Terence Fung
Silicon Valley is experiencing an extended boom that has only recently shown signs of fatigue.
While the local real estate/rental markets remain on fire, given an increasingly restrained funding environment, devaluations for once-hot startups, notable recent layoffs at high-profile tech companies and a challenging IPO market, many observers portend an ominous environment ripe for a bust similar to the early 2000s.
Yes, there are many similarities between now and the dot-com boom. There are, however, key differences that will enable Silicon Valley to continue driving forward, no matter the headwinds.
The similarities
Similar to the dot-com era, an abundance of capital is chasing a much smaller pool of quality companies. The latest hot trends see dozens of companies created and chasing the same market opportunity. There’s been unabashed optimism and increasingly aggressive deal terms and valuations for startups. Many investors have been willing to overlook traditional metrics and invent new ones, even for mature startups. There’s fierce competition to attract talent with companies driven to one-upmanship on lavish compensation and perks. Ultimately, many companies are burning cash way too fast.
The differences
The market to reach consumers today is significantly simpler — companies and consumers are benefitting from the infrastructure investments from the last tech boom. Today, much of the world enjoys reliable, faster and cheaper internet, and more than 2 billion people own smartphones, powered largely by Apple- and Android-related app stores. As a result, many companies are able to focus on delivering value straight to the customer by leveraging established infrastructure. In fact, six out of the top 10 so-called “unicorns” are consumer — versus enterprise — companies.
While it’s much less expensive to get most startups off the ground today, the bar for both private and tech funding is higher. Companies must rely on private funding for longer periods of time; Q1 2016 saw zero tech IPOs, something the market hasn’t seen since 2009. Companies that aren’t cash-flow positive and that can’t secure funding (or an acquirer) will be forced to shut down.
Private investors/high-net individuals will largely be the big losers this time around, versus before when such companies successfully IPO’d and mom ‘n pop investors lost big. Scaled industry leaders will not remain unscathed, but will continue to profitably grow after the dust settles. And when previously white-hot startups face cost cutting and layoffs, the market leaders will be ready to absorb talent.
The silver lining
If and when the bust hits Silicon Valley, it’s sure to hurt — jobs will be lost and many dreams will remain unfulfilled. But today’s Silicon Valley is much more fundamentally strong and resilient than the dot-com era. The very essence of Silicon Valley is about embracing change and reinventing itself.
Collectively, we will take any hits in stride and improve upon our experiences and offerings to deliver something even better than before. We’ve learned from experience and are looking for sustainable businesses that provide real value — even if that means forgoing the ping pong table.
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