The Back to the Future Arbitrage of Silicon Valley and what it will take to beat it

I’m not a huge fan of Silicon Valley. It reminds me so much of Hollywood and the movie and TV industry.

In Hollywood every one will talk and listen to you about your project.  But while they are standing there, right in front of you, they are not looking at you. They are looking past you to the next project where they can raise/sell more.  Where they can be a bigger star. There is always a bigger fish. Who ever is standing in front of them is hopefully just the bait.

Silicon Valley has become the exact same thing these days. No one wants to literally start from scratch in a garage and build something. No one wants to bootstrap a business to profitability.  Those are such archaic notions these days.

Like Hollywood, today’s nouveau entrepreneurs are looking past the pitch right in front of them to the next source of capital who will pay a higher valuation. Or if they are discussing a job, they are looking past the interviewer in front of them, already contemplating whether or not the stock options they get in this company will match the value on exit of the next gig they could get.

In essence start up employees are marking to market the stock options they haven’t earned yet against the options they haven’t yet received  in companies they haven’t yet heard of .  It’s the  Back to the Future arbitrage. Welcome to Silicon Valley.

In silicon valley it seems like anyone who went to Cal or Stanford feels like they deserve a minimum startup valuation of 8mm dollars or more. Why ?  Seriously ? Why ? Because they went to Cal or Stanford.  That’s why.   It is one of the key reasons many folks feel like there is a bubble in Silicon Valley. The starting points of valuations are crazy.

I too was of the opinion that valuations were in a bubble. I am no longer of that opinion ? Because I was slow it took me a bit to come around to fully understanding what Silicon Valley does best.

Silicon Valley as a source of capital is no better or worse than any other big city. There are plenty of sources of capital everywhere.  Yes, they may be better at writing 40mm dollar checks to startups (Color anyone ? ). But start up capital is not their secret sauce.

What Silicon Valley does better than anyone is create exits.  They know how to get people who they have made money for to turn over a lot of that money to buy the companies they have invested in. They know how to put on a show to get a company to an IPO. They know how to go out and get hundreds of millions of dollars to bridge companies with 10s of millions in revenues to their IPO and more importantly to make sure the IPO happens.

So if you want your new tech corridor to play in the big leagues with Silicon Valley and its VCs , don’t stress about capital for entrepreneurs to create companies. Stress about capital that will buy  provide exits for companies  or that can get them to a liquidity creating IPO.

And it doesn’t have to be billion dollar exits. Millions. Tens of Millions. Small IPOs.  If you can help enough companies get to capital that takes them to the big leagues or gives them an exit, it will be like financial gravity. It will pull entrepreneurs to you.

So if you want to be the next Silicon Valley, don’t promote the startups you have in your city/state. Many of them are going to go out of business before the ads hit or the conferences happen. Brag about the exits and how there is capital waiting for amazing entrepreneurs to reach their goals.

What changed ? First of all the IPO market is finally starting to open up a tiny bit for tech deals that raise under 50mm dollars and are not “hot” companies or household names. 8mm vs any IPO is still a good thing.

50 thoughts on “The Back to the Future Arbitrage of Silicon Valley and what it will take to beat it

  1. Pingback: Two Ideas for Economic Development: Lifestyle and Exits - Eric Waltmire's Blog

  2. Mark, great insight on Silicon Valley and what it will take to stop it. I elaborate a little further about it on my blog at http://www.upnext.tk and actually link back to yours here. Once again, thanks for the great insight.

