Greylock Partners Q&A: ‘There's Too Much Money Out There Right Now’

David Sze and John Lilly talk bubbles and burn rates

Greylock's Sze: There's Not a Lot of Fear in the Market

This year, venture-capital firm Greylock Partners celebrates its 50th anniversary. The company has backed some of the biggest successes in technology history, including Facebook, Instagram, LinkedIn and Workday. How does the firm ensure that the next 50 years are as successful? Emily Chang sat down with partners David Sze and John Lilly on Bloomberg Television's Studio 1.0, which airs July 9 at 7:30 p.m. ET/PT. As the valuations of so-called tech “unicorns” soar, they said investors are taking on significant risk and burn rates are high, but that doesn't mean the next Google isn't being built somewhere.

How would you rate competition for deals right now?

John Lilly: It's intense. I think it's intense at every level.

David Sze: Look, there's too much money out there right now. I think that risk is mispriced.  I think there's not a lot of fear.  There's just a lot of belief and not a lot of fear. And those are, you know, worrisome times, I think, and can be dangerous if unchecked. But on the other hand, if you look at it, there's only a handful of firms that, you know, we really find ourselves competing with again and again.  And so there is a sort of boundary to that. 

Bill Gurley says we're in a risk bubble, and companies and investors are taking on too much risk.  How would you guys describe it?

Sze: I think we're being asked to take on a lot of risk. I think there is a lot of money in the system, and I think there's a lot of optimism that's causing pricing to be higher, that's causing expectations to be higher. And I think we're asked to take higher risks than you know, probably since '99, 2000 timeframe.

On the flip side, there's the belief that mobile is a fundamental shift and is probably only in the third inning right now still. And you can see how that is changing the world where businesses that would've been terrible businesses—you know, an Uber, an Airbnb, et cetera—in previous generations, now are enabled by mobile in ways that weren't possible before.

You can also look at public companies as a benchmark and say it's not clear they're—the equivalent companies in the public markets—it's not clear they're so overvalued if you look at their multiples. And so there's a bunch of sort of mixed signals that leads to an environment, I think, though, where risk is mispriced for us.

Lilly: There's no sense of how quickly things tighten when they tighten.

Would you us the term bubble?

Sze: We don't sit around and talk about a bubble or not. We certainly talk a lot about those prices being expensive.  But we make our decisions on a very micro basis, based on "Is this a great entrepreneur to be with or not?" I think we're feeling the prices we're paying are higher, and we're being asked to take on risk. But we're finding great entrepreneurs, too, that we're excited about what they're doing.

John, do you think we're in a bubble?

Lilly: I think there's a new Google to be built; I think there's a new Office suite like Microsoft to get built. There are some really big, important companies that will feel expensive and then turn out to be cheap.  I think the truth is some stuff is wildly overpriced and will look obviously so in retrospect.  There's some stuff that feels wildly overpriced and will look the opposite in retrospect.

What about burn rates?  Do those concern you?

Lilly: Sure—what else matters, really, other than product and whether people love it and how much you're spending?

Greylock's Lilly: Uber Could Be Worth $500 Billion

Would you put money in Uber at $50 billion?

Sze: I have not looked at Uber's financials in recent times. So, hard to say. It would be a high bar. There are not a lot of public companies that are at that level. So they would have to be numbers where you can see them crossing that chasm—already.

Lilly: I'm looking for companies where I get five, 10, 15 times returns. And so, I can imagine them as a $500 billion company. But I don't think I would—that's probably not where I'd put my dollars today. I think it's a big opportunity. But I wouldn't invest my venture dollars right now. I'd put it somewhere else.

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