The second problem with bubbles: overfunding

By November 26, 2015Venture Capital

The first problem with bubbles is well known. Valuations crash, lots of companies aren’t able to raise money and go bust, and most of the good ones are only able to raise smaller amounts of money and have to layoff staff. Bubbles are brilliant for companies that exit before the burst, but for the rest they bring a lot of pain.

There’s a second problem though, and that is overfunding of whole industries. As Bill Gurley said in a recent interview, “Once your competitor raises $400 million, you don’t get to choose whether you’re in that game or not.” and the result is that whole industries get overfunded. They then spend all their money competing to grow and margins for everyone disappear. Strong companies are still built but exit valuations aren’t what they could have been because cashflows aren’t healthy and acquirers have choice.

There’s a good chance that’s happening in the home delivery market where large numbers of startups are well funded – Doordash, Postmates, Deliveroo and Instacart are the first ones that spring to mind, and then there are others which bundle product with delivery, usually food, e.g. HelloFresh, Munchery, and Blue Apron. Back in July CBInights reported that food delivery startups raised $1bn in 2014 and $750m in H1 2015.

My former partner at DFJ Andreas Stavropoulos describes this as ‘venture fratricide’.

  • Mark Mc Laughlin

    Nick. Seeing the same in ticketing with VC funding used to build market share by offering product at a loss. These companies’ USP of low or no costs brings down margins in the near term but at some stage they won’t be able to support losing money on every transaction so their USP disappears.

  • http://www.theequitykicker.com brisbourne

    Great example. Thanks Mark.