    Comment by Up Next (@UpNext4U) -

  3. yea , i guess you are correct half way, otherwise why would you sell Box.net right, I lived in silicon valley and used to worked for Zynga in early days , now starting my own company funded by mark pincus, I think nowdays start up more mature, they think long term like Bezos or at least boostrap for longer term

    Comment by ed (@namenode) -

  4. Mr. Cuban,
    My name is Dan O’Hara and I’m with the Special Situations Group at Source Capital Group in Westport, CT. We’re working on a new deal that I think may interest you,Quantum Leap Innovations, a Delaware based company (and yes they actually live there), about as far away as one can get from Silicon Valley in the continental US, literally and figuratively.
    Quantum Leap Innovations is a “Big Data” company with unlimited verticals that’s been working for various US Government agencies and branches of service for the past 15 years. QLI has been involved in pattern based analytics long before Palantir raised their first $100m. QLI’s big data/advanced analytics software platform is fully developed and applied at key launch clients and has 2 dozen valuable patents and IP. This is not a SaaS R&D project. Product is already being used by some major corporations and obviously the US Gov.
    QLI is now pivoting their business focus to the higher margin commercial markets and is looking to raise capital for sales, marketing, expansion of the products and technology and aggressive IP protection.
    Please let me know if you’d like to set up a call with management to learn more about Quantum Leap Innovations potential.
    Thanks,
    Dan O’Hara

    http://www.quantumleapinnovations.com

    Comment by Dan O'Hara (@mtcblue2281) -

  5. Good Afternoon Mr. Cuban!

    Quick question, does your team post job openings or have interns (paid or non-paid)? If so, how does one apply?

    *Excited to share my skills, learn and grow,* Kim Greenwood

    Comment by ishopfresh -

  6. Mark- too much focus is on what can the customer logo can do for us versus what can we do for the logo. Or, on the consumer side, how can we scale to meet all the potentials without focus on enhancing the core service-application that got us to this point. I see so many pitching major media companies on why their channel is disruptive, yet limited on how it actually could impact KPIs that really drive budget allocation, which you would think is the key metric. Harvey

    Comment by Harvey Benedict -

  7. Hello Mr. Cuban I know I will never here from you but I’m going to give it a shot.
    My name is Anthony Weiburg and four years ago my life changed drastically. They had found a growth in my daughters spine and it caused here internal organs to shift. She had problems breathing at night and throwing up was a common occurrence. I was on the phone with one of the Doctors one Christmas eve and while on the phone my daughter came over to me and said Dad am I going to die. I could not hold back the tears. She said to me don’t worry be strong I knew then I had to make a change in our lives. Thank God for Columbia Hospital in New York my daughter is O.K. She still has minor complications but she is O.K. Well here it goes and I will make it short. In three years time I developed a nail polish that helps in loosing weight. I have had two clinical studies done with a 90% success rate.I also have had a Scientist do a study on it. IT REALLY WORKS. It does not mean one can eat hot dog’s all day and expect to loose weight. Diet and exercise are still the front runners but it is something to add to your routine for both men and women. Ungual and Transdermal application is the future of medicine delivery and has been for hundreds of years. In fact my daughter is now in college to become a chef and couple of weeks ago she had come home with two of her friends for the weekend and was complaining that she was gaining weight because she has to taste all the food she cooks. I gave my daughter and her friends each a bottle of polish. This weekend she came back after being away two weeks she came running up the stairs saying dad between the three of us we lost 9 pounds.I said wow great she then reminded me that they could only use it on there toe’s since they can’t use polish on their fingers at college. My number is 732 372 8460 and my Email address is jade331203@aol.com. I’m also the worst when it comes to computers. Thank you again for listening to my story maybe another miracle will happen in my life. God Bless Anthony and Janet Weiburg.

    Comment by Janet Cavallo-Weiburg -

  8. Very interesting read Mark. The key is the exit? Never would have thought that. What also amazes me is that there is so much supposed “value” in these companies that have not proven profitability. I wonder if the exit game is building the bubble as investors come in with cash to purchase companies with over inflated valuations. i would hate to see any of this lead to redo of late 90′s tech crash… http:/edpalermo.com

    Comment by edpalermo13 -

  9. Yeah! I’m not looking for venture capital for a new iPhone app, just another commercial ER, PZEV, FS, HEV with V2G option (except that aren’t any others on the market; a few military and civilian prototypes exist). Think what you could do with a truck/van/bus that uses one quarter the fuel, and has at least 10Kwh of power to provide to SOHO/Portable work shop/storm isolated abode/etc…

