Why Silicon Valley May Be At "DEFCON 1" Status

Tyler Durden's picture

Authored by Mark St.Cyr,

For anyone not familiar with the term “DEFCON 1” it’s a military term used to identify the most sever military condition in the U.S. The degrees of severity range from “5” being the least severe or, at general peaceful conditions, and “1” representing the threat of imminent nuclear war. As I look out and extrapolate many of the warning signs that have been showing their hands over 2015 when it comes to everything “Silicon Valley.” I can’t help but use this military descriptor as an overlay of what’s taking place there currently. For I truly believe as I’ve written and spoken over these last 5 years – things are really about to hit the fan.

Over the last 5 years in “The Valley” (meaning everything representing tech and disrupting) there has been no other land of opportunity that lived, created, self defined, along with redefined its business metrics than the tech world. Unicorns, Non-GAAP, IPO’s, and more were the terms bandied or used to encapsulate what it was to be a “disrupter.”

Start a company (or idea) and make the rounds to get funded first – net profits are a trivial after thought. And for some they were an outright theory altogether. Then if you’re successful (i.e., you haven’t burned through all your start-up cash) turn your sagging or profitless business into a “We’re killing it!” fairy tale using Non-GAAP accounting. Once steps one and two are complete – IPO, cash out, and buy an island, yacht, McMansion, and more with the proceeds. Boom – done – next!!!

Yes the example is over-simplistic – but it’s not far off the mark. This has pretty much been the meme and/or state of business prevalent within the Valley for quite some time. However, as I’ve stated during all of that time; without the intervention of the Fed’s QE (quantitative easing) free money enabling risk taking to supersede business fundamentals to fund and fuel speculative investments in ways that mirror the dot-com days: there would be no “Valley” as it currently stands.

The amount of wasteful over investment on companies and ideas that should have never seen the light of a ledger book, let alone day, has been astounding. Billions upon Billions upon Billions (I could go on a billion more times) of $Dollars thrown at companies like it were water has been literally breathtaking. Need I remind you of WhatsApp™?

The only thing that challenged this sensation was the jaw-dropping rationales by nearly everyone involved in how, or why, it all made sense. And I mean everyone from the founders, investors, right down to the financial media et al. To say they’ve all been drinking the Kool-Aid® is being kind. Let me put a few things down for some context.

Uber™ for all intents and purposes; is an app that let’s you hail a cab. Current valuation? $50+ BILLION dollars looking to finance another round bringing it up to over $60 BILLION. The reaction, analysis and commentary? “Absolutely! Sounds logical and reasonable. After all They’re killing it!” Fair enough. I’ll just ask you this:

This business model and plan is worth more than 80% of all the companies listed in the S&P?

I mean maybe its’ me for here I am, myself, a once lowly card-carrying taxi driver. Does this now mean I surpassed all those other kids in school who dreamed of rocket science, and engineering to gain the ability as to then work at a predominant innovator? e.g., Lockheed Martin™ or Dow™ or Merck™. Little did anyone know in 2015 driving a car, not a rocket or science was the way to hang out with the stars. For when it comes to “innovative companies” do the numbers now lie? Or tell half truths? See what I mean.

This is just one of the myriad of examples currently contained within the “Unicorn” club for there’s still many more such as AirBnB™, Snapchat™, Dropbox™, Pintrest™ and over 100 others. Yet, there is another interesting data point that coincides with this currently heralded club.

Of the current 130+ that fall into this category (a valuation of $1 Billion or more) 60 of those were created in 2015 alone. To my eyes – that’s a glaring problem. Why? Well, think of it this way:

Nearly half of all the current unicorns that were/are praying, dreaming, and hoping for their day in the rainbow garden of IPO heaven with some big pay-out that was previously near-a-given when they gained their coveted title of recognition in 2015, are slowly waking up with a hangover from that Kool-Aid induced drunken stupor to a reality not based on the unicorn meme and metrics they were so drunk with. No: 2015 ended with a cold dose of reality with IPO letdowns, valuation markdowns, and a whole lot more putting many of these unicorn ambitions or dreams out to pasture. Some are now mulling around within an area that contains a building that ominously resembles a glue factory yet seem oblivious to the implications.

Another metric (as in inescapable reality) that is going to work against everything which previously “The Valley” hasn’t needed to contend with is the overarching result or knock-on effect that had yet occurred when the “free money” (QE) spigot was turned off but, as a direct consequence, and in combination with the raising of interest rates, may in fact push a global rush headlong into the $Dollar sending it skyward, causing balance sheets of companies around the globe into a complete an utter tizzy.

