Signs That The Silicon Valley Tech Bubble Is About To Burst

Tyler Durden's picture

18 months ago there was a seemingly limitless number of Silicon Valley future billionaires buying up multi-million dollar homes and renting out lavish pads.  But if demand for excessively priced real estate is any indication of the health of Silicon Valley's tech industry then all the venture capitalists who have tripped over themselves to invest in the next 'decacorn', or startups worth $10s of billions pre-IPO despite burning billions of cash quarterly, should be getting pretty worried right about now.

As the following chart from Zillow points out, home prices in San Francisco stalled about a year ago and rents have followed a similar path.

San Fran

 

But home prices aren't the only thing stalling, according to a note from The Guardian, resumes are also starting to flood into Silicon Valley headhunters from recently unemployed software engineers who were let go after their companies failed to attract its required latest round of financing at a ridiculous valuation.

“We’re starting to get a lot of résumés from [software engineers at] companies where the business model isn’t working and they can’t get funding, so they are closing down or cutting back,” said Mark Dinan, a software recruiter based in the Bay Area, who keeps track of companies’ hirings and firings.

 

These startups are running out of money because VCs are being more discerning about where they place their money, making fewer, bigger bets.

 

“The number of investments [in the private market] has fallen by about a third, but the amount of capital is around the same,” said Tomasz Tunguz, a venture capitalist at Redpoint, adding that some of the “fast money” from hedge funds and mutual funds had shifted away from the sector.

 

“It’s been happening for a couple of years. It’s not as easy to raise capital and VCs are demanding better terms,” added Aswath Damodaran, a professor of finance at the Stern School of Business.

Despite the meteoric rise in the stock market over the past several years, venture capitalists have been forced to pull back on new investments partly because of a slowdown in companies going public. Last year was the slowest for US IPOs since the recession, with the amount raised by technology companies falling 60% from 2015.

Tech IPOs

 

Meanwhile, if SNAP's IPO is any indicator of how other potential tech IPOs might be expected to perform, then we wouldn't hold out hope for public investors to save the venture market from their valuation sins.

SNAP

 

But, a series of “down rounds” – when a company raises funds by selling shares that are valued lower than the last time they raised funds, leading its overall valuation to fall – may imply that there just isn't a healthy backlog of companies that are IPO-worthy. CB Insights has tracked more than 100 of these down rounds and exits since 2015, including software company Zenefits, mobile app Foursquare and online music streaming service Rdio.

“It used to be that 95% of [investment] rounds were up, now 20% are down,” Tunguz said.

 

Then there are the so-called “decacorns” – unicorn startups valued at tens of billions of dollars – such as Airbnb, Uber and Palantir – which some believe are overvalued, but it’s hard to tell until they go public and are forced to reveal details of their underlying finances.

 

Ride-sharing app Uber, for example, has raised more than $16bn and is valued at more than $69bn. That’s more than automotive giants such as General Motors and Ford, despite the company losing $2.2bn last year.

 

“The interesting question with Uber is how long they can keep as a private company. They are raising capital like a public company without any of the disclosure and consequences of being a public company,” said Damodaran, who believes the company’s value is overinflated and it’s really worth $23bn.

So, how does this moment compare with the time leading up to the dotcom crash?  Here is the take of one Silicon Valley software recruiter:

“I got here in 97 and it was like it is now – incredibly packed, impossible to commute, high apartment costs,” Dinan said.

 

"We’re seeing overvalued companies, funded based on hopes and dreams and aspirations and not good business models. Companies counting users and eyeballs rather than profits. There are a lot of similarities.”

 

Another echo of the dotcom era is what Dinan calls “bad habits” such as the allegations of sexual harassment at Uber and human resources startup Zenefits cheating on mandatory compliance training.

 

“There was a lot of crazy behaviour in the late 1990s, including sexual harassment. It’s a result of there not being discipline,” Dinan said.

 

“The [dotcom crash] happened very suddenly and without any warning,” Damodaran said. “When it does happen everyone says they saw it coming. If you saw it coming then why didn’t you get out of it?”

Well, when all else fails there's always the 'negging' option to drive valuation...

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buckstopshere's picture

Snapchat IPO was the top of the tech bubble.

The absurdity had peaked.

The Nasdaq to S&P 500 ratio shows that the tech momentum has stagnated.

SilverRoofer's picture

I Hope it Crashes like a 10.0 earthquake!

Stuck on Zero's picture

Pets.com went from IPO to liquidation in 268 days. I fear there are Theranos everywhere in the valley.

xythras's picture
xythras (not verified) Stuck on Zero Mar 18, 2017 2:56 PM

I don't worry about those Deep state crooks involved in Silicon Valley.

