A new app called “Yo” has been making waves on social media in the past few weeks. Available on iTunes and Google Play stores, Yo lets users do nothing except greet one another with “Yo”. This seemingly nonsensical tool, which its founder Or Abel said only took him eight hours to create, raised US$1 million from investors last month.
Christopher Mims, tech columnist for the Wall Street Journal took that as a sign that “Silicon Valley has jumped the shark”.
“In the world of startups, money wasn’t flowing where it should anymore,” Mims said, wondering if Silicon Valley is funding the wrong stuff.
Venture capitalists are distorting the way the society allocates capital, Mims quoted Yatin Mundkur, a partner at venture capital firm Artiman.
Same-day delivery services or social networks that seem to have more novelty value than staying power are red-hot businesses attracting most capital. But the kind of technology that transforms lives, in fields such as energy, medicine and food safety, are not getting enough financial support, Mundkur noted.
More money flowed into software in 2013 than at any point since 2000, putting it near the peak of the last tech bubble. Software companies are eating up 37 percent of all VC funding, the highest since known available data, according to the Mims note.
Should taxi-hailing app Uber get US$1.2 billion, Mundkur wondered.
Dubbed as the master of innovation in Silicon Valley, Steve Blank already noticed the problem two years ago. In a blog post in May 2012, Blank said although there are lots of nascent startups dealing with material science, sensors, robotics, medical devices, life sciences, etc., “more and more frequently venture capitalists whose firms would have looked at these deals or invested in these sectors are now only interested in whether they run on a smart phone or tablet”.
It’s hard to blame them because return is much bigger and much quicker, as reflected by companies like Facebook, Blank pointed out.
“The Facebook IPO has reinforced the new calculus for investors. In the past, if you were a great VC, you could make US$100 million on an investment in 5-7 years. Today, social media startups can return hundreds of millions, or even billions, in less than 3 years. Software is truly eating the world,” said Blank. Compared to IOS/Android Apps, investing in new drugs, clean energy or electric cars, or all the other stuff that is hard, takes lots of capital and the returns take forever, he added.
Such misplaced investor enthusiasm, however, may continue as interest rates remain low and more traditional investments, including those related to fast-growing economies of Brazil, Russia, India and China, now appear shaky, Mims wrote. “But, money wants to go somewhere.”
Still, “You don’t have to be a venture capitalist to question whether, from the perspective of net social benefits, or even long-term return on capital, the problem of replacing instant messaging is a better investment than countless other potential businesses,” Mims concluded.
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