Today, there is a debate about a startup-SV-VC bubble but I don't have a sense for who is exposed and what the greater ramifications would be, if any.
For most people it will be a non-event, they wondered how people could invest in a company at those valuations and so won't be surprised when they lose their investment.
It will be really really hard to raise money for a while. Perhaps as many as 6 or 7 years. Companies that depended on new startups like digital ocean will have large layoffs as they cut costs to stay profitable.
Anyway, that is my guess. We get to see how it plays out.
When will this happen? Soon. If you look at the number of seed vs. A vs. B+ rounds, you'll see that A rounds are on the decline. That's important because that's the stage where companies move from a startup to /real/ companies. Lack of A rounds means investors are willing to throw a little money (seed) on potential, or go big on proven success. That's usually great, but lack of A's means they're not willing to take any risk. That's a sign this bubble is deflating.
_FWIW - I'm a technical founder of a non-funded tech company._
Last time, tourist investors (newbies and the lay man) invested in stocks that crashed. Private huge rounds are protecting the tourist investors by virtue of lack of access.
This is what I'm getting at. Is that extent of it? Before the housing crash, most institutional investors thought it would be confined to the subprime market... but that wasn't true at all.
Where are the VCs getting all their money? Are mainstream banks exposed? Hedge funds? Corporations? Retirement funds?
I predict that the coming tech crunch will be a sideshow in much bigger chaos caused by the effects of rising interest rates on newly-minted college grads. We live in a bubble in Silicon Valley; across most of the country, youth employment never really ticked upwards. If interest rates go up, I think we'd start to see widespread non-payment of student loans and possible political unrest. That's much scarier than a few startups going belly-up.
VCs raise money from Limited Partners (LPs). Who are they? The regulars of course (fund of funds, foundations, endowments, large family trusts, pension funds, etc), but it seems pretty common for VC firms to also take on money from other wealthy individuals who made a lot of money from the machine, i.e., founders who got big exits and even other VCs or ex-VCs who likewise previously made bank.
In other words, there's a surprising amount of circulation or recycling of funds in the bay area tech scene. And that's awesome, win or lose.
It all eventually comes back to the Federal Reserve. Interest rates are at record lows (much below a "market" rate), and funds are taking advantage of this to flood money into stocks, housing, tech companies, etc.
I'm not an expert, but I think most VC funds have a 10 year lifetime. Once a fund raises money and closes, it can't really be dissolved during those 10 years. Maybe the post-bubble lack of unicorns would mean the new/existing funds don't return anything, but most small VC funds don't end up having attractive returns today (especially taking into account their illiquidity).
Or would it be something like higher interest rates drying out VC funds leading to startups going out of business left and right?
I better buy more ThinkPads...
One presumption, usually left unexplained, is that there are a lot of "unicorns" that will collapse.
I am most interested in classifying these unicorns, and speculating which will fall and which won't.
Here's my list -- I want your thoughts on it.
1) Uber -- will not go down
2) Dropbox -- will go down
3) Airbnb -- will not go down, unless threat from regulation becomes stronger
4) Snapchat -- will go down
5) Twitter -- will go down
6) Facebook -- will suffer significantly
7) Square -- will go down
8) Apple will be entirely unscathed
9) Google will suffer, but be largely fine
10) Microsoft is suffering already. It will continue to suffer, but will not go down.
Companies like Uber, Dropbox, Twitter, Facebook can just downsize their operations and keep their business afloat since they all have substantial revenues.
The ones hurt the most will be these series A-D companies that haven't started bringing in serious money yet all while raising 10s of millions of dollars. There are probably hundreds of pre-IPO companies that have raised $50m+ in the past few years.
2): Dropbox is under attack from free/cheaper equivalents but defending well. It is still the easiest to use and have an incumbency advantage, but has made a few too many missteps (photos) to be comfortable.
3): AirBnB is under attack from booking.com and the like, but is a pleasantly strong business for now.
4), 5) and 6) all are fashion (or nightclub) businesses where the crowds happen to be, and the more they try to monetise the more they upset the crowd. Crowds can leave at any time.
7) Square face competition from Apple Pay and the like for payments, and payments is where they make their money. Out of the USA payment systems are far more advanced.
8) Judgement day will come for Apple when they successively fail to launch things that have an edge on everyone else, and as with RIM the decline could be fast. For now they are well ahead but my own pick is that Huawei will become the giant to beat.
9) Google is fat and happy, but their core revenue base is advertising, and when crashes arrive advertising falls.
10) Microsoft is resurgent, and I believe on the early steps of a long term turnaround program. The switch to the cloud means we are less reliant on any particular OS but Microsoft Office is dominant for business.
I especially agree on Apple.
What Microsoft has done recently is great. I hated them with the passion of a thousand suns when I was in college, but Satya seems to get it. He knows that if you put out a browser that causes devs around the globe to have to program exceptions because it doesn't behave like the others, they will hate you for it. (Doubly. Once for technical reasons and again for acting like a monopolistic ass.) And what you gained from some niche technical benefit, you've lost 1000x in goodwill and, ultimately, bad PR. I'm actually rooting for them now. It's crazy.