What they lose from tech will gain from the big military contracts. Because NATO:

Trump Says US “Must be Paid More” to Defend Germany

http://dailywesterner.com/news/2017-03-18/trump-says-us-must-be-paid-mor...

 

 

Chris Dakota's picture
Chris Dakota (not verified) xythras Mar 18, 2017 3:41 PM

They are moving to Texas, Arizona, Utah now.

lots of them phasing out saying "Its too expensive to do business here."

canisdirus's picture

They have been moving that direction for years. Austin is just an exurb of the 909 now. Arizona has been a stopping off point for refugees from California since at least the 1980s. Utah used to be an in-shoring spot for tech companies (it was cheap like off-shoring to India, but they speak slightly more intelligible English in Utah) after being a huge spot for telemarketing (many major corporations still have them there, but Mississippi, Missouri, and Atlanta are cheaper now).

Jay's picture

If your business needs electricity to make a thing, you've got to flee CA thanks to all that "cheap" solar and wind energy. Some companies, like Cisco, don't stop running till they get all the way to China.

Douche McGoosh's picture
Douche McGoosh (not verified) Jay Mar 19, 2017 1:11 AM

Teh only thing that can protect you and your family from teh bursting tech bubble is Bitcoin. Accepted by Preppers everywhere!

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hope_talk's picture
hope_talk (not verified) Douche McGoosh Mar 19, 2017 6:46 AM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

SilverRoofer's picture

So move out of communifornia 

And fuck up other states with your fucked up political views like what's happened to my state since 1990

 

El Oregonian's picture

Maybe I'll try having a start-up IPO on a business cannibalization program model, called "Corporate Carcass Clean-up.com". "Where we make our bones the old fashioned way: We Turn it"' tm

canisdirus's picture

The difference between then and now is that none of these companies own any physical assets that can be liquidated. Their infrastructure is all "in the cloud", their tech is readily rebuilt by a small team, and the most valuable things they own are patents for things nobody cares about.

This unwinding will be epic.

Bigly's picture

Isn't it true that less than 5% of them have actually turned a profit?  Perhaps THAT is why....

canisdirus's picture

This was in response to a comment about IPO to liquidation. They're lasting longer with no income because the investors have nothing to gain from pulling the plug and a distant chance of profit if it ends up being that unicorn... It's just like feeding money into a slot machine in a vain hope that it will pay out more than you've fed in.

general ambivalent's picture

But how will we survive without cat videos, cat liveblogging, and cat memes?

canisdirus's picture

Let's be honest: We won't have to. Most major players have competitors that could step right in. Those that don't would be easy to replace. Only a few have ecosystems complex enough to make their replacement difficult.

BarkingCat's picture

And Pets.com was actually useful.

yogibear's picture

LOL, some people believed SNAP had no limit. They put buys all the way to $45/share.

Goes to show how bubbly everything is.

Publicus's picture

FUCK SILICON VALLEY AND FUCK LIBERALS.

Mini-Me's picture

I live in the midst of this madness.  Imagine paying nearly $4K/month for a one bedroom apartment.  Insanity.

813kml's picture

You're paying for future valuation potential, after the next big quake that one bedroom could become a two bedroom.

BarkingCat's picture

With a view or perhaps waterfront. 

That is a lot of potential,.

Deplorable's picture

This epic failure will be just like the Grapes of Wrath in reverse.

Move your ass out of that state!

 

chosen's picture

Bubbles always pop, the one certainty in economics.  Just wait, when the dot.com bubble pops, rents and home values will drop 75%.  I am looking forward to it.  Looks like it is starting to happen.  The owner of my apartment building just sold it.  I didn't like him, but selling at the top was a smart move.

Gladi8tor's picture

In Las Vegas NO ONE WANTS TO SELL with the raiders coming here and Marijuana is legal!

www.ViewLasVegasRealEstate.com

Houses Depreciate's picture

$4k/month is an outlier. Typical rents for one bedroom are well under $1600/month.... And falling. And housing prices here are falling too.

kareninca's picture

Boy are you wrong about Silicon Valley.  I was just looking for housing for my father-in-law here.  The very cheapest studio (250 s.f.) was $2,500/month, and it is in a crappy area; I didn't feel he would be safe.  So, he's living with us, in our small condo.  If there were a one-bedroom anywhere around here for $1,600/month there would be a line a mile long for it.  $4,000 for an even slightly tolerable one-bedroom sounds about right.

