Has the tech bubble peaked? Signs that the startup boom may be fizzling
Has the tech bubble peaked? Signs that the startup boom
may be fizzling
Startups are beginning to run out of money and investors
are becoming more discerning. How does this compare to the time leading up to
the dotcom crash?
Olivia Solon in San Francisco Friday 17 March 2017 03.02
EDT Last modified on Friday 17 March 2017 12.49 EDT
If you were looking for an apartment in the Bay Area 18
months ago, realtors recommended you took your checkbook to viewings and were
prepared to fork out for the deposit and first month’s rent – that’s $8,000 to
$10,000 for a two-bedroom place in San Francisco – on the spot.
“There was no negotiation because there were 10 people
behind you saying, ‘We’ll take it’,” said Ron Stern, CEO of housing relocation
service Bay Rentals.
Today, rents are still expensive, but the market has
plateaued after years of painful increases. It’s part of a broader trend in the
Bay Area: Silicon Valley’s technology bubble has had some of its wind knocked
out – not bursting, but fizzling – with VCs making fewer investments, startup
valuations falling, and recruitment slowing.
“We’re starting to get a lot of résumés from [software
engineers at] companies where the business model isn’t working and they can’t
get funding, so they are closing down or cutting back,” said Mark Dinan, a
software recruiter based in the Bay Area, who keeps track of companies’ hirings
and firings.
These startups are running out of money because VCs are
being more discerning about where they place their money, making fewer, bigger
bets.
“The number of investments [in the private market] has
fallen by about a third, but the amount of capital is around the same,” said
Tomasz Tunguz, a venture capitalist at Redpoint, adding that some of the “fast
money” from hedge funds and mutual funds had shifted away from the sector.
“It’s been happening for a couple of years. It’s not as
easy to raise capital and VCs are demanding better terms,” added Aswath
Damodaran, a professor of finance at the Stern School of Business.
This is partly because of a slowdown in companies going
public. Last year was the slowest for US IPOs since the recession, with the
amount raised by technology companies falling 60% from 2015, according to
Bloomberg News.
“Silicon Valley has not had a major success in terms of
IPO before Snap for years – and Snap is in LA,” Dinan said.
A stream of “down rounds” – when a company raises funds
by selling shares that are valued lower than the last time they raised funds,
leading its overall valuation to fall – has led investors to be more
discerning. CB Insights has tracked more than 100 of these down rounds and
exits since 2015, including software company Zenefits, mobile app Foursquare
and online music streaming service Rdio.
“It used to be that 95% of [investment] rounds were up,
now 20% are down,” Tunguz said.
Then there are the so-called “decacorns” – unicorn
startups valued at tens of billions of dollars – such as Airbnb, Uber and
Palantir – which some believe are overvalued, but it’s hard to tell until they
go public and are forced to reveal details of their underlying finances.
Ride-sharing app Uber, for example, has raised more than
$16bn and is valued at more than $69bn. That’s more than automotive giants such
as General Motors and Ford, despite the company losing $2.2bn last year.
“The interesting question with Uber is how long they can
keep as a private company. They are raising capital like a public company
without any of the disclosure and consequences of being a public company,” said
Damodaran, who believes the company’s value is overinflated and it’s really
worth $23bn.
How does this moment compare with the time leading up to
the dotcom crash?
“I got here in 97 and it was like it is now – incredibly
packed, impossible to commute, high apartment costs,” Dinan said.
“We’re seeing overvalued companies, funded based on hopes
and dreams and aspirations and not good business models. Companies counting
users and eyeballs rather than profits. There are a lot of similarities.”
Another echo of the dotcom era is what Dinan calls “bad
habits” such as the allegations of sexual harassment at Uber and human
resources startup Zenefits cheating on mandatory compliance training.
“There was a lot of crazy behaviour in the late 1990s,
including sexual harassment. It’s a result of there not being discipline,”
Dinan said.
However, Dinan said that his view is clouded by his
personal experience of the dotcom crash. “I probably have some scar tissue.
When you’ve seen your income go down by 80% as a recruiter, I could be seeing
things that aren’t there.”
The critical difference now is that it’s not a universal
tech slowdown. There are now large established technology companies such as
Google, Oracle, Facebook, Apple and Salesforce trading on public markets that
can bring stability to the region.
“We still think of tech and high growth as
interchangeable,” Damodaran said. “But there’s old tech and new tech. It’s new
tech that’s overpriced.”
That correction could lead to job losses and single
rather than double-digit millionaire founders but is unlikely to lead to a
dotcom-style crash.
“The [dotcom crash] happened very suddenly and without
any warning,” Damodaran said. “When it does happen everyone says they saw it
coming. If you saw it coming then why didn’t you get out of it?”
“If it were possible to forecast collapses we could get
incredibly rich.”
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