Bill Gurley to entrepreneurs: beware of “sharks”

Silicon Valley entrepreneurs in today’s climate already have a lot to worry about — plummeting company valuations, layoffs, and the ever-looming threat of going out of business. Venture capitalist Bill Gurley just added something else to the list.

Sharks.

A lengthy piece posted online Thursday by the Benchmark Capital partner laid out a cheat-sheet to help entrepreneurs, investors and everyone else navigate the shifting Silicon Valley ecosystem.

Gurley warned that today’s turbulent waters are loaded with “sharks,” or investors that will try to take advantage of this shifting landscape by writing “dirty” terms into their deals with entrepreneurs. Such deals give the startup cash at its desired valuation, but allow for restructuring of the terms later on in the investor’s best interests. Those “dirty” terms also inject a complexity into funding deals that will scare away potential future investors.

Instead of taking such dirty deals, Gurley wrote founders should bite the bullet and accept cuts to their valuations.

“You should be more concerned about the long-term valuation of your shares, and minimizing the chance that you have the whole thing taken away from you,” he wrote. “Terms are the true Godzilla that should scare you to death. A down round is nothing. Get over it and move on.”

Gurley also spent time laying out the state of the market, and explaining why “dirty” terms that preserve valuations can be tempting. It’s become dangerous to be a “unicorn,” or a private company valued at $1 billion, in today’s economy, Gurley wrote.

“All Unicorn participants — founders, company employees, venture investors and their limited partners (LPs) — are seeing their fortunes put at risk from the very nature of the Unicorn phenomenon itself,” he wrote. “The pressures of lofty paper valuations, massive burn rates (and the subsequent need for more cash), and unprecedented low levels of IPOs and M&A, have created a complex and unique circumstance which many Unicorn CEOs and investors are ill-prepared to navigate.”

Gurley pointed to The Wall Street Journal’s investigations into problems at blood-testing company Theranos and human resources startup Zenefits as turning points in the Silicon Valley narrative, and warns we should expect more such revelations to follow.

Image: Bill Gurley’s LinkedIn profile. 

 

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