Venky Harinarayan, Co-Founder of Kosmix, and Venture Capitalist wrote an article on why the bust is good for the Valley. In this interview with Bambi Francisco, he shares his insights on what will happen to Silicon Valley in the next few years.
BF: Lets start with why the bust is good for silicon valley?
VH: So the thesis of that article, which was somewhat controversial, is pretty simple. What I said was, over the last 5 to 6 years after the technology boom and bust, Wallstreet has not really been open to the valley. It’s been very difficult to do an IPO, and the reason for that is Wallstreet had an easier way to make money which was creating securities and playing the game that we all know. They felt it was a risk free way to make money, so why take the risk on investing in unproven technology companies when they could make easy money creating these securities. What we realized was, there was a huge amount of risk with creating these securities, and they paid the price for that. But the net was there have been very few IPO’s in technology companies over the last 5 to 6 years.
BF: I saw that you wrote that. It was, there have been more IPO’s in 2 years in the 90s than there have been in the last 8 years.
VH: Exactly. So what it tells you is that, the door to Wallstreet has literally been closed over the last 8 years. You cannot have a good, robust environment when you cannot IPO companies. Because what happens is, nobody is going to take the risk of investing in these companies, so these companies really have to prove themselves out before they go there, and not every company can do that. Take a company like Amazon.com. In today’s environment they could not have IPO’d in the last 8 years. There’s no way you could have built a company as big and successful as Amazon unless somebody was willing to take a risk on a company which was not clear whether or not they were going to win.
BF: They spent that money gambling. They should have spent that money on other things.
VH: Exactly, on creating value. As a society, if you do not take the risk on these companies we lose out as a society in terms of creating value.
BF: Are you saying M&A is bad?
VH: I think all M&A is bad. If you look at the ratio of M&A to IPO’s…
BF: Was M&A bad for Junglee?
VH: Having an environment which only outcomes in M&A’s are bad. Because what ends up happening, is very simple. If there is nobody IPO’ing, who’s doing the M&A? At some point the crop of people that can do the M&A start going out of business. Especially as these companies mature. They start running into problems of their own. You have these companies like Yahoo! and even Google today which have more in turn because they’ve been around for so long, they have their own problems and have to get out of the M&A market for a while, and then the whole ecosystem comes crashing to a halt.
BF: What’s going to help? Is it going to be sort of government regulations relaxing?
VH: I just think that taking away the biggest competitor to investing in technology companies, which was these risk-free-securities, is going to cause us to come back as an entire society to figuring out where value is created and sort of aligning financial returns and value creations. Those two were not in alignment over the last 5 to 6 years. You could make money without creating any value in the last 5 to 6 years.
BF: It sounds like you wouldn’t want regulations to be relaxed. One of the inhibitors to going to IPO is just the cost.
VH: It is the cost, and also I think aren’t willing to take the risk of buying into these companies. So I think you’ll slowly start to see regulations being relaxed, people with money willing to take bets on companies, because that’s the only way you can make real money in the near future. So my bet is you’ll start to see the IPO market open up when we are all set and done with this bust. It’s not going to be immediate, I think 2009 is going to be a tough year for everybody.
BF: And then you see a technology bust and bubble in 2012?
VH: So my view is the following, I think we unfortunately seem to be living in a world of bubbles. You have effectively a lot of free money coming into the system. Interest rates are zero percent. At some point people are going to start taking this money and start making investments or bets with this money. So if you any disruptive technology that starts to happen in the 2010 timeframe, I think money will start to find a way. So unfortunately it seems like how we’ve been operating for the last 10 years now.
BF: Well, we’ve lived through it before. Thank you Venky.