Top VCs Debate Rising Startup Valuations [Video]

The venture capital valuations for still-have-that-new-car-smell startups like Quora, FourSquare, Blippy are reaching unprecedented levels, and we wanted to find out why. Top VCs Marc Andreessen, Ron Conway and David Hornik came by the TechCrunch offices to debate the issue.

Four month old Blippy is worth around $38 million. Quora, still in private beta, is valued at around $86 million in its most recent round. And Foursquare will be worth $80 million or more when it closes the round it’s negotiating now.

These are all young, basically pre-revenue startups. A year ago these valuations would have been unthinkable. So what’s driving the feeding frenzy? The IPO market is still mostly closed to startups, and most acquisitions are still in the low tens of millions of dollars. There’s no clear profitable exit for VCs who invest at these valuations.

Andreessen says there are very few “main event” startups, pointing to a study that says Silicon Valley creates an average of fifteen startups a year that eventually get to $100 million/year in revenue. Those are the startups venture capitalists are aiming for, and valuation is secondary to just getting in the deal. Those deals tend to get bid way, way up.

He also says that the hottest deals tend to have valuations at 4x what comparable startups can command – meaning some intangible factor pushes the valuation of a startup way beyond what the numbers will support.

Hornik also says that history has proven some crazy valuation deal to be very smart in hindsight. He uses Greylock’s investment in Facebook at a $500 million valuation as an example. At the time a lot of people said they were crazy. Now, it looks like the deal of the decade.

“Silicon Valley has a very short term memory,” says Hornik, saying that overpriced deals that eventually go south are quickly forgotten. And smart deals tend to be remembered.

Conway says that venture capitalists need to do their due diligence. He invested in Google at a $75 million valuation in the late 90s, and the company had no revenue and no business model yet. But the search engine was so exceptional, he says, that the investment made sense when they looked deeply at the team and the product. Obviously, he was right. Good diligence plus good deal flow equals a good portfolio, he says.

What’s most interesting about the talk is that none of these guys seem particularly concerned with rising valuations. Getting a piece of the hot deals seems to be of crucial importance.

This was a 30 minute conversation and there were lots of great side discussions as well, such as how they deal with entrepreneurs who want to sell out of a startup instead of going the distance. And near the end I hounded Andreessen on when Skype might go public.