This Bubble Finally Burst - Which One's Next?

Tyler Durden's picture

Authored by Simon Black via SovereignMan.com,

Like so many other high-flying Silicon Valley startups, Clinkle was supposed to ‘make the world a better place’.

Founded in 2011 by a guy barely out of his teens, the company picked up early buzz after proclaiming they would disrupt mobile payments. Or something.

Silicon Valley venture capital firms were apparently so impressed with the idea that they showered the company with an unprecedented level of cash.

(Given that investing in an early stage company is high-risk, investors might provide a few hundred thousand dollars in funding, at most. Clinkle raised $25 million.)

The company went on to burn through just about every penny of its investors’ capital.

There were even photos that surfaced of the 21-year old CEO literally setting bricks of cash on fire.

At the end of the farce, Clinkle never actually managed to build its supposedly ‘world-changing’ product, and the website is now all but defunct.

This is rapidly becoming a familiar story in Silicon Valley.

For the last 6-7 years, Silicon Valley startups have been able to raise unbelievable amounts of cash.

Yet so many of those companies haven’t managed to turn a profit. Ever.

There’s some of the big names like Uber and AirBnb which are supposedly worth tens of billions of dollars despite having racked up enormous losses.

(Last year ride-sharing company Lyft promised investors that it would cap its losses at ‘only’ $600 million per year. . .)

But there are countless other examples of startups being anointed with absurd valuations and continually replenished with fresh capital even though they keep losing money… and have no plan to ever make money.

Snapchat’s investment prospective summed it up best:

“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.

It’s as if the more money these startups lost, the more popular they became with investors.

Clearly that was unsustainable.

In business, profit (or even more specifically, “levered free cash flow”) is the most important metric.

No company is born profitable; it takes time for entrepreneurs to create and build a financially sustainable business.

In the meantime, startups sometimes need outside investment capital to keep going.

Early stage investors take a risk that the company’s founders and management will be able to execute on a plan that turns a big idea into profit.

But there’s supposed to be a plan. There’s supposed to be an objective to reach profitability as quickly as possible.

Silicon Valley investment firms ignored this basic principle for years, dumping their investors’ savings down the toilet into loser companies with no hope of profitability.

It was a bubble, plain and simple… and now that bubble seems to have burst.

According to Dow Jones Venture Source, venture capital firms in Silicon Valley pared down their investments in tech startups by 30% in the last several months after reaching peak insanity in late 2015.

Unprofitable, unsustainable companies that used to easily be able to raise capital during the bubble years are now struggling to find new investors.

Many are starting to go out of business. For others that manage to successfully raise more capital, the terms are much more strict and conservative.

It’s a new reality, and one that makes more sense: lower valuations, a push for profitability, less insanity.

It makes me wonder, though– if the startup bubble in Silicon Valley can burst, why shouldn’t the bubble in the larger stock market?

In some respects there’s very little difference between the two.

The average stock is trading at a record high valuation despite tepid performance.

And some of the most popular companies are as financially unsustainable as Clinkle was.

Netflix might be my favorite example.

The company’s most recent earnings report for the period ending March 31, 2017 shows, yet again, negative Free Cash Flow of MINUS $422 million.

Not only is that a record loss, it’s 62% worse than in Q1/2016, and over twice as bad as Q1/2015.

Netflix just keeps losing more and more money.

Remember, “Free Cash Flow” is a MUCH better indication of a company’s financial health than profit because it takes into consideration all the capital they must reinvest back into the business.

In the case of Netflix, management must constantly make new ‘capital investments,’ i.e. acquire more content to deliver to their viewers.

If they don’t keep updating their content library, Netflix will go out of business.

So the company has been steadily accumulating huge losses and burning through cash.

They make up the shortfall by going deeper into debt, which is clearly unsustainable.

Don’t get me wrong– as a consumer, I love Netflix.

But it seems nuts that a company with such an unsustainable financial model could be so popular with investors and worth an all-time high $66 billion.

Something is wrong with this picture.

And these investment fundamentals just don’t seem that different than the insanity from the Silicon Valley startup scene over the last few years.

