Valley Veteran Brad Garlinghouse Sees Signs of Tech Bubble

Photograph by L. Shaefer

Brad Garlinghouse said startups are raising money at high valuations, picking numbers for the purpose of “chest-pumping.”

Even as Facebook and Zynga shed more than half their value in the public market, Silicon Valley veteran Brad Garlinghouse sees signs of a technology bubble.

The former executive at AOL and Yahoo said startup founders are raising venture capital at high valuations, picking numbers for the purpose of “chest-pumping” and not because they need the money. Companies are also focused on building glowing public reputations, sometimes using Hollywood celebrities, without the revenue to back them up, he said in an interview.

Garlinghouse, who is chief executive officer of content collaboration site YouSendIt, offered two reasons why the behavior concerns him:

It’s bad for investors. Raising at higher-than-necessary valuations means they’re less likely to get acquired. If a company is worth more than $1 billion, the pool of companies that can afford to buy it shrinks. A startup’s founder may be planning for an initial public offering, but it’s good to have other options for paying back investors.

It’s bad for employees. “Everyone wants those guys to get rich, if they deserve it,” he said. If companies raise at a high valuation, the strike price, or price at which workers can exercise their options in the company, is a lot higher.

Garlinghouse isn’t the first to make these arguments. Around the time of Facebook’s IPO in May, Pacific Investment Management Co.’s co-chief investment officer Bill Gross wrote in a posting on Twitter, “I know a bubble when I see one.”

YouSendIt hasn’t raised money in more than two years and should break even within the next two quarters, Garlinghouse said. The company is dependent on its users, not advertisers, for revenue, he said. YouSendIt competes with Dropbox, which has a $4 billion valuation, and Box, which is valued at $1.2 billion.

 

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