Apple have a strong position. If google/ms survive, then apple will....
Plus, Apple already bite the dust, almost lethally. Now they have enough cash to survive for long, and enough goodwill, marketshare, etc to keep them afloat..
Look, if MS have survived for so long being the evil INC, and hated far more than Apple..
They got a lot of criticism before and immediately after their IPO for not justifying their value. Today they are genuinely making a lot of money. Their advertising platform it is valuable not unlike Google's. I think the only thing likely to harm facebook is losing users.
Which is supposedly happening.
The more people flirt with quitting, the more they realize their feeds have been reduced to attention whores and babies (their real friends stopped posting long ago), the mroe they'll quit and it'll just snowball.
FB messed up by getting too big. I'm going to post my true thoughts when my grandfather might read them? Nope.
Not really clear how that would happen though - at the very least IAP games are making a lot of money, and carrying TV advertising budgets. Their business model looks pretty stable, assuming studios can deal with or defeat the fact mobile games tend to be short lived.
They could lose a lot of small advertisers, the startups that throw some of their seed funding into Google and Facebook's advertising pools a long way before having a real business model if those companies dry up - but I don't see it coming close to killing them.
Beyond the immediate vicinity of VC backed startup land I don't think the fallout would be very severe. VC funded startups are not really a very big employers in the scheme of things. VC as an asset class isn't a big one either. Since VC investments are expected to be high risk, most end user investors allocate only a small portion of their portfolio to the class. It is expected to be high risk and on the whole it is considered very irresponsible to depend on its success. Even startup employees do not generally treat their jobs as highly secure, so at least psychologically they are prepared to one day find themselves looking elsewhere. They are also generally employable in the much large technology fields that are not directly related to VC money.
For an analogy think of the hypothetical bitcoin bubble bursting. Some bitcoin centric businesses would go bust. Some gamblers would too. But I imagine that most people holding large amounts are aware of the risk, they haven't bet the house on it.
I think the "systemic" impact would be minimal. The real dangerous bubbles are asset classes like real estate, bonds, blue chip shares and those esoteric but enormous "instruments" and securities. These are expected to be reliable and safe so money that must not disappear goes into them. They are also much bigger.
I guess you never really know unless it happens, but I doubt the kinds of levers that make big bubbles so bad are present here. A lender wouldn't/shouldn't be loaning out money to be invested in VC, so I don't think you would have the kind of domino effects that make crashes spread.
If it was severe and scary enough with big name "startups" going under, tech stock prices might dip. That might be a good time to buy. I can't see much of a relevance of a VC crash to Google, FB or MSFT's medium term prospects.
EDIT: One more - Since VC is a "professionals only" class of investment, we are not likely to see middle class people directly impacted. This means that macro-demand shouldn't be effected much either, except directly by employees losign their jobs and startups no longer consuming whatever they consume.
There are other more volatile economic "bubbles" out there to be concerned about.
If you're assuming starting a business based on delivering over priced telegrams or selling rolls of quarters at a 180% markup will lead you to your "exit" than okay be afraid of "the tech bubble".
Start a real business that makes sense, and the bubble is irrelevant.
If a true bubble burst were to happen, it'd kill startups by percents, not by merit. Some investors will keep money for their portfolio companies, others will sit until the market hits bottom and they can get better deals. It'll kill everything and everyone, not just the bad companies.
Companies that are still in the growth phase, and not profitable yet would find themselves in real trouble.
You could argue those startups aren't (yet) delivering real value, and I'm sure in large majority of cases that'd be true. But not in all cases.
> & need
> to invest in something, so now the question is what?
How about nothing?
Yes, there is a lot of capital out there which wants to be invested in something profitable.
I don't see where the need for investment is. If someone has $10 billion, and has $8 billion invested, and has $2 billion left over but sees no good investments, why do they need to invest that extra $2 billion? They don't need to invest it, so they don't invest it.
What has the capacity utilization rate of total industry in the US been? A postscript at the end of this post tells you how to see for yourself on government websites. From 1967-1969 the rate was over 87% every year. From 2001-2007 it never exceeded 80.4%. And from 2008 to 2012 it never broke into the 80's, even hitting 68.6% in 2009. I can't find data past 2012.
That's just one trend, but if existing capital was being used at an 87% rate at the end of the 1960's, whereas in past few years it has been used at a 68.6%-79.2% utilization rate, why invest in a new capital plant? Companies aren't even using their old capital plant.
The statistics say there's overcapacity. Over the past decade, invested capital has been sitting idle 20%-30% of the time where it could be in use (invested capital, meaning money invested in the stock market, VC firms etc., not money that those with a lot of money are keeping on the sidelines - counting that, the amount would be even higher). In 2009, even more than 30% of industrial capacity was unused - for the whole year.
