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.