Photo: ShineYourLight (Sang Kim)
Trends don’t start here in the cold North. We all know that. They tend to come from the coasts. Not always, but mostly. Some trends never even get here at all, and we can be fine with that — or not even realize we missed another one. Then there’s a trend that turns into a… crash.
There’s one of those taking shape out there in the world of big tech that we should hope never gets here. We’re hearing the talk more and more. New signs pop up. I caught a story yesterday that uses the stock market term “correction” in the headline — how polite — then proceeds to cite so many reasons it could be called a crash. Or a bubble burst.
Which is it that’s coming? You decide. If it happens, it will affect a lot more than stock market investors. These events may start with public stocks, but they sure as hell don’t stop there. The market-caps of two more high-flyers were almost cut in half this week: LinkedIn and Tableau. More I-told-you-sos for the bubble-burst alarmists, led by VC Bill Gurley.
Well, so what, you might say. You don’t think private company valuations are linked to the public markets? Guess again.
That Business Insider article above mentions three current reasons for concern:
• startups are having a harder time raising money
• they’re “laying people off left and right”
• 75% of venture capital limited partners are concerned about the pace of investment by VCs and startup valuations
It lays out in pretty sobering fashion what “we could see”:
• A bunch of startups who accepted unfavorable terms when they raised their last rounds could find investors forcing them to liquidate or sell on terms that help investors recover some of their money, but leave founders and employees with nothing.
• Startups that are burning too much cash could quickly disappear as funds will be harder to raise.
• A wave of acqui-hires as cash-rich giants scoop up talent by raiding struggling startups.
• Lower salaries and fewer perks as startups and big tech companies alike strain to show investors that they’re being responsible during these lean times.
The tech-startup go-go years (the latest round thereof) could be coming to an end. Then again, it could be a trend that’s not coming to Minnesota — in which case you could go ahead and disregard this post.
Those of us in the tech world have a tendency to think the party will never end. That’s kind of been the position of another VC, Marc Andreessen — that things were fine. For some time, he and Gurley were carrying on a robust public argument over whether a crash was coming. (Andreessen lately believes we’re in a bust — from the standpoint that certain tech companies are actually under-valued.)
You don’t have to be too old to remember that crashes can happen. I was there when things imploded in the early 2000s. That was by far the worst of four business cycles that I’ve survived since I started my business. (Andreessen was there, too, of course, and almost saw his startup die. Yet in recent times he’s been a lot more positive than Gurley.)
The thing with cycles, they aren’t always easy to see coming. Many people deny the signs. These things don’t just bonk you over the head and say wake up — until they do. Big shifts in the tech industry take time to comprehend. Those with experience in business cycles see things others don’t.
In the last big bubble burst, the so-called dot com crash, the immediate pain wasn’t so bad — unless of course you were holding a ton of publicly traded tech stocks. But the two or three years following that stock market crash were brutal for the tech industry. (One of my Silicon Valley friends even wrote a book about how to escape from there to find another life.) And there was just as much pain here in Minnesota as there was anywhere. Myself and some of my colleagues took to calling that the Nuclear Winter. Trust me, none of us would want to go through more long years like that ever again. So, we learn. We watch for signs.
The Business Insider article I cite above comes to this conclusion:
We’re probably not going to have another implosion like what happened in the early 2000s. Today’s companies at least have real customers and revenues. Mostly.
Sure, some of them. But many, many do not have profits or, worse, business models. A vast number that have raised huge amounts of money are in for a rude awakening about their valuations when the cash runs out. Some will vaporize. Many more will be getting major haircuts that will interrupt a lot of lives.
I wrote a post five months ago about how much money certain Minnesota tech startups were raising that they didn’t need. The conclusion (from a VC whom I interviewed) was that it was about bolstering the balance sheet. Could that be to survive an impending slowdown… or worse?
How will we fare here in Minnesota when the tech crash comes? What will we see?
You tell me.
[Note: This post first appeared on my personal blog, Graeme Thickins On Tech.]
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UPDATE 2/8/16: Today, I received an informative, thoughtful response from Michael Gorman, a founding Managing Director of Split Rock Partners, who’s based here in their Twin Cities office:
Graeme, thanks for sharing your interesting post. The public markets are an important reference point for private valuations, as they typically need to converge at the time of an IPO. As you have seen in recent months, public markets have not been supportive of many of the later stage high valuation rounds, and companies have traded below those numbers. Private investors are taking note as you would expect. In addition to valuation pressure, there will be more attention paid to the capital efficiency of business models to reduce the overall financing risk in the business. Many of these companies have been priced for perfection in terms of very aggressive growth rates long into the future, and I think the recent results suggesting lower growth rates are rapidly changing the calculus.
Thank you, Michael. Well stated, as always.
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UPDATE 2/13/16:
Here’s some further commentary, from another guy whose reaction I requested — my friend Patrick Meenan. He was still thinking about it when I asked, on his way to a conference. He’s a VC at Fargo-based Arthur Ventures, which funds B2B software startups at the seed/series A stage “anywhere outside of Silicon Valley.” Patrick is based in Minneapolis. His post: How the tech market volatility really impacts SaaS entrepreneurs outside the Valley. Thanks, Patrick!
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UPDATE 2/20/16:
Great article by Rolfe Winkler at the Wall Street Journal that will give you even more perspective, and facts, on what the reality is today in tech valuations and funding: