Over the weekend, Yammer founder and CEO David Sacks ignited a firestorm with a posting on his Facebook (NASDAQ:FB) page. He declared that “Silicon Valley as we know it may be coming to an end.” Well, Sacks got a stream of comments from tech luminaries like Marc Andreessen, who is a partner at the venture capital firm Andreessen Horowitz, and George Zachary, who is a partner at Charles River Ventures.
Sacks did make some excellent points. He noted that it’s getting more difficult to create successful start-ups. After all, incumbent Internet companies, like Salesforce.com (NYSE:CRM) and Google (NASDAQ:GOOG), are extremely savvy and have tremendous resources to deal with threats. Another factor is the increasingly aggressive use of lawsuits (and threats of them) to protect patents, which can pose a huge problem for startups.
Perhaps all this explains why Sacks recently sold Yammer to Microsoft (NASDAQ:MSFT) for a cool $1.2 billion. Although, when I talked to him last month, he mentioned that the main reason was that he saw huge potential synergies in the two companies (Yammer provides social media applications for businesses).
Now, it should be no surprise that VCs like Andreessen and Zachary would vigorously disagree with Sacks. They argue that start-ups are the real source of breakout innovation, and we haven’t reached the limits. Andreessen writes that the opportunities are “an infinite number — human creativity is limitless — which doesn’t make it easy, but does mean the opportunity is unending.” How’s that for being optimistic?
As is the case in any high-level debate, there’s truth on both sides. Sacks is right that — in today’s transparent world — it is hard to keep a company under the radar and disrupt incumbents. Then again, Andreeseen is spot-on that innovation is far from dead.
But I think something important is missing from the debate: timing. The fact is that innovation often takes a long time to get traction. People tend to be risk-averse and stay with proven methods.
As a result, investors can often get too enthusiastic about new technologies, which can lead to unsustainable valuations. This has been the case with recent IPOs like Facebook, Zynga (NASDAQ:ZNGA) and Groupon (NASDAQ:GRPN). It could also become a problem with cloud-computing companies, which have seen outsized valuations.
But when looking at the long-term, the opportunities should be substantial. The key is waiting for the hype to calm down — which can take a lot of discipline and willpower.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.
