Looking back at the dot-com bubble, which burst in early 2000, there are certain similarities with today’s tech startup bubble.
Some analysts point to a period of suspended disbelief which then blew up, with spectacular consequences, writes Christopher Mims for The Wall Street Journal. They say that things are going the same way now.
tech startup bubble in trouble
“Startup investment has cooled. Valuations are falling. But many investors and entrepreneurs haven’t grasped the new reality,” said Keith Rabois, a partner at Khosla Ventures “If that suspended disbelief ends, all hell breaks loose,” he says.
The parallels are not perfect, especially given the fact that the Nasdaq index has gained 12% since early February. By April 18 it had come within 5% of its post-2000 high, and venture capital funds broke their record for amount of capital raised in one quarter.
However Rabois says this is a bearish sign.
“One of the reasons people are raising all these funds isn’t because they want the money, but because they believe their own metrics are inflated at the moment, and they want to get that money before companies in their portfolios start crashing and burning,” he said.
tech startup bubble – Change in behavior necessary
Some startups like Mixpanel Inc., an app-analytics company, are going down a similar route. Spending has been cut and approximately 90% of the $77 million the startup has raised is still in the bank.
However such prudence may prove the exception rather than the rule. Some so-called tech unicorns have reached valuations of more than $1 billion on the back of wild spending, and those heady days look to be coming to a close.
Rabois says there will be a “catastrophic shift downward” across startup investing as venture-capital firms are more interdependent than many observers think. The venture market is driven by greed and fear like any other.
“Empirically, there are so many unicorns that many of them have to pop,” said Jason Lemkin, a venture capitalist formerly with Storm Ventures. “Two hundred and some-odd unicorns won’t yield that many billion-dollar companies.”
Rounds of layoffs and more frequent changes of CEOs have become a noticeable trend in the unicorn community. Capital-intensive startups are likely to be the most vulnerable when funding dries up.
Uber Technologies Inc. may be a bellwether. It is valued at $62.5 billion, claims to be profitable by some measures in the U.S., but continues to burn cash attempting to capture other markets. If Uber were to change its behavior, the shockwaves would be huge.
And today, the WSJ has a follow up on the topic – the ping-pong table indicator.
As the WSJ notes:
The table-tennis indicator is a peek into Silicon Valley culture, in which the right to play ping pong on the job is sacrosanct.
“If you don’t have a ping-pong table, you’re not a tech company,” says Sunil Rajasekar,chief technology officer at Lithium Technologies, a San Francisco software startup.
So where are we now?
The WSJ continues:
“Last year, the first quarter was hot” for tables, says Mr. Ng, who thinks sales track the tech economy. Now “there’s a general slowdown.”
In the first quarter of 2016, his table sales to companies fell 50% from the prior quarter. In that period, U.S. startup funding dropped 25%, says Dow Jones VentureSource, which tracks venture financing.
So if the ping-ping table is any indicator we are in for trouble at least for some Unicorns.
Of course, if major media is calling a top (especially two days in a row) is that a sign that this is really a bottom? Only, time will tell.