
Silicon Valley's Soft Landing - adventured
http://www.bloomberg.com/gadfly/articles/2016-01-08/silicon-valley-comes-to-its-senses-on-silly-startup-money
======
timr
There's an elephant in the room: nobody really knows how many valley companies
exist solely because of revenues that are diversions of this river of money.
Startup-servicing startups. Hosting. Metrics. Food delivery. Recruiting.
Hell...there are hundreds (if not thousands) of companies just doing
advertising services, alone. Everyone fixates on the unicorns that are doing
big revenue numbers, but the regional effects of those redwoods are tiny in
comparison to the "robust ecosystem" of mushrooms that grows in their shadow.

I often wonder how much of Facebook's revenue (for example) consists of valley
startups trying to micro-target indifferent consumers. Pretty much any time I
look into a VC-funded consumer company, I find that they're spending money on
Facebook ads, Google ads, mobile ads...you name it. When that money dries up,
the "ecosystem" of ad services takes a huge hit.

I'm sure there are consumer companies that have organic growth, but it's hard
to tell when there's so much money sloshing around. One King's Lane, for
example...they were buying ads like crazy. At their peak, they had big,
unicorn-y revenue. They're probably going to sell for a fraction of their
total investment, and have never been profitable [1].

Meanwhile, the theoretical market cap of all current private-market unicorns
($300-$500Bn, depending on the source) is something like 10-20x the market cap
of every IPO issued in 2015 (~$30Bn) [2]. It's pretty clear that the economic
status of San Francisco is at least _correlated_ to the huge influx of VC
money since 2012, and that a lot of the resulting value is creative
storytelling. I don't see why people are so confident in a soft landing if
that same money goes away.

[1] [http://recode.net/2016/01/06/one-kings-lane-once-valued-
at-9...](http://recode.net/2016/01/06/one-kings-lane-once-valued-
at-900-million-is-likely-to-sell-for-fraction-of-that/) [2]
[http://wolfstreet.com/2015/12/22/ipo-window-suddenly-
closes-...](http://wolfstreet.com/2015/12/22/ipo-window-suddenly-closes-worst-
year-since-2009-worst-december-since-2008/)

~~~
w1ntermute
> Hell...there are hundreds (if not thousands) of companies just doing
> advertising services, alone.

[http://idlewords.com/2015/11/the_advertising_bubble.htm](http://idlewords.com/2015/11/the_advertising_bubble.htm)

> I often wonder how much of Facebook's revenue (for example) consists of
> valley startups trying to micro-target indifferent consumers.

During the dot-com boom, a large fraction of Yahoo's revenue was coming from
startups, who were using their VC money to pay exorbitant amounts for
partnerships with Yahoo. You can guess what happened at Yahoo when the party
ended in 2000 and the money men went back to NYC.

~~~
leoc
That's also basically what happened to mighty Sun after it became the Dot in
Dot-Com, right?

~~~
adventured
Sun, Oracle, AOL, EMC, Nortel, Lucent, Cisco - all took huge shots from the
ecosystem of dotcoms going under.

Cisco for example, in the 4th quarter of 2000, grew sales by 61% (55% for the
year). Famously they had basically accelerated growth every quarter for a
couple of years. The projections had gotten almost insane, about how big Cisco
was supposed to be in just a few more years.

The money quote from August 2000:

"We see no indications in the marketplace that the radical Internet business
transformation in practices like customer service, supply-chain management,
employee training, empowerment, and e-commerce that is taking place around the
world today is slowing -- in fact, we believe it is accelerating globally,"
said [then CEO] Chambers.

~~~
rodgerd
3Com. They basically shut down their networking division because their
management and investors figured that they were now a wrapper around Palm.

------
code4tee
I don't think we will see a .com bubble style 'crash' but it seems
increasingly certain that the screws are going to get turned on startups that
can't sustain themselves without constant injections of cash from investors.

