Billionaire VC: Startups are spending way too much on useless 'window dressing'

There's too much money in tech, and it's caused huge problems for both the companies and San Francisco alike, said billionaire venture capitalist Chamath Palihapitiya.

"There's way too much money in the system ultimately still chasing few really great companies. And the problem with that is you have a bunch of impostor companies that get funded for a lot longer than normal cycles," Palihapitiya said during an interview.

If there was less money, companies would die faster and not "take up space," both physically when it comes to rent, but also metaphorically in a crowded market for talent and success.

The open tap of money in Silicon Valley is causing companies to pay more for employees - and pay more in rent for fashionable offices to attract them. In turn, the rents go up as money just adds fuel to ever-increasing prices. There's not a feeling of needing to pinch pennies and make better decisions, an environment that famed Benchmark venture capitalist Bill Gurley also decried.

"I think that really great entrepreneurs can raise money in any environment so on a relative basis, they're disadvantaged in these environments because lower-quality people can raise money, and enter their field, and bring this kind of unsustainable competition," Gurley said.

If you're spending more than 15% on rent, you're hosed

To fix it, Palihapitiya said there's work to be done publicly and privately.

On the public side, "You have to basically get rid of the NIMBYism and you have to decide to build up. You need to quadruple the amount of housing, quintuple the amount of housing. You need to tell every young engineer from the university of Michigan that they can afford to live here on $80,000 a year," Palihapitiya said.

It's not only governments, though. Venture capitalists can - and should - be playing a role.

"On a private level we need to hold our companies to a higher standard so they're not wasting their money on useless stuff that is window dressing. That is just fundamentally getting in the way of building something useful," Palihapitiya said. "The minute that they start to spend more than 15 percent of their burn, money that we give them, good money, on rent, a huge red flag goes up."

If rent costs more in San Francisco, it has to be justifiable, otherwise you're raising a larger amount of money to cover larger costs for no reason. Every dollar that someone raises in Redwood City or Mountain View has to be multiplied by two for it to be go as far in San Francisco, Palihapitiya said.

Palihapitiya has even considered raising a real estate fund to buy a live-work space for startups and offer that as a trade for working with with the firm. But, the startups have to have the "courage" to live and work in San Mateo and San Carlos, Palihapitiya said.

"It's fine to fail, in fact, it's great to fail," Palihapitiya said. "But if you failed because you don't have the courage to move to Oakland and you burned 30 percent of your cash on Kind bars in the office and exposed brick walls you're a f----ing moron."

He continued, "If at the end of this cycle, whenever it ends, if we look at who made all the money and it's not Benchmark or Sequoia or Social + Capital or Andreessen, but it's Cushman and Wakefield, WeWork, and ZeroCater, something's wrong," Palihapitiya said.

He also noted that San Francisco isn't exactly a hotbed of successful tech companies: Every tech company worth $100 billion or more has started no farther north than Palo Alto.