    Comment by Stephen Wyman -

  10. Thanks for your perspective. I’ve started and exited four startups without ever raising capital in Silicon Valley. My first exit was to a SV company, the second was local (upstate New York). The third was to a public company in Raleigh NC and the fourth to an international buyer. I’m currently investing in startups from all over the world through a world-class startup accelerator in, wait for it, Upstate New York. One of the main reasons to do it here is that in Upstate New York, unlike Silicon Valley, entrepreneurs are serious about building great, valuations are sensible and investors are not jaded. One thing you got right, Mark, is that exits or IPOs are crucial. Without the liquidity event on the horizon, there’s little incentive to invest. We’re not aiming to be like Silicon Valley, but we’re doing really well. Not so well that we can get cynical or brag, but really really well.

    Comment by chuckstormon -

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  12. Today read an article that over 20% of all houses on market in SF metro area asking over $1 million. The valuation of real estate in the area is just as crazy as the examples you cite…

    Comment by Patrick Pine -

  13. That’s an interesting take on it. What if you’re not motivated for the money? Should you be?

    Comment by Scott Asai -

  14. I’m shocked you’re not seeing people wanting to “start from scratch in a garage and build something”… Either someone is filtering those you see and doing a bad job of it or SV is a lot worse than I thought.

    The start-ups who actually want to have real products and build a long term businesses are around. Trust me. Maybe not in SV

    Comment by matthewadambyrd -

  15. Just wondering how many of these people commenting are trying to subtlety pitch you for investment. Hmmm….a third?

    Comment by bringbackbernie -

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  17. Mark,
    Though I agree with your post I can’t help but think that programs like Shark Tank reinforce the same ideia that you so adamantly seem to disagree with. It glorifies the few that have the capacity to market themselves whilst the focus of the program is on money, valuations and exits – even if at times not explicitly.
    Whilst there are thousands bootstrapping and trying to make a solid business, those aren’t the ones that make it through to prime time.

    Comment by Nuno Machado Lopes -

  18. Pingback: Where is the Exit? | Take Five

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  20. I’m entertaining the notion that diversity in business funding is a good thing. And you’re right….if you want to build a solid long-term company often you have to be willing to find a “small” starting point, stay committed, adapt and grow. Apple, Google, & Twitter are great examples. Silicon Valley is the modern day “California Gold Rush” and yes…it’s mainly driven by greed and many entrepreneurs much less investors couldn’t give a rats ass about the end users…just how much “cha ching” they can milk out of it? Also, it’s a function of the underlying social values….which have definitely become less “ethical and moral” in general.

    Comment by John Bowden -

  21. Hi Mark,

    I grew up in Silicon valley and think you are talking to the wrong people because the majority of people are not like what you’ve described here. The same can be said of Hollywood and New York City.

    On the issue of funding & bootstrapping:

    I’m a chemist trying to start an applied research company who’s first product will be a patent for a more energy efficient way to make bleach. The current method uses 1000 kWh to produce 1 tonne of bleach, my method about 670 kWh. Since the world produces about 100 million tonnes of bleach a year, this is a huge environmental issue. It is also about a $2 billion market every year, so I figure the patent is worth between $20-200 million over its lifetime.

    What is my business model template? Edison Laboratories, better known today as GE, the early days of 3M.

    Can I bootstrap my business? No, chemistry is very expensive, highly regulated and development will take about a year before I can look for licensees. A new lab at a university typically gets $150,000 – $300,000 for equipment and supplies despite having shared resources and very inexpensive labor (graduate students make a 1/3 to 1/2 of their industrial counterparts and sometimes one gets free undergraduate labor). I don’t have that type of money nor do my friends and family.

    Could I do this at a university/national lab? Possibly, but I’d have to do 2-3 post-docs of 2-4 years each before I’d have a chance of landing a faculty position with my own lab where I could work on this. Furthermore, a university would insist on owning the IP.