Some might think, “Oh, well that will only pertain if you’re a commodity company and such.” No, I’m sorry, it will influence far more sectors than just that. And the Valley is going to face this in ways just like many of the commodity producers have. A fact that for many have remained absolutely oblivious to.  Or better yet; behave just like many are viewing that building at the edge of the unicorn meadow. Content to mull around under the watchful gaze of another animal friendly face (e.g., that of a bull) that adorns the building’s facade never contemplating for a moment the implications of the business contained within is called Elmer’s™.

If the $Dollar does indeed grow stronger from here it will add to the ever challenging issue of earnings reporting where revenue will take place front-and-center in a more pronounced way than ever before in the life of not only today’s Unicorn club – but the Valley as a whole.

User growth, eyeballs for dollars, and all the other metrics that were spun in a vortex of idiotic reasoning’s and rationales will not only not help – they’ll hurt if not outright maim any investor confidence if it’s coupled with the all but inevitable “foreign exchange conversion.” i.e., Had it not been for the $Dollar we would have made money rather than losing it.

Couple the $Dollar paradigm with another (now even more prevalent) “user growth was X coming in less than our projected Y” and you have a prescription for an investor revolt with a ticking time bomb laced with nuclear styled repercussions on your hands in my estimation. And that countdown clock has already started and is easily view-able as the first earnings season of 2016 is already making its presence known with an ever growing/worsening reporting of retailing metrics.

However, the $Dollar issues don’t stop there. They will fall even harder on companies that make things and sell them around the world. And, more importantly – buy the ads to sell them with.

Many advertisers will be hit with $Dollar issues to their own revenue sides of the ledger, and with that, all expenses will become more acute in their reasoning and rationale. And just like a company that needs to cut personnel to help bolster values. (i.e., send the Wall St. signal to buy, buy, buy) So to will ad expenditures fall into this same category. And with the holiday season now in the rear view mirror, just throwing money onto any and all platforms in a “hail Mary” fashion will no longer be expedient or allowed. And this will hit right at the heart of many of not only today’s Unicorns, but rather right at the bell-weathers such as Facebook™ and others.

If this happens the fallout will not be contained within the Valley itself in my estimation. It will be a global, all out nuclear winter in the ad space. How severe, and long is the only question.

So what does all this have to do with a comparison to something like a DEFCON 1 you maybe asking. Or, you might be thinking “That’s all a little hyperbolic” when talking about issues concerning Silicon Valley. Well, may be it is, yet, maybe it isn’t so far-fetched if you think about it using the following:

Back in September of 2014 I penned the following article titled “The Shot Heard Round The Valley World.” At that time my viewpoint on the issues I saw facing Unicorns and IPO’s was anathema to anything emanating not only from the Valley itself, but across all of the financial media. In that article I made the following statements:

“Problem is for a great many, they have never seen the real Jeckyll and Hyde personality of “investor funding.”

 

“IPO is not going to have the same term of endearment it now has. I believe it will turn into the last and most dreaded three-letter acronym no one ever imagined in Silicon Valley.”

There was more but, it was all predicated or inspired by tweet-storm unleashed at that time when Marc Andreessen ended his viewpoint about conditions within the space with the word “WORRY” too which I agreed was spot on. The resulting backlash to his argument took on rebuttals more in line with condescension rather than informed push-back in my opinion. And that viewpoint resumed with an attitude of retrenchment for much of 2015 rather, than viewing the unfolding reality objectively.

Yet, if I were to classify that period using the headline induced classification we were then at DEFCON 5. Over the subsequent 12 months we have moved progressively up the scale passing 4, and 3 jumping directly to 2 when the IPO’s of Square™ and Match™ showed the undeniable scary truth of the markets ending bewilderment of horns-over-hooves stampede to “get in-front of the IPO bandwagon.” But if that was “2” what causes a call of “1” you’re asking? Fair enough, for that happened just days ago.

It’s been reported or at least rumored to be that Peter Thiel and/or others are trying to cash out of Palantir™ (a current member in the Unicorn club) without an IPO. They cite many reasons and rationales why this may be good, bad or indifferent and that’s fine. However, I’m just going to throw this in for your own contemplation:

Do you think this argument, rational, or anything else resembling it would be taking place if we were still in a QE driven market circa mid 2014?

 

Welcome to DEFCON 1 is how I’m viewing it. For just this change in mindset with all the implications it can unleash within the Valley itself is enough to compound the impending fear of an all out debacle off the horizon – and straight into one’s own back yard.

