Facebook’s Sean Parker is cautioning Silicon Valley and hinting that it may be in trouble because too many angel investors are throwing way too much money at aspiring entrepreneurs who aren’t up to the task of building a company.
During a panel at Techonomy 2011 in Tucson, Arizona, the hot-button issue came up and Parker said that the assembly line model of rapid-fire investing is a model that works well in a bubble – in a market where everything goes up. However, he adds, “There was a huge inefficiency in the market six or eight year ago, where there wasn’t enough early stage capital. It was that opportunity that allowed Founders Fund, my venture fund, to enter the market to fill that void because angels had become very skittish and started to believe they could never get their money out.”
But now Parker points out that we seen an explosion in angel investing with lots of angels coming out of Google and Facebook investing very quickly and wanting to be players and stay close to the game. This desire is causing them to make tons of investments often in companies that aren’t full baked – “either the team isn’t fully baked or the product isn’t full baked or there’s no conceivable revenue model,” says Parker.
According to Parker, the right team is a very important component.
“Understanding your place in the ecosystem and the value you’re able to bring gets lost and distorted when there’s so much money sloshing around, and everyone you know is pushing you to go and start a company,” he said. Unfortunately, nearly any great engineer, who has a good pedigree, “can go and get a $250,000 or $500,000 check and start a business and they’re probably not qualified to do so.”
So where is this all heading? According to Parker, “you’ll probably see a lot of these companies shutting down, and I guess this is where it really ends – when way more of these companies shutting down than getting bought. Then that causes this million-dollar price per head thing to drop, and the scarcity in the market goes away.”