Bill Gurley: ‘We’ve Been Playing in This Fantasy Land for Too Long’

Bill Gurley, General Partner, Benchmark.
Nikki Ritcher

Venture capital funding lavished on startups is on pace this year to exceed the past six as companies such as Uber, Airbnb and WeWork have scooped up monster rounds. These investments at rocketing valuations while M&A and IPOs exits sag have raised anew concerns of irrational exuberance in tech.

Venture capitalist Bill Gurley, who has urged sobering caution the past year, says that we’re in a reckless period of overfunding companies at sky-high valuations. The good news, he says, is it’s “all coming to an end.”

The Wall Street Journal last week spoke with the Benchmark partner about startup investing in the current funding and exit climate. The following is edited for length and clarity.

Is there something missing with this massive backlog of unicorns and limited path to exit?
I think this whole kind of myth of stay private longer is a thing is gonna prove to be a really, really bad piece of advice that was put on a bunch of these companies. And I think what’s happening as some of the better companies try to go public, we realize that these private valuations were too high and that running companies that lose money forever is not good business practice. And I think there’s going to be a new awakening or new dawn where these companies realize that they have priced themselves out of the M&A market and they are not preparing themselves to be good public companies and that they do not have any liquidity paths in front of them. We’re going to have to sober up and go back and realize that becoming a valuable public company requires operating discipline and hard work and it’s not easy–cause we’ve been playing in this fantasy land for too long.

What do you think of companies like WeWork, with some of their investor slides revealed?
Look, I think every single company, every single company is forced to play the game on the table. And if money is wildly available, and your competition is going to use that money to directly pursue market share, you’re faced with a prisoner’s dilemma. You could be super thoughtful about your operating plan, but you might just yield the field to someone else. And I’ve gone out and said this numerous times, but I think these types of sloppy environments are relatively bad for great entrepreneurs. These environments allow for kind of reckless competition in a market that wouldn’t be there in a normal environment. The best CEOs we work with wish this party would end as fast as possible.

Has there been this sense of recklessness in terms of what investors are willing to buy–that they want to get in on the next big thing and don’t want to miss out?
Investors are not doing their due diligence and they are overfunding these companies, which is leading to sloppy business execution. The good news is, I think it’s all coming to an end. And Ipersonally believe that all of the returns for the venture industry are going to be posting corrections. People that have assumed too much about paper IRRs are gonna be surprised. I’m already seeing kind of mass scrambling for the last dumb money out there, you know some of the funds that have been super aggressive spending a lot of time trying to scramble the Earth, comb the Earth looking for people who can top off these companies because they can smell that the tide’s turned.

Do you think there’s been a reset in terms of valuations in terms of the Nasdaq resetting in the private-to-public comps?
I do. I feel like things are definitely changing. I think the first shoe to drop was China because companies there were more aggressive and you had the combination of this kind of hyper aggressiveness combined with the economic downturn, and so you had a macro event and a micro event.

Do you think companies will be facing lower valuations when they go for another funding round?
Yes, I’ve already heard that, absolutely.

Write to Scott Martin at scott.martin@wsj.com. Follow him on Twitter at @scottysmartin