Silicon Valley’s Rise of Unicorns– Predictions of ‘Bubbliciousness’: Decline Signs of a Golden Age?

What is Silicon Valley a Place or State of Mind? Silicon Valley is partying like it’s 1999, but there’s a growing realization the good times cannot last forever. According to Marc Andreessen; young technology companies are irresponsibly burning cash at unsustainable rates, and many startups will ‘vaporize’ when the market turns south

The issue is less about the absolute burn rate of $100,000 or $1 million or $10 million per month. It’s about: Do you have enough runway to get to profitability? According to Rob Enderle; if startups begin imploding, the fallout is likely to infect publicly traded technology companies, especially those that are not profitable… a company not very profitable is trading on hopes and dreams.

It’s time to wake up. During boom times, investors tend to overlook the blemishes of a company’s business model, inexperienced management team, lack of established track record… Investors typically just assume away the risk because they believe this venture is the next big thing. They never stop to ask whether or not they even have the possibility of making any money…

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According to Will Oremus; the Silicon Valley of the popular imagination is defined by its success stories, but they are the outliers. According to CB Insights, which tracks the venture-capital industry; 75% of startups go nowhere, another 21% get acquired by a larger company, and that leaves just 4% with the chance to make it big on their own. Startups that turn into billion-dollar companies are so rare that they’ve acquired the nickname ‘unicorns‘…

Yet they are the ones you hear about in the news every day– the ones that fuel the Silicon Valley dream… So what about the other 96%? What is it like to work for a startup that isn’t destined for fame and fortune? Like so many startups, they start out as a grand idea to disrupt and democratize a market and they end up as a scheme to help e-commerce firms get more people to click on their links…

According to Felix Salmon; Silicon Valley is gripped by a mass delusion– a headlong rush for fool’s gold on the part of hordes of misguided techies who are better off simply getting jobs And, there is a reason Silicon Valley takes failure so lightly, and it has nothing to do with empathy; it’s that failure, and lots of it, is essential for the proper functioning of its economy… So if you are in the 21% group you will reap a small windfall in the form of cash or equity in exchange for selling out. If you are in the 75% group you will get a regular salary and benefits as a– coders, go-for, want-to-be… but then if you are a unicorn (4%), rare as you are, you end up rich beyond belief…

In the article Age of Unicorns by Erin Griffith and Dan Primack write: It was not long ago that the idea of a pre-IPO tech startup with a $1 billion market value was a fantasy. Google was never worth $1 billion as a private company. Neither was Amazon nor any other alumnus of the original dotcom class… Today the technology industry is crowded with billion-dollar startups.

When Aileen Lee coined the term ‘unicorns‘ as a label for such corporate creatures, just 39 of the past decade’s VC-backed U.S. startups had topped the $1 billion valuation mark. Now, casting a wider net, Fortune Magazine counts more than 80 startups that have been valued at $1 billion or more by venture capitalists… And given that these companies are privately held, a few are sure to have escaped detection. The rise of the unicorn has occurred rapidly and without much warning, and it’s starting to freak some people out…

According to Jason Green; venture capitalists are now hunting just startups with the potential to rapidly reach a $10 billion valuation– or ‘decacorns’… In late 2013 just one private company had crossed that threshold– Facebook; but now there are dozens of companies, for example; Uber and its valuation is higher than the market capitalization of at least 70% of the companies in the Fortune 500…

Technology is driving the boom with; smartphones, cheap sensors, and cloud computing have enabled a raft of new Internet-connected services that are infiltrating the most tech-averse industries, for example; Uber is roiling the taxi industry, Airbnb is disrupting hotels… and investors see massive opportunity in the upheaval…

Then there are the broader financial trends contributing to this craziness, for example; a nearly six-year-old raging bull stock market has produced a tailwind for private company valuations and convinced the latest crop of tech entrepreneurs that there will be plenty of time to cash-in… record-low interest rates also have caused some big institutional investors to search for returns in the high-risk, high-reward world of venture capital…

Add to that a lack of regulation; after the passage of the JOBS Act in 2012, which aimed to make it easier for small business to raise capital, startups could take on many more investors before the Securities and Exchange Commission (SEC) effectively forced them to go public…

Finally, there is the intangible element of perception: In the startup world, a valuation of $1 billion says that you are no longer a fly-by-night startup with plans to quickly sell out to the highest bidder...Venture capitalists justify these soaring valuations by looking backward. After the dotcom crash, a wave of prudence swept over Silicon Valley, and investors kept valuations low and tried not to overcapitalized their companies.

That strategy lasted until ‘Facebook’ came along… If a startup is going to be worth billions of dollars in a few years, why quibble over a few million on the entry price? As a result, the median valuation of a Series-A round of funding soared 135% between 2012 and 2014, according to the law firm Cooley LLP. This has created an echo effect, with new gains setting the bar higher for each subsequent round of funding. So venture capitalists have recruited unlikely new partners in the form of traditional money managers such as; Fidelity Investments (led the latest deal for Uber) and Wellington Management (backed DocuSign and Moderna Therapeutics) to support unicorn-level rounds. Call it trickle-up economics…

It also doesn’t hurt that U.S corporations have record-breaking stockpiles of cash on their balance sheets, for example; Facebook had people scratching their heads when it paid $19 billion for instant-messaging startup ‘WhatsApp’, then followed-up by shelling out $2 billion for virtual reality headset maker ‘Oculus VR’. In 2014, Google paid $3.2 billion for smart thermostat maker Nest, Apple acquired headphone maker Beats for $3 billion, and Microsoft spent $2.5 billion to own the Swedish gaming startup responsible for Minecraft…