And speaking of “back yard.” If anyone remembers, I also said not all that long ago you’ll know everything has changed when “I’m going to live in this shipping container till we IPO and then I’m going to get myself a McMansion!” looks more and more plausible that one might be looking at life as – living in a shipping container! This was in direct response to the current supposed craze of people opting to live out of metal storage containers in San Francisco as they pursued their IPO dreams.

Now with iconic Silicon Valley impresarios such as Theil or others being reported that they may be looking for ways as to NOT IPO rather that too? Those shipping containers may morph far faster than anyone previously thought straight into indefinite fallout shelters rather, than the start-up kits many view them as. For a nuclear winter pertaining to the world of Unicorns may be as “1” is said to represent: imminent.

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lolmao500's picture

Too bad the US miliary is not at DEFCON 1 to nuke the shit out of these Saudi scumbags

GhostOfDiogenes's picture
GhostOfDiogenes (not verified) lolmao500 Jan 3, 2016 7:07 PM

Yes. Nukes solve all problems.

Depleted Uranium for instance.

Good for the DNA. The US of idiocracy dropped tons of it on Syria, Iraq, Afghanistan, Libya, Palestine...

The christian nation that gives forever.

Stuck on Zero's picture

Christians aren't running this nation.

GhostOfDiogenes's picture
GhostOfDiogenes (not verified) Stuck on Zero Jan 3, 2016 7:35 PM

They elect the satanists that do.

Every christian I have ever met was evil. Do you have an hour? I can inform you about what xtians have done to me...

Seems jesus eternally takes away their sins, so they don't have to stop.

Insanity at its finest.

I Will Explain All's picture
I Will Explain All (not verified) GhostOfDiogenes Jan 3, 2016 8:26 PM

You are just a brainwashed goyim.  Nothing more.

 

Onto the main point:  Uber is fucking retardedly priced.  That shit is going to crash.

& you can block out ads with adblockplus.  Nuff said.

GeezerGeek's picture

Be warned: there are some web sites that will not work if you are using an ad blocker. Others refuse to work if Java support is turned off. 

gdogus erectus's picture

Market caps are one thing, the local economy is another. I've been here for 30 years and watched the valley rebuild itself form semiconductors to software. Don't underestimate the surveillance state. Intel, Google, faceplant, etc etc are all here. I just watched the massive Samsung campus go up.

Prop 13 let's us stay in our homes that we "only" paid $350,000 for. At 3.75% mortgage rates, $100,000 can be borrowed for $475 a month. A technician and an executive admin making a buck 75 combined can easily afford a $700k mortgage. Low interest rates and Chinese money distort the housing market as much or more athan the latest Google millionaires and their ilk.

The trick is to take you barely middle class, sorry ass 6-digit salary here and use it to keep on stacking. And not to buy stocks whose certificates are held in a street name that used to be stored by the DTCC at 55 Water street. But that's another story...

justdues's picture

Well I will willingly go without any web site that does not work with ad-block (so far I have encountered none) for the peace and freedom of not having my screen  covered in shit

wanderer9641's picture

Your comment makes very little sense -It is unfortunate that many people posing as christians are running around but "Forgive me God for what I am about to do" is a definite dealbreaker - As for the electorate, women form the majority and feminism is satanic - that we can agree on - It is a hard world for actual Christians - The end is approaching and divisions will be made - then you can see who the Christians were not.

Occident Mortal's picture

Facebook is a pivotal part of the Tech bubble.

 

Every startup raises funding from venture capitalists, with the lure of creating the next $100 billion FB.

Each startup then pays their venture capital monies to facebook, to purchase a userbase.

 

This money supports facebooks revenue growth story, which in turn provides the carrot / end of the rainbow goal.

 

Very few tech companies are generating much revenue from the real economy other than Apple. Even Google makes most of their money from startups looking to purchase new users, money which ultimately comes from investors.

 

For all the hype and coverage it gets and despite the huge valuations, tech is less than 3% of the economy, and of that 3% the majority of it is Apple.

Scooby Dooby Doo's picture

I love Facebook! Scooby has his very own Facebook page.

Scooby Doo!

Vampyroteuthis infernalis's picture

The VCs have learned how to dump useless companies onto the public. This started in the 2000 dotcom bubble and has grown more so since the Fed's free money. This is going to implode and wipe them all out. Silicon Valley is a sh*t hole anyways.

TuPhat's picture

I would rather down vote your posts if they actually made sense.  Try a little harder please.

Larry Dallas's picture

I like Mark's articles, but damn if they are repetitive.

This whole article could be cut in half without the Frasier Crane-esque language. Stop trying to impress people with your wordiness.

And knock of the "TM's" too.

Farqued Up's picture

Serbia, Bosnia, Herczegovina, too.

