Submitted by Mark St. Cyr
The Shot Heard Round The Valley World
The greatest issue facing Silicon Valley is the one thing many newly minted and aspiring entrepreneurs have taken for granted: the money.
Many believe this gravy train of a never-ending Venture Capital/Angel Investor class will not only always be there, but the ranks will swell becoming even larger with burgeoning pocketbooks filled with their own newly minted IPO greenbacks.
Problem is for a great many, they have never seen the real Jeckyll and Hyde personality of “investor funding.”
Initial Public Offerings (IPO) has been the rallying cry for many over the last 5 years to the detriment of what it really means to be an entrepreneur. (i.e., creating something that becomes bigger than one’s self)
The term has now morphed into something akin to: I’m going to push this idea, get it funded, IPO it, and cash out! Rinse – repeat. For I’m a “Trep!” (For those not familiar with the term, it’s the newest self-appointed moniker for the person who seems to be following this pattern of entrepreneurship.)
For what it’s worth, this style of thinking about entrepreneurship from my perspective is very worrisome. The reason? It’s only about the “Benjamins.”
Is there anything wrong with that? Absolutely not. However: If your purpose was to bring a real company, (what ever the field,) run and grow it to its full potential you’ll find too your detriment – money alone will not do it. Regardless of how much.
And, if your sole focus for your existence hasn’t been on sales, customers, and net profit. Or, you’ve been lackadaisical in any other manner because the dominating thought in your mind is – “I just need to get another round, then I can IPO and be through with this?” Your time is probably up.
Come this October the Federal Reserve will make its final tranche of QE available. The amount assumed by many is that it will be 50% larger than what we’ve seen over these last years. ($15 Billion as opposed to $10)
One may see an increased flurry of buying into anything and everything that has even the slightest possibility of making a profit. Or, what Wall Street cares about even more; a growth story that can be perpetuated via financial engineering that sticks during earnings seasons.
But, one shouldn’t read into this as “confirmation” the risk appetite story is not only alive but growing. For that is all about to change.
Once the Fed shuts down the section of QE that has been pumping Billions upon Billions of dollars every month – it’s over for a great many of today’s Wall Street darlings.
Think of it this way: Who is going to fund your next round when they no longer have access to the Fed.’s piggy bank? Let alone pump more money into older start-ups that just haven’t produced any real money (as in net profit,) but have produced nothing more than great new employee digs or benefits?
Tack along side this the culture shock in what will seem near instantaneous with the shunning that will take place of any business resembling the, 3 employee, menial customer base, Zero if not negative profit margin businesses formed with the implicit intent as to be bought up or “acquired” for Billion dollar pay days.
These will be the first to go. That formulation is going way of the now infamous Pets dot-com sock puppet. This will be the first true shock to Silicon Valley culture that hasn’t been seen in many years. And it will be far from the only one.
Many will point directly at the darling of both Silicon Valley as well as the touchstone of riches for aspiring entrepreneurs; Facebook™ (FB) as proof this line of thinking is off base. And why shouldn’t they? The price has never been higher.
Yet, what many shield their eyes from and a great deal more turn their heads from entirely is what I and very few others have been arguing: “It’s all been possible via the Federal Reserve’s interventionist policies.” And the greatest source of that inflow of cash made available via “investors” is about to be shut down.
Let me go on the record here and point out what I believe will prove my point in the coming weeks and months.
Currently Zuck and crew have been lauded over with the prowess in its acquisition choices. You will know everything has changed when the calls to rescind Mark Zuckerberg’s authority in having carte blanche via not needing board approval for acquisitions going forward is demanded by Wall Street.
And that won’t be the only monumental shift coming. Maybe, one at an even faster pace: The meaning of IPO.
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.
The IPO screams of joy will turn into wails of terror when those VC “angels” meet at many “treps” desk and state – they’re IPO-ing.
No, not getting one set up for the big pay-day. No IPO will mean: “I’m pulling out.” i.e., “Have a nice day. Where’s the rest of my money?”
The once renowned purchases of “Billion dollar babies” will prove out not to be worth two cents in this environment.
Valuations will get crushed and people will be shocked at just how fast a company touted across the financial channels and other media as “fantastic buys” are flogged and fleeced when Wall Street comes back for their “investment.”
If the story or the numbers aren’t there – neither will these once darlings of Wall Street. Regardless of size or stature.
People will continue pointing at FB and others as proof that this whole idea of what I’m professing is off base. Again, they’ll point to the stock prices and say, “Look! During the recent sell off some they went higher! This proves, blah, blah, blah.”
What it proves is this in my opinion: It’s a last gasp effort to have exposure in these companies during this newest round of earnings season. i.e., As to have the possibility (more inline with hope) of any earnings windfall, whether it be real, or financially engineered. Because: There isn’t going to be another shot after this one. The money to take these stylized chances will no longer be there. Period.
I watched and read many viewpoints on what has now been circulated throughout Silicon Valley as the “tweet storm” unleashed by well-known Silicon Valley sage Marc Andreessen where he ended his views with the word “WORRY.” I believe he is spot on.
Many in the so-called “know” of any and all related to Silicon Valley pontificate that his alarm bells are a little “over the top.” Some have stated in rather condescending tones that “It’s not like the current crop of Silicon Valley has never had issues with funding. I mean, it was hard in 2009.”
Oh yes, it was – for about a week!
I would remind everyone to remember what took place in 2009? The birth of QE. Then it was off to the races. Or should I say “coding?” And as of today there has been no need to look back. Until now.
This next bout of what I believe to take place will not be limited to just the small-sized, or start-up class. It will be just as abrupt of a sea change for the current crop of Wall Street darlings that have produced what many have seen as “skeptical” results. e.g., FB, Twitter™, Pandora™, LinkedIn™, et al.
They are going to face harsh skepticism this earnings release period. Far more, and certainly more harsh or critical than any previous in my opinion.
The reasoning is: With no more “free money” pouring in from the Fed. for “investors” to slap around anywhere and everywhere in the hopes of something sticking. They’re going to do what anyone would do. Buy Nothing – Sell Anything and everything that isn’t making real money. For they are well aware their bankers or margin clerks – don’t accept “likes” as legal tender for deposits in their accounts either.
One last thing: If you think all this “worry” stuff is just nonsense. Let me leave you with this one line…
Yahoo™ just announced it’s interested in AOL™.
Feel better now?