There is a knock on effect too in where the risks aren't entirely understood.
For example think about mobile/web analytics companies. Tons of their revenue
comes from other unprofitable companies that are propped up by VC cash. Even
if the web analytics company is doing well in their own right there is a huge
hidden risk with the business model of such companies since a big chunk of
their revenue comes startups propped up elsewhere with VC cash and that cash
is about about to start drying up really quickly. In other words a lot of
companies that think they are doing well are in reality just also propped up
with VC cash indirectly.

In short, the tide is going out and we're about to see who's been swimming
naked.

------
carsongross
The whistling past the graveyard is hilarious.

We are going into a 2008-style financial crisis, with the Fed already zero
bound and China heading into a deflationary collapse. The banks, at least,
have better balance sheets on paper this time around, but the carnage is going
to be breathtaking.

How many cycles of "things are amazing -> a new, permanent plateau -> I see no
evidence of a bubble -> soft landing for sure -> no one could have seen this
coming" do we have to go through, folks?

~~~
oldmanjay
What's nice about doomsaying is when you're wrong no one cares and when you're
right that one time, you get that useless fleeting feeling of self-
satisfaction

~~~
ra1n85
Is it really doomsaying when it's occurring at somewhat regular intervals?
1990, 2000, 2007...

~~~
oldmanjay
Yes. The human tendency to find patterns where none exist makes the whole
thing feel more compelling than it is

~~~
adventured
There is an obvious pattern. The Fed is intentionally inflating asset bubbles
to fake economic recoveries. Those asset bubbles inevitably must implode
because they're not supported by fundamentals (such as the extremely slow GDP
growth the prior six years). They did it in response to the 2001 recession,
and they did it again in response to the 2009 recession. They openly admitted
they were attempting to inflate assets this time around.

------
Animats
The value of a company is the present value of future dividends. Investors,
collectively, will not do better than that. However, it may be possible to
find investors who will overpay for an overvalued company and lose money. The
"unicorn" business requires a large supply of such suckers.

"It is in the nature of markets to move money from the many to the few."

~~~
avn2109
Googled that quote and can't find a source; who is it?

~~~
Animats
It's a common statement by stock traders. The original version seems to be
from Henry Lloyd, in 1894, writing about "business combinations", at the dawn
of antitrust law: "Property to the extent of uncounted millions has been
changed from the possession of the many who owned it to the few who hold
it".[1]

The shorter version shows up in the writings of many stock traders. "The
markets are designed to take money from the many and distribute it to the
few.", is from Bruce Babcock.[2] "There is a persistent overall tendency for
equity to flow from the many to the few. In the long run, the majority loses."
is from William Eckhardt.[3] "The purpose of the markets is to redistribute
wealth from the many to the few" is from Peter Brandt.

[1] [http://www.let.rug.nl/usa/documents/1876-1900/excerpt-
from-h...](http://www.let.rug.nl/usa/documents/1876-1900/excerpt-from-henry-
demarest-lloyd-wealth-against-commonwealth-1894.php) [2] [http://www.rb-
trading.com/article1.html](http://www.rb-trading.com/article1.html) [3]
[http://www.aaii.com/journal/article/market-wizards-advice-
do...](http://www.aaii.com/journal/article/market-wizards-advice-doing-the-
uncomfortable-thing.touch) [4] [http://peterlbrandt.com/the-purpose-of-the-
markets-is-to-red...](http://peterlbrandt.com/the-purpose-of-the-markets-is-
to-redistribute-wealth-from-the-many-to-the-few/)

~~~
avn2109
Cool thanks :)

------
jusben1369
Good technology is a terrible company to inject into this conversation.
They've been around for a decade or more and were always an also ran in their
space. They hardly match the desired narrative that the NYTimes, or anyone
else wants to use, of a 3 - 5 year rocketship/unicorn who is suddenly engulfed
in flames. When I first saw that article a couple of weeks back I was like
"What? That company was still even around?"

And why would the author assume, based on one quarter worth of data, that any
sort of landing of any kind has occurred? Surely you'd want to let the change
of direction play out a little longer before making any type of claims about
whether there's a meaningful change and at what speed it's happening.

------
hkmurakami
Now that I think about it, it feels a bit "off" to me that we refer to both
behemoth, money printing companies like GOOG and AAPL and smaller, money
hemorrhaging, ultra-growth phase Series A and B companies as "Silicon Valley"
in the press.

They're really whole different worlds, perhaps best separated as private vs
public companies, and it's strange that we haven't clearly made a verbal
distinction between the two.

