Is this the beginning of the end for Silicon Valley's fairytale valuations?

Nick Naylor's picture
Rank: Orangutan | 252

While I'm not expecting Uber to be valued at $100mm next week, there does seem to be a trend emerging in the convergence of price and value at these so-called "unicorn" start-ups, which is not a particularly good thing for the founders and early investors (among others). As CNBC reports:

High-profile consumer start-ups are feeling the pinch. Evernote and One Kings Lane are cutting staff, Rdio was acquired out of bankruptcy, Gilt Groupe is nearing a sale for a fraction of its peak valuation (according to The Wall Street Journal) and Dropbox shut down two products.

In the absence of IPOs, employees at highly valued start-ups are trying to sell some of their shares on the secondary market, but buyers are increasingly scarce.

It appears that valuations are coming back down to an area of normalcy, where projections may need to be backed up by some sort of quantifiable metrics (how crazy is that?) However, for the cream of the crop, investors still seem to be piling on to whatever they can attach themselves to- start-ups such as the aforementioned Uber, AirBnB, and Lyft are all boasting extremely healthy valuations as of late.

I think this will be an interesting time to see what the 18-25 year olds plan to do with their professional lives. As we've all seen on this forum, there is usually a minimum of one post a week asking whether or not this person should enter Wall Street over Silicon Valley (a topic touched on quite nicely by @UTDFinanceGuy over here.) Especially due to the issues being faced by non-key hires (namely their "equity" being diluted to near-worthlessness), will we see a shift in this east vs. west trend? Or will a taste of employee lounges adorned with craft beer and Xbox (minus any realistic expectations of becoming an IPO-billionaire) keep drawing top graduates from Wall Street to Silicon Valley?

Comments (11)

Jan 24, 2016

I don't understand how it even got to this. To reach those kind of valuations the people had to really know how to sell their product but at the same time I think investors wanted to put in the money hoping that one of the start-ups they invested in is going to work and make the other losses worth it but that doesn't seem efficient.
I wonder what's going to be the next hot trend. Agriculture technology? Biotech? Restaurant business? Prostitution?

OT:Silicon Valley is a great show by HBO and totally recommend it.

Jan 26, 2016

Tech as a whole will still be a huge deal, due to several fascinating technologies with big potential, including robotics, the blockchain, 3D printing, AI, and others.

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Jan 25, 2016

The unicorns are going to get slaughtered. Some of these companies are not even making a profit. I would even consider saying that there is currently a tech bubble.

Jan 25, 2016

Its crazy that we got into tech bubble two only less than 20 years after tech bubble one. Maybe we will get into a comic book bubble two.

Jan 26, 2016

I don't think there will be a massive blowup as there was after the dot-com bubble, but rather the tech industry will go through a much needed contraction period. Unicorns that are burning cash like crazy with no immediate prospects of turning a profit (e.g. Oscar, Snapchat, Yik Yak, and so on) will be decimated. Unicorns with better prospects (like Uber, Palantir, and DJI) will have no choice but to go public (else they face down rounds) but will survive. Venture capital and growth equities funds will be hit hard and many of them will close down (seed-stage funds and accelerators/incubators will not be hit as hard, however.)

A correction like this is a good thing for the industry. Several of today's most successful tech companies, including Google, Facebook, PayPal, eBay, Amazon, and Priceline, were founded during the dot-com bubble or the time period immediately after it (2001-2004). Among current unicorns, the best and strongest will survive, and I am sure several of them will go on to become the next Googles and Amazons.

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Jan 26, 2016

Well said Vlad

Jan 26, 2016

No doubt a very interesting time in this space. I was looking at this report that showed median VC funding valuations have more than doubled since '06. Even more interesting is seeing how mutual funds have begun VC activity. Same report showed that mutual funds have increased VC participation by something like 300% in 10 years. (report: http://pitchbook.com/news/reports/download/2h-2015...)
Obviously there is a bubble, that's a certainty. This brings to mind something I heard a VC guy spew a while back, he essentially suggested that an innovation bubble - i.e. a situation where high tech industries become overly bullish to a fault - is actually a good thing for the greater economy, which I agree would with. I think this will slow the start-up space down a bit, but the tech train will keep chugging along with little more than a hiccup long-term.

That said, I'm really curious to see how things play out in the VC space. In the dotcom bubble, the firms that went bust were mostly publicly traded, so the aftermath was spread among institutions, retail investors, etc. Right now, we're seeing fewer and fewer liquidity events. So when the Theranos's of the world finally fail, a few VC's and company employees will be hammered. Yes, that will trickle down to institutional investors, but I highly doubt - or at least hope - that most pension funds and endowments can handle a rough year for DFJ. Nonetheless, I'm very interested to see how this affects the broader economy in the next 12-18 months.

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Jan 26, 2016

There will always be high valuations and always be bubbles, and there will always be advancements in technology.

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Best Response
Jan 26, 2016

I think Professor Aswath Damodaran put it best.

Behind every bubble is the human ability to overreach.

Can you imagine living in a universe where 'bubbles'/irrational exuberance/overreaching never occurred? I'm guessing no one would want to live in that universe.

There will always be bubbles. It's intrinsic to human behaviour and one of the reasons we are such a fucking awesome species.

They are a natural and necessary part of human economic markets. They will clear away the bad, whilst leaving the good.

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Jan 26, 2016

I remember 5 or so years ago being in the startup space and it seemed everyone had some sort of app idea that was going to make them the next Steve Jobs. There were even apps coming out designed to search other apps based on your preferences, it was crazy. No one cared how it was going to actually make money, and they all made these apps with a 3-5 year exit plan to be sold to Google/Apple of the sorts.

It's funny how similar Silicon Valley is to Wall Street. Pretty much the same thing except you're going to work in plaid instead of a suit and tie.

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Jan 26, 2016
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