GhostOfDiogenes's picture
GhostOfDiogenes (not verified) Jan 3, 2016 7:07 PM

Fake money>fake industry>fake people>spiritual death not far behind

Its the American dream, babay!

Print moar money for the jew run fed banks, goyim!

Its the law!

alphahammer's picture
alphahammer (not verified) GhostOfDiogenes Jan 3, 2016 7:22 PM

 

You are obviously crying for help. There are hotlines for your condition. Don't do anything stupid. 

GhostOfDiogenes's picture
GhostOfDiogenes (not verified) alphahammer Jan 3, 2016 7:30 PM

Says the jew.

Isn't it past your bedtime in tel aviv?

TuPhat's picture

Perhaps he is only a ghost of his former self and doesn't think too well anymore.

Tasty Sandwich's picture

There's an app for that.

RyeWhiskey's picture

Fuck SiliCON valley tech cartel.

sidiji's picture

jumped the shark long ago

bamawatson's picture

speaking of jumping, the following is only tangentially relevant. in the vein of yesterday's caption contest.... any guesses on this fresh story? http://nypost.com/2016/01/03/man-commits-suicide-at-gramercy-hotel/

knukles's picture

Does that sound like a suicide to you?  Sure as hell sound suspicious on the surface to me.  Like the guy fro the Vatican Bank found hanging neath the Blackfriar's Bride in London some 35 years ago.  Or the chap found inside a zippered closed duffel bag with his arms tied behind his back ... both ruled suicides.
So who was that masked man?

buzzsaw99's picture

this too, is bullish.

Opinionsareus's picture

Good analysis! The underbelly of Silicon Valley's successes over the last two decades has been mostly driven by connected insiders; they protect each other; invest in each other; "recommend" each other's investments to the Street and to their connected friends in the media. In other words, it doesn't matter if you're not creating real value as long as you are protected by your pals and know when/how to fold your cards before the general investing public catches on.

I've watched complete incompetents get funded and run their investments into the ground, only to get funded on their "next big thing". Sure, there have been some real value creators in the Valley - Apple, hp (before Fiorina), Intel, Cisco (currently a base camp for mostly unqualified H1Bs who get hired by their H1B recruiter pals - try looking for a mid-level gig in the Valley without having to speak with a South Asian Indian recruiter) - and, a few dozen others.

Stanford seeded this development and it spread like wildfire. Digital IS a revolution, but as we all know, once something starts to look like a winner, it's easy to start promising hyper-returns and hyper-opportunity.

One way that I use to judge whether we've begun to hit botom in the Valley is the names some of these Unicorns call themselves..."Simplivity", "Guidespark", "MInted". Really?

The truly sad thing is that the investment scene in SV has become an insider "game", with (as usual) the big dogs protecting themselves via their connected business and banking networks.

Side effects? (local...

True socioeconomic diversity is dead in the Bay Area - nurses, teachers, retail workers, public safety personnel, smallbusiness owners, government personnel, etc. etc cannot afford to live in the area. Rents are out of sight. Empathy has gone downn the drain. It's all about "the next opportunity". Forget sustainable communities.

Dre4dwolf's picture

Everyone dumping their money in these shit companies that produce prototypes for head worn displays lol.

Everyone thinks VR is the next big thing to hit.

 

https://i.ytimg.com/vi/huyd7FqQGFY/maxresdefault.jpg

 

IMO the tech has been around for the better part of a decade......... and still has no real market share people just aren't that interested and the demand for such products is minimal.

It might just be that peope prefer not to burn out their retinas playing games lol

i_call_you_my_base's picture

I've tried it, and it's cool. It won't save the world or anything, but it will be big. But it's impossible to predict who will win the hardware battle. So many are at it.

It's not that it hasn't been around, it's that the motion sensors and other technology around it make it better than it's ever been. You can look around a 3d environment, it's not just having a screen strapped to your face. At the very least it will be big in the gaming market.

Farqued Up's picture

May be because it may require some critical thinking?

zibrus's picture

I'd like to pop in on the VR comment.

 

It's going to be huge! It will change everything. The first uptake will be gamers (yes I enjoy the games and my current best on the market is Oculus). Retail stores don't have to exist. Seeing something in person will be the VR experience. Art, 3D product designs, architecture, you name it... VR is going to Rule.

 

I don't like facebook and I am pissed Oculus is now owned by them (although it has some capital funding research positives). Either way, VR is going to change our experience of the world, pleasure, business, commerce, education, leisure, design,... everything.

djsmps's picture

There are many great aspects of VR. The way you describe it is sad.

zibrus's picture

Sorry DJ, it's been a long evening and I have to get ready for work tomorrow. I didn't have the time to write a manifesto on why VR is going to be great.