    Can I get government grants? Most require university affiliation and/or non-profit status, or they require a business with an equipped lab as an eligibility condition. That said, I’m going after whatever I can find and am eligible for.

    Can I partner with an existing company? Yes, I’d be happy to but so far I haven’t gotten any to acknowledge my inquiries, that does include Clorox.

    Now that I’ve dealt with the typical questions I get asked about my business, I’m left with needing to find private money. I need $3 million for 3 years, though it does not need to be single lump sum. That money will get space, equipment, 2 PhD chemists (myself being one), a BA chemist and an office manager/CEO.

    Can you suggest where to look for angel investors or VC who are interested in my type of business?

    Thank you,
    Troy Wahl, PhD Chemistry

    Comment by Troy Wahl -

  22. Mark – The idea of a valuation in Silicon Valley or Sharktank is a Hollywood dream…. I recently completed a research project and I came out with a bundle of ideas. I don’t have a company worth anything, yet I have a bundle of ideas and I would like to create something. The only thing holding me back is capital. The idea directly relates to scalable communications. Employers want capital up front in today’s world. I am considering a campaign for the 1 million dollar limit to finance another research project required to design a working machine. I’m hesitating because I think I might be better off finding partners up front. My idea relates to the Memex concept and an alternate fundamental computer design. My background is IT management but I have made a computer science discovery. I want to test it for viability, yet I can only disclose so much. I need patent research help and want to file some provisional patents if I can create a working prototype, yet I would prefer not to require a million dollars to do so. There is 200 million invested in the creation of a quantum computer. I would like to build something intermediate, The risk is total but the reward is a majority stake in the creation. I’m seeking a way to finance my education to a masters degree and eventually get a product to market. I would love to share my project with you and open a discussion. I believe the Internet of Things is where we are going, perhaps not in the right way the first time. I see growing pains ahead. I have gained a unique perspective in the end to end experience of the Internet recently.

    Seek Mitchell Crase, University of Michigan at AngelDorm.com to make donations to my education…. all donations gracefully accepted!

    Comment by milleniummitch -

  23. Mark – I fully agree that the demand will drive supply of startups & entrepreneurs. IPO and exits are the ‘demand’ at least from an investor perspective.

    I am still not clear on your valuation assessment. What do you think the fair valuation is for a 6 month old startup with nothing but a demo and a Cal-Stanford team in a world where everyone wants to be an investor? Given that startups at some level are binary outcomes – complete failure or 10x or more returns – does $5M vs $8M valuation really matter? Plus what do you suggest we do to fix it? Valuations are being set by an open market of over eager early stage investors.

    Comment by Anshu Sharma (@anshublog) -

  24. I just returned to NYC after my first trip to the bay area and this is exactly the feeling I got (you and I met at LAUNCH w/ Don Dodge). I couldn’t put my finger on it, but many of the people I met were talking M&A. It was almost rare to find someone willing to set a pick for a layup…everyone wanted to shoot a half court shot.

    Comment by Armand Patella (@A3ella) -

  25. Mark,

    You are partially right, Silicon Valley and Hollywood. The common denominator is greed and take as much as possible. I grew up there and watched my hometown of San Jose become something else. My aunt worked in the Del Monte fruit packing warehouse during the summer because the pay was better than as a nurse. I worked in that same warehouse many years later for a great startup until it was sold to a larger company. The fun died that day. Next came a series of startups, again all great and fun until the exit, one with chained doors.

    High costs are forcing regular folks to live as refugees. Refugees are living as kings. A startup who accepts backing will give a lot away. First in equity, second in payments to the investor who will take 2% for “fees” and have a guaranteed 20% plus investment on exit. Even more devious is the convertible debt.

    All these are not really visible to the hard working entrepreneur if things are great and the company exits with a $MM deal. When it goes bad, I’ve seen companies layoff in order to pay fees, get a better debt ratio or to survive another day. The layoff impacts many people, some to the point of losing it all after giving it all to the company. The convertible debt is the most evil of all when a company folds and the investor takes the technology to a new start up.