From the standpoint of profitability, capital is overfunded already. Which means there is a small amount of overproduction - even with 20-30% capital plant non-utilization, sometimes a tiny bit more more commodities are put out then needed (or a lot more in the case of homes paid for by subprime mortgages). If capital plant production went down to 15% underutilization, that would be massive overproduction of commodities - and would still mean 15% underutilization.
People can't afford to buy what is being built with companies running at 70-80% of capacity. So why invest more in companies? People aren't buying what the existing capital plants are capable of putting out.
P.S. Go to https://www.whitehouse.gov/administration/eop/cea/economic-r... which is the 2013 Economic Report of the President . Go to "Appendix B: Statistical Tables Relating to Income, Employment and Production". Look at "Table B–54. Capacity utilization rates, 1965–2012" which is page 75 of the PDF and page 387 of the overall report.
One reason for so many unicorns, that is,
such valuable private companies,
is the reluctance of significant private
companies to do an IPO. Reasons
include (A) having to
try to please Wall Street
that has a very
limited view of real progress
for a company and a very short term focus
and (B) the
overhead of Sarbanes-Oxley.
But I believe that you will find that
a surprisingly large fraction of
the unicorn fundings are
more like traditional private
equity instead of venture capital.
So, for the unicorns,
the high post money
evaluation may be at high risk
but, due to the deal terms,
the last investor is
relatively well protected and
at only low risk.
post money evaluation was just
something out in the ozone anyway,
a long way from that much in
so that, if such high evaluations
disappeared, that is, the bubble burst,
the effect on the economy would
So, why do these goofy late stage
fundings and unicorns even exist? The
companies may want the cash from
the equity funding and not
want to attempt an IPO, and
the private equity investors
see maybe an upside, if the
bubble doesn't burst first.
2. It would be harder for new startups to raise money. The big losses in the unicorns would then lead to smaller B/A/angel rounds.
3. Lots of unemployed people who formerly worked at startups, scrambling to get jobs and the handful of large survivors.
4. With money drying up, it would be a good time for bootstrappers or people who don't need much financing.
"If stock in a company is worth what somebody will pay for it, what is the stock of a company worth when there is no place to sell it ?"
If such predictions were easy to make, bubbles wouldn't occur, at least at the scale of the dot com and housing bubbles.
I'm a junior developer, so if there became a huge oversupply of developers I think it would be very hard for me to get a new job. This is actually something that really worries me currently. I'm already having a hard time finding a new job, if there was another economic crisis I feel like I would have to leave the tech industry to get a job.
1- Facebook: Will go bust and be bought by a conglomerate (non IT Group or Microsoft). They will be the "Lehmans Brothers" of the next crisis.
2- Dropbox: Likely to go bust. No diversification and a lot of competition.
3- Twitter: Will be hurt but can survive,due to appeal to Marketers/News/..etc.
4- Google: Will likely drop a lot of products and concentrate on search and self driving cars.
5- Apple: Will become the new Microsoft.
Lots of smaller companies, like Redhat, were hit in their valuation, but made it through.
With interest rates rising, other asset classes will see returns rise, reducing the attractiveness of startup/VC investing.
Welcome to the new normal.
A citation for a future event? Its clearly a prediction...
So far, when VC flips its products on to the public markets, the markets react fairly rationally and the bad companies tank. Look at Zynga. The market may be overvaluing it still, but it's nothing like the 1990s. Public markets seem to be recognizing shitty tech stocks as what they are. So, we're not at the 1999 level of bubble.
Furthermore, the 2001 crash didn't have a major effect on the economy (although it was bad for the Bay Area, and for many engineers). It wasn't the crash, or even 9/11, but the sluggish ("jobless") recovery in 2002-4 that made the 2000s (except for people on Wall Street or in the slowly recovering Valley) a shit decade.
So, let's assume that the VC bubble ends. Some people will get hurt. The celebrity engineers who make $500,000 and aren't any good will get beefed. Run-of-the-mill engineers, if they're any good, might drop from $140k to $125k; not such a big deal. The ScrumDrone engineers will have a hard time finding work. Unfortunately, this will also hurt self-taught (meaning "no college degree") engineers even if they are good; the ones who are talented are still in a position of low leverage because "everyone knows" (well, employers know) they're more sensitive to a dry-up.
The short answer is that some people will take painful hits-- you're going to have a lot of 25-year-olds who thought they were millionaires, find out that they worked overtime for nothing-- but average people of average-or-better talent will mostly be fine. Bay Area salaries for good engineers might go down 10 to 20 percent at worst.
The bad news: housing in San Francisco's not going to become more affordable. First, the people who actually have money (not a half-million from options) are already diversified and less exposed to dot-com/VC, and the foreign money-launderers aren't exposed to it at all. Second, people hoard rather than sell (a steep positive volume/price correlation) when the market "should" soften. The stupid competitiveness around getting rentals (e.g. competitive open-houses, people cutting checks for a whole year's rent) will go away, but rents and prices will stay about where they are.