicts that they will begin pouring more money into foreign markets, real estate, and - inevitably - venture capital.
We're two to three years away from a reckoning.
As this capital arrives in startups, Chamath foresees that they will raise even more absurd amounts of money and valuations will reach even higher heights globally. So far, Chamath's concerns about a valuation bubble are not particularly unique, as they have been mirrored by numerous tech figures, such as Mark Cuban.
We haven't seen that cycle play out, we're only seeing the beginning of it.
Chamath figures that the companies which are most exposed to the negative impacts of the valuation bubble are those who have already raised funds while being valued around $1bn. These companies will spend that money quickly in order to grow their business to $2bn when their possible market cap may only be somewhere around $200m. In their quest for greed and notoriety, these CEOs fail to see that their company isn't truly worth $1bn and does not have the growth potential to reach $2bn. Thus, they will spend their capital and collapse with the bubble, cutting back and laying off employees. Chamath sees this as a problem of expectations, where the tech world has become to accustomed to sky-high valuations that everything else is considered a disappointment.
Right now it's like people are ashamed of (being a $200m company). Why be ashamed of that? It's a great outcome...if (a $1bn company) was more prudently managed as a $200m, $400m, or $500m company, you'd probably have a great outcome.
Chamath's Advice
Want to avoid the most negative impacts of a valuation downturn? Focus on Product-Market Fit and don't get greedy. Chamath believes that companies that focus primarily on their Product-Market fit will always be in a strong position, even during a valuation downturn. They will always be able to raise funds, even if they are forced to do so at a lower valuation. Not only will this help companies survive economic struggles, but this is also important because entrepreneurs should seek to build businesses that are sustainable with a solid framework for long-term success. This ensures that employees are rewarded rather than punished for helping to build the company.
Something that can be protected in the period where there is a hiccup: True product-market fit and defensibility. Those companies will always be able to raise money.
Chamath's insights suggest a second piece of advice for entrepreneurs: don't be too greedy. Don't be too egotistical. Just because you want the fame and attention that comes with creating a company that is valued at $2bn does not mean that company is actually worth $2bn. Don't fool yourself. Manage prudently and intelligently, and remember that capital might not always arrive in the same massive bundles. Think long-term.
Failure should be celebrated, but stupidity should not be celebrated. And there is a difference.