 

Glad you agree with me that there are are many great aspects, but, like bitcoin, VR will revolutionize our experiences here on this planet. No, I don't have time to explain it to you. There have been countless articles on the matter.

Bastiat's picture

The best thing about it is that you can have your head up ass and not even know it.

kerfuffled's picture
kerfuffled (not verified) Jan 3, 2016 7:32 PM

fake-conomy

Soul Glow's picture

I had the chance to meet one of the guys that invented Google Maps last week.  Nice guy, really smart too.  He had a chance to tell me how investing works in detail in Silicone Valley.  Very capitalistic.  WHat I walked away from it is this - in a boomtime money flows faster than anyone can imagine.  During a downtown the money dries up to next to a trickle.

CHoward's picture

Making a profit is so...20th century thinking - totally outdated and causes much needless accounting. 

PeaceLover's picture

Pretty obvious with out free money(fed counterfeiting)  someone would need something to make a profit.
How many will pay Facebook .99 cents a month when someone else will open another FREE FACEBOOK REPLACEMENT.
my guess is maybe 1%.

Facebook is no ones fool they only sure way to keep the money is give it to a non profit save the world and let you wife run it good way to launder the money in front of the fool's(tax payers).
Can't claw-back a charity

Let see give the .00001% interest money by the billions to the investment bank they buy buy worthless IPOs that are now valuable because someone running the price up.
The CEOs book profits in front of everyone.
Take Pay Checks,Bonus that no one can claw back.
And what was the great thing you did for the world.
Invest printed money, on air "Facebook" running up the price.

now you have bunches of cleaned"laundered" money
In the mean time the bankers destroyed the rest of the world for them-self.

 

Seem Wrong some how.

 

 

ebworthen's picture

The post header tags say it all:  "Free Money, Kool-Aid, Quantitative Easing, Reality"

ROFL!  Nice one Tylers.  F.A.N.G.'s bite kids!

ThrowAwayYourTV's picture

Give the heroin addict free heroin, that'll cure em. Well, in a way. After a while.

We can expect the same results with QE/4.0 Well, in a way. After a while.

Archive_file's picture

I live in my van in San Francisco and deliver food on my scooter 7 days a week. I see all the fake bullshit, Ivy League douchbags, and Manhattan idiots. The lamest app/concept I've EVER SEEN is www.ifonly.com. It's for a small subset of rich people that can't figure out a way to waste their money or time. I pray every day it fails. That is all....

zibrus's picture

Patience is a Virture. It will fail.

GooseShtepping Moron's picture

It's bellwether, not bell-weather. A wether is a castrated ram, around the neck of which a bell was often placed to lead the flock. Weather is whatever the sky happens to be doing at the moment, and it's usually not dropping bells.

Max Cynical's picture

UBER just raised $880M...I think this has a ways to go.

Max Cynical's picture

Another SV term I'm sick of seeing bandied about..."serial entrepreneur".

GeezerGeek's picture

Wasn't there a guy way back when named Kellogg who was a cereal entrepreneur?

Janet Shalom Bernanke's picture

Us at the Fraud are prepared to endlessly prop-up the S&P 500, Dow, and Nasdaq, but we can't be responsible for the unicorns in Silicon Valley and the biotechs.  That is for other central banks to defend.

 

chisler's picture

Its all degress of bull crap, the closer you get to the crap the more it stinks, you can still play the game, just have to know when the stink will out.

Laplacian2003's picture

There was an interview with some of the key people in Google a few years ago.   What was surprising, was their frank admission that only one product made them money (granted a whole lot of money).  It was their AdSense advertising link system I believe.   That was very eye opening  as all of their other products were net losses.   But think about that.....if the overwhelming majority of Google's products do not make money, what are the odds that some of these ridiculous startups will ever make a dime?

All of the profit for the pure software guys seems to derive around advertising and how many eyes view the app.   So if ad-blocking does go global, there is going to be one heck of an "oh shit" moment  as advertiser dollars flee for other more accessible media.   OF course, given all of the money that stands to be lost, don't be surprised if politicians step in and prohibit ad-blocking.   Just look at what they have done with regards to cable/satellite tv (and the prohibition of a la carte programming to protect large media companies).   Cronyism lives on...

JailBanksters's picture

As long as there is no penalty for creating money out of thin air and it's cheaper than the buying and selling of stocks, then the sky's the limit for stocks. And that's eactly what the FED is doing.

You can make the stock price anything you like, because another Bank will buy it back tomorrow for more than what you bought it for. See, the Economy is going great guns.