Why One of Silicon Valley’s Savviest Investors Has Shut His Wallet
The last new investment Hartz made was more than a year ago. At the time it was a little company no one had heard of called Pinterest. You’ve probably heard of it now. Hartz also made early bets on Airbnb, Flixster, Palantir, Trulia and Yammer among others. He’s mobbed up with the PayPal mafia, not as a former colleague, but again, because he was an early backer. Hartz is making follow-on investments in his current roster of startups, but he’s not looking to do anything new — it’s just too expensive.
“We don’t know where we are in this cycle,” Hartz says from Eventbrite’s San Francisco headquarters. “We can’t know how much longer this abundance of capital will last, but I don’t want to be a part of it. When I see a massive number of new investors and carpetbaggers coming in, it’s time to get out.”Hartz doesn’t use the word bubble; it’s more complicated than that for him as a guy who sits on both sides of the money equation as an investor and an entrepreneur. It’s more a winter is coming view of the startup world, especially for the consumer internet on which Hartz focuses. His advice: Get prepared for a chill to set in.
As an investor Hartz points to the usual signs of too much money-chasing deals. The billboards on highway 101 between San Francisco and Silicon Valley touting startups no one has heard of. The bus stop signs in tech-heavy locales like Mountain View and Palo Alto advertising scads of engineering jobs.
“Everyone is competing for the same people, going after the same real estate, the same support services,” Hartz says. “The natural resources of the startup world are getting scarcer and scarcer, and the cost is getting higher and higher. It’s all an outgrowth of an abundance of capital.”
While venture capital investment in internet companies at $1.4 billion was down slightly in dollar terms in Q1 of 2012 compared to the end of 2011, there has been eight consecutive quarters of more than $1 billion invested in the sector according to the National Venture Capital Association. That’s well over $8 billion in a two-year period. No wonder for every Instagram, or Dropbox, a dozen copycats crop up.
All that money makes novice entrepreneurs do funny things, Hartz says. “That relentless competition coupled with the cash tends to train entrepreneurs to be far more aggressive and less focused on things like measurable results,” Hartz says. “There are some entrepreneurs who can and should be aggressive, but they possess a certain type of pattern recognition, an understanding about what’s really lifting a business.”
Hartz puts his fellow PayPal mafia brethren in that category, Tesla and SpaceX CEO Elon Musk in particular. “The PayPal guys have always been very good at seeing what makes a business work, and then raising capital opportunistically during the good times,” Hartz says. “They bulk up ahead of the downturn.”
At Eventbrite Hartz is taking his own advice. He’s raised $80 million to date, but is sitting on $58 million preferring to run Eventbrite frugally while growing steadily month after month. Don’t misunderstand, Hartz believes in the consumer internet. He’s all-in as an entrepreneur, but as an investor, he’s out.
“When things are most dire, and people are most scared,” Hartz says. “When people openly mock the consumer internet space and the excesses of it, that’s when I will start investing again.”