    My intent here is not to sound bitter. I many have fond memories of the hard work and the teams I am still in contact with. My goal is to make folks aware that it is a double edged sword. Forty years in Silly Con valley, has shown me that idiots can raise millions, spend it in months and shatter many lives in less than a year. Saddest of all, it means only money to the VC and everything to the entrepreneur who is emotionally vested in their dream to build something. If the venture succeeds and makes money, the VC is now vested in the exit which spells the end to the founder’s dream.

    For real success, take a longer view than 3 to 7 years. Make it grow with the teams that care and nurture the business. I’ve had and lost a million or so in my time, I’d rather have the teams and the challenges of the startup and a small house to go home to.

    Comment by RW Spangler (@RWS2point0) -

  26. Pingback: The 'Back to the Future' Arbitrage of Silicon Valley and What It Will Take to Beat It | Omaha Sun Times

  27. Mark, you were pretty good at creating an exit yourself! ;)

    Comment by Chao -

  28. I had Rob Minicucci at Welsh Carson describe the Californian wine industry as the same model as the VC industry and why he only had French and Italy wines. Your a Vigneron and I am a vigneron we each go to the wine auction and bid on each others cases of wine to a crazy price and make a market.

    Comment by Aivars Lode -

  29. This was quite inciteful Mark, thank you for the post. I believe there is truth to this. I think Silicon Valley has become a black hole for entrepreneurs at the stake of local state start ups. The goal is IPO or buy out with little regard to building solid business on strong fundamentals.

    In saying this, I don’t think there are many viable alternatives for entrepreneurs other than Silicon Valley. They have a proven track record, established ‘old boys’ clubs, and are able to add value from experience.

    For ex, if your VC firm is on a ‘buddy buddy’ level with execs at Google/Apple/FB, the buy offer price may reflect this relationship.

    Cheers,
    Paul

    Comment by honourslawstudent -

  30. I’ve both raised equity finance and bootstrapped a startup to millions in revenue. Funnily enough the startup that raised failed, but I don’t think it’s necessarily a smart thing to bootstrap to profitability. The key is to identify the moment it’s right to really attack a market opportunity and accelerate growth rapidly! Bootstrapping and self funding a project to profitability, whilst admirable, can sometimes leave behind a huge opportunity that others who raise can gobble up and not everyone has the funds or access to friends and family with capital to even get a product to launch.

    Comment by Sean Fee (@seanfee80) -

  31. Pingback: The 'Back to the Future' Arbitrage of Silicon Valley and What It Will Take to Beat It | We Report

  32. Mark Cuban’s blog today, always interesting

    Sent from my iPhone

    >

    Comment by Colleen -

  33. Mark, I appreciate your blog post. I met with several VC’s who were providing the capital for a start-up several years ago. The company didn’t have the infrastructure to succeed and I opted not to join the start-up. When I came up with a product, I didn’t crowd fund my company (AnatomyBasics.com). I purchased books, read, wrote my own code, developed several apps then financed my ideas from my savings before I went to experts to fine tune the code. It hasn’t been a huge success but I learned a lot along the way and it’s given me insight for what I do and don’t want to do in the future. I appreciate SharkTank for calling people out on outrageous evaluations when they haven’t launched a product or demonstrate proof of concept. Thank you,

    Comment by Joe (@AnatomyBasics) -

  34. This is right on Mark! I see it everyday here as we are an old school company living in this crazy overvalued Silicon Valley. We have to fight for new employees and partners that see our core business values and the ability to bootstrap and become profitable using your OWN money! We are very proud to have never taken a dime of venture and run our business to bring value to our customers,employees, and business partners.

    Comment by Brian Friss -

  35. On Wed, Mar 19, 2014 at 1:07 PM, blog maverick

    Comment by Alex Immerman -

  36. >> Silicon Valley as a source of capital is no better or worse than any other big city. There are plenty of sources of capital everywhere.

