Valuations for start-ups appear stretched as Silicon Valley takes on too much risk, venture capitalist Randy Komisar told CNBC on Friday.
“We’re getting ahead on valuations,” Komisar, a partner with venture capital firm Kleiner Perkins Caufield & Byers, said on “Squawk Alley.”
To Komisar, a former CEO of LucasArts Entertainment and founding director of TiVo, there are a few reasons behind this growing concern. First, “there’s too much capital and there’s very few places to invest it,” he said. Second, risk is not being priced properly and so venture capitalists are taking high-risk, high-reward bets, he said.
“The mega winners, while they have low probability, have had such great returns that they tend to be the best bets that the market’s made in Silicon Valley certainly in the last decade,” he said. “So consequently, that sort of investing—very, very high probability of failure, but very, very extraordinary returns on the winners—drives people to take risks differently.”
Looking forward, Komisar said accountability will come into the marketplace as people reconsider they will raise capital to sustain these big bets.
The debate over valuations and risk regarding start-ups has consumed Silicon Valley recently.
On Thursday, venture capitalist Marc Andreessen said start-ups are taking on too much risk and burning up too much cash.
Last week, venture capitalist Bill Gurley told The Wall Street Journal that Silicon Valley is getting a little too risky with all of these start-ups.
“I think that Silicon Valley as a whole, or that the venture capital community or start-up community, is taking on an excessive amount of risk right now; unprecedented since ’99,” Gurley told the Journal.
But Venky Ganesan, managing director at Menlo Ventures, saw things differently when he appeared on Monday’s “Squawk Alley.”
“While we are in an up cycle, we are nowhere close to the top,” Ganesan said. “I think what’s going on is more like a block party than a citywide party. There are pockets of irrational exuberance, but for the most part, I think it’s actually fine.”
Ganesan acknowledged that the party will someday end—but in the meantime, he plans to capitalize on the right investment opportunities.
Image credit: CC by Simon Cunningham