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Silicon Valley's Problem: Tons Of Cash, Few Sure Bets

Silicon Valley's Problem: Tons Of Cash, Few Sure Bets

Silicon Valley has a problem. Not necessary a bad problem, but a problem nonetheless. Venture capital firms have too much money and too few investment ideas.

According to a Bloomberg report, venture capital firms raised a whopping $12 billion in the first quarter of 2016 alone, which marks a 10-year high. A few years ago, there was no shortage of companies to invest in as any startup that claimed to provide a mobile solution to any problem (payments, photos, blogging) would have no issue with raising capital.

"That pitch was enough to get going," Roelof Botha, a partner with VC firm Sequoia Capital told Bloomberg. "It's not enough anymore."

Smartphones aren't growing at the pace they were a few years ago, while Bloomberg estimates the growth of smartphones in the United States is near zero and declining across the world. Meanwhile, new technologies such as wearables and virtual reality haven't made the case yet that they will be the next must-have gadget to replace smartphones.

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The few good investments, including Uber, Airbnb and Snapchat, are able to get away with raising seemingly unlimited cash to the point where many are questioning the reasoning behind their large valuations. For example, Uber's $69 billion is worth more than General Motors Company (NYSE: GM) and Fiat Chrysler Automobiles NV (NYSE: FCAU) combined, Airbnb's $30 billion valuation is worth more than any hotel chain and Snapchat's $25 billion valuation values the company at 25 times what Facebook Inc (NASDAQ: FB) paid for Instagram in 2012.

Recent deals may also signal the same valuation concern.

One Kings Lane, an online home goods retailer that was once valued at almost $1 billion, sold itself to Bed Bath & Beyond Inc. (NASDAQ: BBBY) for just $12 million. Instacart, a grocery delivery startup, sold some of its shares to Whole Foods Market, Inc. (NASDAQ: WFM) at a $2 billion valuation — the same valuation at which it raised cash two years ago.

In addition, companies facing criminal or regulatory scrutiny, such as Theranos, have also managed to stay afloat.

"There are a whole bunch of businesses that are good, not great, but they've raised money as if they were great," Social Capital founder Chamath Palihapitiya told Bloomberg.

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