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The Roots of Bust 2.0

Posted by TimSlavin at March 30, 2004

"Collectively, the Valley's venture capitalists have tens of billions of dollars in their accounts, so the millions doled out to social networking represents a small fraction of the money venture firms have at the ready. The question, though, is whether there are tens of billions of dollars' worth of companies in which to wisely invest. Instead, the presence of so much cash is likely to drive VCs to make some of the same mistakes they did during the bubble, when startups were grossly overvalued and stock prices inflated. "It's getting a little scary out there," says lawyer Scott Dettmer, whose firm, Gunderson Dettmer, specializes in counseling tech startups.

Blame it on overhang, a term you hear a lot nowadays in the Valley. It's a word borrowed from the banking world's shiny-shoe set and used to describe the presence of too much money in the hands of venture capitalists. It suggests cash so plentiful that tree branches sprouting $1,000 bills groan from the weight. We should all have such problems, you might be thinking. But overhang wreaks havoc on the Valley's delicate ecosystem, where entrepreneurs and venture capitalists have thrived for decades and everyone dreams of being dubbed the next Google."

Excellent in depth overview of how venture capital works with startups in Silicon Valley. From Wired.

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