All of this has begun to feel ‘bubblicious’, especially to those who lived through the last cycle. According to Alan Patricof; people are buying traffic growth, revenue growth, but it’s the ‘emperor has no clothes’ theory… At some point all of these companies will be valued on a multiple of EBITDA… If IPO market goes away, or for any reason there’s a blip in the outlook, people could be left holding a lot of inventory they wish they didn’t have… But, on other hand, proponents of the ‘unicorn’ boom posit that this time; no seriously! is different…

In the article Dear Silicon Valley: Here is Your Wake-Up Call by Henry Blodget writes: For the past 15 years or so, ever since the tech industry began its recovery from the dotcom bust, observers have rushed to declare a new ‘bubble’… With each successive increase in the valuations of companies like– Google, Facebook, Twitter, Uber, Pinterest, Snapchat… skeptics have dismissed the growth as a ‘fad’ and the extraordinary and real value created as a delusion…

However, for the past 15 years these skeptics have been wrong, and insofar as they dismiss today’s tech environment a ‘bubble’, and they are still wrong. Today’s investment climate is still a far cry from the bubble years of the late 1990s… But, just because today’s environment is not a ‘bubble’ that does not mean that you will escape a day of reckoning: You won’t… The tech industry has always been cyclical: Booms have always been followed by busts, and this time will be no different, but the only question is ‘when’?

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No one knows the answer to that question, but a few of Silicon Valley’s best and brightest say that alarm bells are ringing… Silicon Valley, to its credit, has always been a hotbed of optimism and the future is always bright and opportunity is always everywhere, and failures are always just part of the innovation process. So if you want to get pumped up about where the world is heading and excited about the future, you just head for the Silicon Valley

However in normal times, Silicon Valley’s optimism is thoughtful and calculated; it’s fact-based: Ideas are hotly debated and risks are respected, understood… But in ‘boom’ times, like in late 1990s, and healthy skepticism and dialogue disappears, and ideas, no matter how fanciful are assumed to be sound, and success is assumed to be guaranteed… Moreover, when basic assumptions are challenged, typical establishment response is– dismissive; saying that– you skeptics just don’t get it…

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The important story here is that some of the smartest minds in Silicon Valley appear to have stopped thinking critically, and instead after being surrounded by 15 years of unbridled, unpredicted success in the face of highly vocal skepticism, they have gotten caught up in their own natural and admirable enthusiasm and have begun to regard it as a given that anything they dream up will come to fruition… some skeptics remember when that happened in the late 1990s… And, it wasn’t long before ‘boom’ turned to ‘bust’. Maybe the current cycle has another year or two left; no one can predict with confidence when cycles and markets turn… And for the prudent skeptics– the alarm bells are now ringing…

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It’s a story told over and over again in Silicon Valley: You are growing at rates you have not seen since the bubble in 2000 and, According to the 2015 Silicon Valley Index; Silicon Valley’s job growth rate is at 4.1%, the highest it’s been since 2000, adding nearly 58,000 jobs. Average annual incomes in Silicon Valley and San Francisco are at $116,033 and $104,881, respectively, compared to $61,489 in the U. S… On the investment side, Silicon Valley and San Francisco lured $20.2 billion in venture capital in 2014… The report says there were 275 U.S. Initial Public Offerings (IPO) in 2014; 23 of which were Silicon Valley companies, and five of which were San Francisco companies…

But not all the news is good: There is a growing wage gap, nearly 30% of the region’s population does not make enough money to meet their basic needs without public assistance… The median income for high-skilled workers in the region is $118,651, while the median wages for low-skilled workers is $28,847… And the income gap between the sexes is worse in the region than nationwide… Further, not everyone agrees with Silicon Valley’s sunny outlook; skeptics point to the public valuation of Internet companies as grossly overvalued…

According to Jeffrey Pfeffer; there are enormous amounts of money sloshing around and valuations are high… And it’s not a healthy economy when service workers can’t afford to live in communities– bubble or not– things must change…

Evidence continues to mount that certain sectors of the tech market are experiencing a speculative bubble similar to the one that developed during the late 1990s. According to Bill Gurley; excessive risk taking is apparent given the sheer number of people working for money-losing companies in the technology field. He also argued that the expansion of this behavior is self-reinforcing… 

According to Robert Ackerman; the innovation economy is at risk of overheating as investor expectations in certain market sectors run ahead of pragmatic realityAccording to Igor Sill; the recent astronomically overvalued pre-IPO prices awarded to dozens of tech companies is craziness…

According to Mark Cannice; it remains to be seen if there will continue to be enough public market and corporate inquisitor demand to absorb the growing number of highly valued private ventures and sustain the currently robust venture environment…

The reality of Silicon Valley is problematic; there is absolutely no reason why VCs, angels, investment firms, talented developers… should be geographically limited to Silicon Valley… The technologies that were born and developed in Silicon Valley will ultimately humble Silicon Valley– technologies that enables many companies to be located in just about any geographical location on the planet and still innovate– there is no longer a reason for talented innovators to be tether to Silicon Valley… Presently, the amount of new businesses being created in Silicon Valley is outweighing the amount of businesses leaving. But the rate is on decline; it’s happening slowly but it’s happening.