Before the Great Stock Market Crash of 1929 on Wall St, an investor named Roger Babson produced what has become one of the most prophetic quotes on the crash.
“Sooner or later, a crash is coming and when it does it will be terrific,” he said.
This is where Silicon Valley is headed right now. Its knock-on effects will be felt here in Ireland as investors look out for their cash. We’re headed for yet another bubble burst.
If you asked me about this even a year ago, I would have said that this was different.
The raft of billion-dollar start-ups was a reflection of the time and it was never easier to reach hundreds of millions of people around the world. The valuations were about the potential and the real estate.
However, over the past six months, it has become apparent that something is desperately wrong in the start-up community.
Valuations are becoming increasingly alarming. The amount of venture capital being poured into non-performing companies has gone past the point of insanity.
The Valley still worships at the altar of the entrepreneur and relies upon gut instinct.
The media has become increasingly stagnant in its questioning of these types of practices. They all want the exclusive with the next big thing, foregoing even the simplest of questions like how they are going to make money.
Instead, what you get are fluff pieces orchestrated by PR companies and carried through by media.
Designed to add fuel to the flames of the hype around a company, there is rarely a detailed look at how it’s all going to work.
We are in an environment that has made accountability a dirty word. To question the legitimacy of companies like this is met with the usual response: “Don’t listen to the haters; people always try to pull you down,” they say — the phrases of smokescreen artists. Everything is answered in retorts.
The Silicon Valley system of venture capital funding has been redefined. Rather than it being an expression of the art of the scaling of a start-up, it has become reliant on the kindness of strangers.
A place where companies can shuffle down the road without any discernible plan and keep asking investors for huge amounts of money.
Coherent plans seem almost non-existent. Let the spirit of the entrepreneur roam free, don’t bung it up by mentioning nasty things like business plans or sales strategies. Free-range entrepreneurs are what Silicon Valley is all about.
Those same investors are flaming the hype around these companies. They announce wherever they can that the company they just put money into is the next Uber.
It is funny how a lot of companies are the next something or other. It is never a statement of this is who we are and therefore we are different. It’s all a venture capital roundabout. The constant search for yet more capital as ‘scaling’ moves more quickly.
More and more investors put their money in as a company scales and scales. More than 100 employees and $100m later, there is still more money being pumped into an enterprise that’s four or five years down the road, with no serious income to speak of. Too big to fail, too big to stop investing in.
I recently read an article about a popular blogging platform which has $134m (€127m) invested in it.
Taking the rule that investors expect 10 times what they put into a company, it means it needs to create the best part of $1.5bn to pay that investment back.
For a company that started to avoid the need for advertising in a media market, it’s going to be tough to see them getting anywhere near that. It’s insanity and nobody is stepping in to create accountability.
Uber is one of the world’s most valuable companies. One of the fastest growing start-ups in the world, valued at over $60bn, it still has big losses. Last year alone it lost over $3bn globally. It looks like Uber will soon go for IPO, selling shares to raise more capital.
It is hoping those staggering losses won’t scare away investors.
Asked about these big losses in 2015, the company said: “Shock, horror, Uber makes a loss. This is hardly news, and old news at that.”
Investors’ seemingly infinite patience with Uber isn’t going to last forever.
That ‘gut feel’ is where the trouble starts. An entrepreneur, no matter how good they are, will only get so far with gut instinct. Elon Musk, Richard Branson, or Bill Gates wouldn’t even be anywhere near the pantheon of business if they didn’t make sales.
Even if 100m people download your app, it isn’t worth anything until they start giving you money. That means a sales strategy is kind of essential to development.
Put this together with what has been essential to the rise of the billion dollar start-up, the mobile phone industry. Mobile sales globally, particularly in the US, have begun to fall.
The market is nearing saturation point and that points to the market leveling off.
Wearables, virtual reality, and augmented reality are nowhere near making the impact needed to replace the mobile as the place through which to filter your life. That creates problems for any company where mobility is key to the scaling of their business.
Here is the biggest problem of all. Investors want to make money — that’s a natural law. Founders want to create a successful business — that’s a natural law.
However, the problem is that nobody holds either to account. Accountability seems to be the lowest priority on the ladder.
There is nothing that seems to click that a vast amount of money is poured into something that is non-performing.
If neither has the objectivity to see what’s really happening, can we really be surprised that something is seriously wrong?
Sooner or later the bubble is going to burst in Silicon Valley, and when it does it will be big. Big not only there but for Ireland as well. So many of our best start-up stories have roots with investors in California.
If they go belly-up or become more tight with their money, it could make a big impact on our own start-up scene, which has been one of the shining lights here in recent years.
If we’re not watching closely, we’re going to find ourselves in trouble.
We should be deeply concerned as we move into a new year that all is not well in The Valley. Something is rumbling below the surface and it’s been doing so for some time.
A reckoning is coming and it will be terrific.