# Irrationality, Welcome Back to Silicon Valley

Wow, finally people noticed.

All it took was Google to supposedly offer $3.5 million to an engineer to not go to Facebook. Now, that is what rational people would call cutting off the nose to spite the face. But these are not rational times. I have been writing about the escalating irrationality in Silicon Valley, which for some odd reason exists detached from the global economic reality. In past few months, I wrote about three major and potentially troubling signs. • Silicon Valley & the Scent of Money talked about the increased number of startups getting funded and the amount of money being pumped into the startups going up, thanks to hyperactive, always tweeting, angel investors. • Silicon Valley’s Talent Crunch talked about how there was a decline in certain kind of engineering talent and other professionals in the valley, thanks to the breathless hiring from giants like Zynga, Google (s GOOG), Apple (s AAPL), Facebook and Twitter. • The media’s focus on investors and not the founders. There are some excerpts from Fred Wilson’s post I think are worth highlighting. I think the competition for “hot” deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I’d be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely. Irrationality often doesn’t seem irrational because it is often labeled as conventional or fashionable thinking. Let’s step back for a minute: if you take what Michael Arrington wrote or what Fred Wilson has to say or my own reporting, we are beginning to see signs of hyper-inflation in the web and startup landscape. Fred doesn’t want to call it a bubble and he is right, mostly because it is not a classic case of mass hysteria, and instead it is a madness that impacts only a certain genus, the professional investor. The implications of this early stage investment hysteria are going to be felt across the ecosystem. Let me explain. Google, worried and perhaps tired of losing its great engineers and talented people to other companies including Facebook, decided to fight back with a weapon it knows can be effective in the short term: money. A ten percent across the board pay hike and generous offers to exceptional and standout employees are a good way to stem the flow of talent. Facebook and others, if they do indeed want these people, now have to spend cold-hard cash to lure people out of their cushy Google gig. Of course, one could argue that what is good for the goose is good for the gander. The more cash big web companies offer as salaries, the more startups and others are pressed to offer higher salaries to their recruits, which in turn means that startups are going to need more money. More money means that tide might turn against the angels in favor of larger Sand Hill Road firms. A million-dollar angel round isn’t enough when you have to pay$100,000 or more in engineer salaries! In other words, the startup economics are going to change.

This is not good for startup founders either. Inflation means they need to raise more money, which will come at a cost: They will be giving up a bigger portion of their business to investors. Of course, higher valuations would make exits –- still few and far between –- tougher.

I think Wilson’s comment about “investors are showing up at the first meeting with term sheets” is particularly telling and indicative of the irrationality in the market. And the sad part –- it is only going to get worse.

Image courtesy of Flickr user joelogon

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