    A bit of an odd claim in view of the hard data on this. For example: https://www.pwcmoneytree.com/MTPublic/ns/nav.jsp?page=region

    Comment by Alex Bugeja -

  37. Mark,
    As an investor and 5x veteran startup guy that has done a lot in the Valley, I have to say I dislike people making wild generalizations like the ones you made in this post. (Yes I know it’s your blog, and I generally agree with most of your viewpoints). The Valley is full of entrepreneurs of all ages that want to “build something from scratch” and investors that not only want to invest capital, but who are also willing to roll up their sleeves and get in the trenches with them. I’m sorry you had a negative experience. I invite you to come back to the Valley, I would be more than happy to introduce you to entrepreneurs and investors who are well grounded and more than willing to work toward their goals. If you are serious and want to take me up on that offer, leave a reply here and I will find a way to reach out to you. (I’m guessing you have a few layers of “gatekeepers”, if you can help from your end and have them look for a message from me that would before efficient). Who knows, you may find your next deal, and even if you don’t, you will meet some exceptionally talented people and maybe even have some fun.

    Comment by ericj33 -

  38. Ahh yes, I’m archaic.. good to know. I DID start in the garage building a product and (still) hope to bootstrap it to profitability… and don’t expect that will change any time soon. I believe I’m entitled to work hard, never cease to innovate and continually expand the product offering through creativity, inspiration and perspiration. THAT is my entitlement because I love, love, love what I do.

    Comment by Judith Sinnard (@smarteplans) -

  39. Understood.

    I am working on something myself, and I’ve encountered some unique resistance and have struggled to attract talent. Sure, geography plays a part (I live in Chattanooga, TN), but the general consensus has been that if you’re not working on an “app” it’s hard to merit the right digital talent. Our idea will change the way kids learn (also by going backward to the future), but we are too small and our digital footprint isn’t glamorous enough.

    So, we’re bootstrapping and working for free until the stars align.

    Is there an app for that?

    Comment by timallenis -

  40. *Completely* agree with Mark. The first dot-com crash was due to ignorant, greedy venture capitalists who didn’t know how to build sustainable, robust companies. The next tech crash will happen because of ignorant, greedy venture capitalists who don’t know how to build sustainable, robust companies. History does repeat itself, indeed!

    Comment by Jordan Malik -

  41. ME ME ME ME ME ME ME ME ME ME ME ME ME ME ME ME ME ME ME ME ME ME ME ME ME ME…… Oh, I’m sorry, Did you say something?

    Comment by FlipHero (@FlipHero) -

  42. Thanks for telling us the truth Mark, a pleasure to read.

    Sent from my iPhone

    >

    Comment by Sundime -

  43. I’m busy trying to crowd fund my education because American employers now expect their employees to provide their own education, it stings that employers then go on to rebuke said education…. I have a ton of creative ideas just sitting on the desk…….waiting for an employer to get back in touch with the real world

    Comment by Mitch Crase -

  44. What you really mean is people in finance have gotten too good at a shell game that permeates right into the financial, banking sector, America doesn’t build anything anymore

    Comment by Mitch Crase -

  45. As usual Mark, spot on! Which leads me to why I laugh at people when they try to negotiate with you on Shark Tank.. Do they NOT realize the amount of wisdom and experience you bring to the table? Rock on Mark!

    Bob
    Funn Networks

    Comment by nypbbob -

  46. I lived in and worked in the Silicon Valley scene for years. This pretty much sums it up.

    Comment by Michael Heckly -

  47. Mark – your assertions about valley entrepreneurs not willing to bootstrap companies and grow profitably are a generalization of the Valley. You are right, there is a large contingency of people that raise money to raise money but those guys usually go out of business or give up so much control of their company that they fail or leave. Your generalization is like saying all NBA players are womanizing gangster thugs – which we know isn’t the truth. Don’t let a few d-bags is silicon valley ruin the whole bunch.

    Comment by Geoff Hamm (@geoffhamm) -

  48. Interesting. I am in Silicon Beach – I get surprised by the divide between this world and the corporate finance world… the angel investors seem pretty bad.

    Comment by anindyaghosh -

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