Peter Barris, a venture capitalist at NEA, took the stage Wednesday night at a Startup Grind event at 1776 in Washington, D.C. Barris, who is perhaps most notable as an early investor in Groupon, opened up to host Brian Park about why, even if some start-up valuations are high, it’s a tremendous time for venture capital:
It’s a great time to start a company. Why? Plenty of capital. So there’s no shortage of capital. There’s more interest in entrepreneurship now than I’ve ever ever seen in my 22 years in this business and across the board. So there’s more innovation going on now. I’m giving it the 500,000-foot view. It’s going into a macro environment where R&D in academia, in government funded places like NIH and corporate America has been slashed. Corporate America in particular has been more reliant on innovation coming from small companies than ever, starkly more reliant than ever before.
We hosted at NEA 70 company days last year where a company would come to us and we would parade portfolio companies by them. Seventy. They’re coming to us, they want to see our portfolio so they’re shopping and we’re the mall. I’ve never seen that before. That dynamic suggests to me interest in entrepreneurship, plenty of capital. Today’s stock market doesn’t matter because we’re investing for where the stock market is five to seven years from now not where it is today. This is a great time, a very robust time. I think the next 10 years is going to be perhaps the best time for the venture capital industry we’ve ever seen.
Barris discussed whether we’re in a bubble right now:
There’s never been a good period of venture capital when prices weren’t high. The cliche phrase in our industry when things are frothy is too much capital chasing too few deals which drives valuations up into the stratosphere and that’s unhealthy.
Yeah there’s some element of that today, we’ll come back to it, but more problematic when you have a lot of capital as we did back in the late 90s, you get in any one sector you might get 20 companies funded. And when you get 20 companies funded often times the weight of that means that none of them will emerge as big winners.
And so in today’s environment although I would say in many sectors not all the valuation on any historical perspective are high, what’s good about today’s environment relative to the dot-com era is we’ve done a huge ratchet down in a the number of a firms. A huge ratchet down in the amount of capital coming into our industry and the concentration frankly of more capital in fewer firms, we’ve been a beneficiary of that but I also think the industry has been a beneficiary of that because what it’s led to is more rational behavior.
So you don’t see as often, rarely today 20 me-too companies being funded. You might see three or four or five or six but out of that if one or two win that’s okay and that is what venture capital is about. There are going to be a lot of failures.
Barris was also asked about sectors that are overvalued and undervalued:
Anything consumer Internet related and now unfortunately anything enterprise software related is at frothy valuations. It’s only in the more esoteric areas of I’ll call it semiconductors, deep technology, hardware, or in some cases tech-enabled business models, where you’re using technology but the technology isn’t really where the value is, it’s how you’re using that technology.
So it may be companies like we funded several from Chicago, InnerWorkings and Echo Global that were disintermediating industries like the print industry or the logistics industry and making pricing between buyers and sellers a more efficient market if you will. Those tend not to be overvalued today.
Health care is generally undervalued. Biotech’s got some frothiness but it’s spotty. Education is undervalued. Transportation is undervalued.
And he’s not a big fan of Nest:
I’m blown away by the valuation that Nest got. … What is it? What does it do really? By the way I’m renovating a second home. I couldn’t use Nest because it doesn’t operate with high-end HVAC systems. I thought this was bleeding edge technology?