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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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.

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...

Buckaroo Banzai's picture

SF is a disgusting place to visit, and has been for 15 years. Back when I was doing a lot of business travel, all over the US and Western Europe, SF was by far my least favorite destination. Maybe in some ways Chicago was worse but whatever, either way SF was basically awful. Filthy, full of disgusting people, everything there is overrated and overpriced. The views of the bay are nice I guess, and the cable cars have a quaint charm. Other than that it's a dump.

chosen's picture

I still live in the Bay Area, and I have no idea why anybody would want to visit or live in San Francisco.  I suppose it is a good place for faggots to buttfuck each other.  It is a pig sty.  Any interesting buildings were destroyed in the 1906 quake.

chosen's picture

Nice film.  Notice there were no faggots, bums, or drug-addicts shitting or pissing on the road or sidewalk.  Also people walking in the street who were smart enough to get out of the way of the tram, even though there were no laws telling them to do so.

johnconnor's picture

I have a good buddy who is a software engineer and was offered a package of salary+bonus of 200K a year to work for a company there, sounds pretty good right? he was making $125K in DFW... he regretted it just after 2 months being there, half of his salary went for Taxes and even a shitty one bedroom in SFC is over $2,500, anything 2 bedroom or a little bit of luxury goes to $3,600-4,000 and up. 

coast1's picture

I am in Oregon, and I am seeing dozens upon dozens of california license plates.  They fucked up california, now they are here to fuck up oregon....locusts.

Boca's picture

moving to Oregon soon, but don't worry I will try to help turn the state back to red

Ballin D's picture

dont need numbers, just voter ID to do that.

vulcanraven's picture

I was thinking about moving up there... been in SoCal my entire life. I have a high school buddy who just pulled the trigger and left here for Grant's Pass. I have a few friends in Portland and visited a couple times, holy fucking hell that place is the biggest white guilt PC shithole I have ever seen in my life. Apparently the entire pacific NW is like this... is there anywhere in the western US that hasn't been ruined by progressive bullshit?

Bungbo's picture

Flew into LA and then Portland, OR on Thursday from Asia.  Nothing but Mexicans and snowflakes.  I'd rather take a dump in the worst public restroom with squat toilets in China than take a leak with all these fucking snowflake queers and brownies.  It's almost like I don't recognize the States each time I fly in after a stint abroad.  And, with all of that I got to deal with the TSA homies.  Shit, it just might get to where one day I just won't fly back.

canisdirus's picture

WA has been suffering from it pretty badly over the last 5-10 years, too (after successive waves of them). The leftards have taken over all major cities on the west coast in the last 30+ years.

directaction's picture

I see these California cockroaches crawling around Arizona, too. Slimy pieces of gargage, arrogant, big SUVs, fat, I can't stand them.

nightshiftsucks's picture

I have an AA in electronics and work in high tech mfg.About 22 years ago when I got into the industry I took a pay cut to get into the career I have now.When I started I was making $10 an hour,now I make over 4x that and when you add in 10% shift,10% lead,12 hour shifts which 4 hours  are OT and then all the extra OT shifts I make a very good living.You can complain about high cost of living and all of the other bullshit but you would have to be an idiot not to get a job like I have in SV.

Stan Smith's picture

    I was in the Bay Area back around bubble time in the 90's as well.    Not in tech (finance),  but we were all knee deep in it.   It does seem like like there are some similarities floating around out there.

    Good ole Alan Greenspans "Irrational Exuberance" seems to be on full display currently.    At some point dont these companies have to make money?   Not just be given it in the next round of funding?

KC Spike's picture

Good commment.  I have experienced that as well. 

Automatic Choke's picture

don't they have to make money...you ask.

answer is no-provided there is a greater fool waiting to buy your speculation at a higher price.   following this thinking, it all becomes a game of musical chairs.   read "the money game"     true in the '60s, and still true, just the names have changed.

Jubal Early's picture

As a 35 year IT professional I was interested in "silicon valley" so I watched a couple of them.  What a bunch of Jew brainwashing.  Once again white males are portrayed as dishonest cucks.  Of course no one would ever be allowed to make a sit-com pissing on Jews.

TAALR Swift's picture

Not since "All in the Family".

Even there, AB was portrayed as the prototypical redneck WM, about a dime short, uneducated and unraveled. 

It's been Open Season on WMs or males in general ever since then, on every sit-com.

KC Spike's picture

Now I do believe what this article says is true in a sense. The Bubble is about to burst, or at least should burst. But they (ZH and others) have been saying this for years. In a sesnse they have been screaming this since they have basically presented no bullish scenarios and yet the markets keep going up I am referring to the tech bubble as described here and to the stock market in general. I have seen many readers here go away because of all of the bearish speculation which they have followed and now are toast. 

Houses Depreciate's picture

Debtors characterize it as ‘implosion’. Those armed with facts characterize it as a recovery.

Remember….. The definition of a “recovery” is falling prices to dramatically lower and more affordable levels.