The Silicon Valley bubble has already burst. Given so many similarities, it seems foolish to bet that the stock market bubble will stay inflated forever.

Do you have a Plan B?

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Stuck on Zero's picture

"Tech startups?"  Hardly tech. Web apps are not high-tech. Any middle schools student can create these things. Silicon Valley has lost it's tech.  It's just hype now.

HRClinton's picture

SK is the new Silicon Valley.

US billionaires are concerned, as this cuts into their core interests to own the technology and IP, and offshore the Mfg. It goes against our and Israeli national interests, as Innovation centers.

If SK needs to be taken down, then we need NK to do the dirty work for us.

(Shhh!)

Your Good Friend's picture

Is that a picture of Donk Craterton you're using for an avatar?

Luc X. Ifer's picture

Canadian housing bubble also popping, it seems the system entered the phase of accelerated cracking, this brings the urgency of massive military conflict damn close.

a Smudge by any other name's picture

Doesn't matter. They will keep throwing money into "tech" because it's the only thing they know how to do. Pump and dump.

I doubt you could train a venture capitalist to make their own half decalf mochachinolattes.

runnymede's picture

Is it hype if people believe?

Gullibility knows no bounds.

mike_king's picture

They are all Pets.com, all the way down. All this debt leads to deflation, then hyper-inflation, then war.

Archive_file's picture

Gymboree will be declaring bankruptcy very soon. They have a very pricey, large headquarters a few blocks from the water in downtown San Francisco. When they haul out their furniture, I'd be surprised if any company leases out their former offices.

I live in SF and have watched a ton of offices stay empty forever.

TWITTER IS NEXT.

Dr. Richard Head's picture

Buy and hold stawks for your "investments" and the unicorns will shit skittles. 

 

Houses Depreciate's picture

lol@silicon valley. 

Where men go to wear their sisters hot pants while other men try to pull the balls out of your pants.

 

Here's what we know about California;

-Record high crime

-Most impoverished poorest state in the US

 

alexcojones's picture

What about a startup called

SnapChatwithPets.com?

Seems like a sure winner

alexcojones's picture

Kinda like that great Startup called Instagram

Images for Butt its Instagram

-or how to make asses out of investors

Rainman's picture

So far my favorite con of the year award goes to Theranos ...  a tight field of eligibles for second place.

http://nypost.com/2017/04/22/theranos-ceo-could-be-a-millennial-bernie-madoff/

carbonmutant's picture

After spending 40+ years in Silicon Valley I can personally attest to the absurdity of VC logic.

It's amazing how fast a company parking lot can fill up with expensive cars after VC funding...

taketheredpill's picture

 

 

 

It's not about how much you earn. It's about what you're worth. And who's worth the most? Companies that lose money.

 

Russ Hanneman

runnymede's picture

Perception management -- it's what's for dinner 

alfredhorg's picture

I guess that's why nobody pays attention to the trash dump guy who achieved annualized gains of 26% in the ten years through 2016:

https://howibeatgold.wordpress.com/2017/01/25/trash-dump-worker-invests-...

pound the vix's picture

What I don't understand is my family of 6 now pays $12 a month for Netflix and at least one person probably use it every day.  If they said I had to pay 19.99 do you think I would cancel?  Dumb.  Why arre they so afraid to charge for the value they provide

Consuelo's picture

 

 

Until word gets out of Pink slip Friday's at Goog, FB, Twatter, AAPl, NFLX, etc., ------- it ain't real...

TacoNasty's picture

I'm calling BS on this article. DJF [Draper Fisher Jurvetson], the fund behind the Theranos debacle, just raised a new $535 Million USD fund last week. The Valley Fever Madness is going to go on for a few more years, yet.

As for the suckers (cops, firefighters, teachers, etc) whose pension money went into the next Theranos via this new DFJ fund - lol F**kerz, thanks for raising my property taxes every year for the last 20 years. Don't bother to wake from your freeze induced slumber when I step over your geriatric homeless a** on my way to work overtime to try and cover my property taxes 10 years from now.

runnymede's picture

The great thing about fiat money is that you never run out. If you're in the club. Good thing this time it's different. As long as people believe-----