Houses Depreciate's picture

Jerry Spring DebtDonkey drama.

timetraveler's picture

I know, 4K for a 1 bedroom is what it costs at The Jasper near 1st St and Harrison

nightshiftsucks's picture

I drive Montague expressway to get to work,back in the day all the offices were full but now there's a shit load of empty office buildings that I pass.There's a big beautiful one on First and Montague and it's been empty for years.

coast1's picture

Not sure if on topic, maybe tho...  I am a biblical scholar and love the stories. Not saying its all true, its probably been bastardized, and not saying there is a God etc, just read the stories as history....I totally made a jehovah witness group go crazy because I said that satan had sex with Eve and Adam joined in, and Cain was birthed from the satan DNA,  thus he killed his brother...Or that the noah flood was to equalize the DNA, because satanic DNA was much too prominant. Cool stories...another great story is tower of babel, where their technology ended up causing massive havoc.  This is where I am on topic, the GMO, the vaccines, the chemtrails are all to change our DNA....Satan is fighting back against the noah flood...Am I crazy?  I dunno, just interesting stuff.  when those currently in power speak of 2024, or further beyond, they have no clue....IMO, there will be no 2024.  They have done too much damage, and it cant be fixed. Something big is about to happen.  Thx for putting up with my rant, I will try to keep short posts in future, just in a mood..chemtrails are real, they are totally screwing up the planet, GMO, vaccines, satanists running rampid....Come on you guys, you know this is all true.

And Trump is really doing nothing.  Let me know one thing Trump has done except talk.

 

Tim Knight from Slope of Hope's picture

Greetings from Palo Alto. My house has already lost over $1 million of its value (thanks, Zillow!). Since I bought in 1991, I don't care, but for the nimrods who gobbled up houses last year..........sure better hope your equity positions stay strong. 

813kml's picture

Hmmm, how many bodies are buried in the backyard?

Professorlocknload's picture

Two steps forward, one step back. Same as always.

nightshiftsucks's picture

I call bullshit,my wifes boss back then had a track house in Cupertino that sold for $400 know it's worth at least $1.5 million.I live in San Ramon valley,prices are still going up.

algol_dog's picture

Perfect time to buy back then. Remember they had that little downturn in around mid "90. That's when Hwy 237 still had traffic lights.

Deplorable's picture

SNAP is the canary in the coal mine....Just like Pets.com at the height of the 2000 bubble.

Pets.com was a dot-com enterprise that sold pet supplies to retail customers. It began operations in August 1998 and closed in November 2000. A high-profile marketing campaign gave it a widely recognized public presence, including an appearance in the 1999 Macy's Thanksgiving Day Parade and an advertisement in the 2000 Super Bowl. Its popular sock puppet advertising mascot was interviewed by People magazine and appeared on Good Morning America.

Although sales rose dramatically due to the attention, the company was weak on fundamentals and lost money on most of its sales. Its high public profile during its brief existence made it one of the more noteworthy failures of the dot-com bubble of the early 2000s. US$300 million of investment capital vanished with the company's failure. The company was headquartered in San Francisco.[2]

 

Ballin D's picture

why would you link to the wikipedia pages for the super bowl and sock puppets (couldve linked to the actual pets.com sockpuppet!).

 

Edit - Im dumb, youre just pasting content from wikipedia here so their useless links are persisting.

Deplorable's picture

Correct...I am too lazy to remove the links.

Sorry I wasted your time.

chosen's picture

It's the dot.com crash all over again.  I am looking forward to it.  I want home prices to collapse, landlords to go bankrupt, and techies to wander the streets begging for a nickel.

Deplorable's picture

And California to slide into the Pacific.

lil dirtball's picture

... and misery has company enough.

buckstopshere's picture

The best investments at the peak of the dotcom bubble and for the next decade were the gold and silver miners.

Railroads also did well.

History does not repeat, but it often rhymes.

johnconnor's picture

I can't wait for the whole San Jose/San Francisco housing bubble collapses, working in IT I had 3 opportunities to move there and I said No three times. 1 million dollar plus for shitty house? add to that another 20K on property taxes for shoebox, add  10% of state taxes on top of federal and local? Fuck no, slowlybut surely companies are leaving California, this madness won't last forever.

KC Spike's picture

exatctly. SF, a nice place to visit but I would not want to live there.

markar's picture

Lived in the BA & SF 20 years until the dotcom crash in 2001. SF isn't even a nice place to visit anymore. Overpriced/overrated restaurants, traffic from hell, homeless pissing/shitting in the streets. Libtard snowflakes & Chinese rule. You can have it.

Automatic Choke's picture

i lived in bay area ftom '71 through '80.     going back to visit in the 80s and 90s was painful....now it is intolerable.  burn it down for all i care...