~~~
sangnoir
I suspect the VC ecosystem encourages/condones the lumping of mature, money-
earners with the money-burners as "Silicone Valley". It serves them (and
founders) well/if in people's minds, startups are nascent Googles and Apples

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tymekpavel
The infographic and analysis are slightly misleading. If you look at the YoY
analysis, funding is basically flat. One could argue that Q2/Q3 2015 were
outliers and that while investment didn't grow in 2015, it didn't shrink
either.

------
api
Equity crowdfunding is now "live," or getting there. This will bring more
money in at the seed stage. I wonder how this will affect the larger
ecosystem?

Seems like we might see a shift away from a few "unicorns" to an ecosystem
with more smaller to medium sized companies trying more things. That's
probably good, and is probably more likely to produce more Googles and
Facebooks than betting the entire farm on a few dozen over-inflated ventures.

Of course the future is also likely to be more geographically diverse. Silicon
Valley might no longer just be in Silicon Valley. That's also a good thing.

~~~
randycupertino
" Silicon Valley might no longer just be in Silicon Valley. That's also a good
thing."

Maybe we'll no longer have to pay $3000/mo for a 1br.

~~~
azinman2
If only. i think it's actually higher Than that.

------
peter303
A friend just got laid off at Twitter after a few months there. I thought he
was a top tier programmer. I heard they released a fair amount of office space
too.

~~~
kspaans
Regardless of your friend's skill, it's possible he simply didn't have enough
seniority-capital to dodge the axe. Juniors, as in newer-hires, are sometimes
the first ones cut during a lay-off.

------
Outdoorsman
Think of the role that an "Advance Man" played for traveling circuses in days
gone by...they were on the road keeping a couple of towns ahead of the circus'
itinerary and drummed up interest with posters, flyers, and sales puffing, so
that the circus would be profitable once it arrived...

Spending VC money on "advertising", or attempting to generate the same "buzz"
for free on social media probably amounts to about the same thing...

Is the "circus" (startup) being advertised to investors the "real deal"...ah,
the risk of the bet...will it scale, or will it fail...?

It seems that the savvy are becoming a bit wary of relying on the hype of an
Advance Man (advertising)...when marketing is required to establish a product
as opposed to the product establishing itself, through proven utility, the
ground is certainly shaky...

------
kimberleyhansen
To give just one example, on-demand ride startup Lyft recently sold a batch of
stock that increased the company's implied value to $5.5 billion. The amount
is eye-popping for a not quite 4-year-old company that is spending far more
money that it generates, and reported a relatively slim $47 million in revenue
for the first six months of 2015, my colleagues Eric Newcomer and Alex Barinka
have reported. To show how outlandish Lyft’s valuation is, consider that on a
roughly similar basis Apple would have a stock market value of more than $12
trillion, about two-thirds of the annual gross domestic product of the U.S.

Can someone ELI5 what a "roughly similar basis" might be? How did they arrive
at this number?

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codesushi42
This article basically reads:

"What, me worry?"

It's way too early in the impending downturn to draw conclusions like this.

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headgasket
This thread has justified the time wasted on hn. I had recently felt the
signal to noise has been dropping consistently here; The smarts catalyzed here
justifies keeping HN in my list. The signal is still strong. I feel an
awakening. Cheers! PS: that idlewords blogpost linked by w1ntermute
[http://idlewords.com/2015/11/the_advertising_bubble.htm](http://idlewords.com/2015/11/the_advertising_bubble.htm)
is exactly what I've been thinking for years now, great blog too.

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nazca
How much did Uber raise in Q3 and Q4? Seems like it would be material to the
trend over the past few quarters, and is at this point a different animal.

