Crisis in tech companies: movement is cyclical and deserved, says BW
Bloomberg Businessweek report argues that phase of inflated valuations of tech companies is over — for the good of companies and investors
Over the past half century, Silicon Valley has swung between two similar and often conflicting activities: creating wealth and making money. Wealth creation is the act of invention and patient building of long-term businesses. It’s the high tide that lifts the boats of employees, shareholders, and everyone else.
Making money is the basic impulse: the quest for quick cash. The tech industry and its happy, bold patrons have learned, time and time again, what happens when short-term profit takes precedence over developing stable companies that can create good things.
And yet, here we are again. After years of wildly inflated valuations, crypto-flavored pyramid schemes, and all sorts of real opportunism, it has brought us to the 2022 bust.
So far this year, the S&P 500, an index of publicly traded heavy tech companies, has lost just under a fifth of its value. Among the hardest hit are: Amazon (-36%), Tesla (-38%), Meta (-45%), Zoom (-44%) and Shopify (-76%).
Priests of Venture Capital
As a whole, venture capital-backed companies that went public during the pandemic are down 48%, according to PitchBook. “The boom times of the last decade are over without a shadow of a doubt,” the partners at venture capital firm Lightspeed Venture Partners wrote in May, in a representative example of the industry sentiment that circulates in presentations. “Schadenfreude was installed.” (Schadenfreude is the feeling of joy or satisfaction aroused by the misfortune of another person.)
Venture capital high priests often argue that these crises are macroeconomic acts of God, like a 100-year storm, or, okay, maybe a 15-year storm. In this case, the argument goes, two decades of low interest rates have turned tech companies into attractive investments, sending a flood of capital from public markets.
The competition to back the most promising startups drove valuations to unsustainable levels, until an unprecedented confluence of bad news (Covid-19, Ukraine, inflation) sent it all crashing down. It’s comforting to blame the world. But the real explanation, which requires real assessment, is that the industry, once again, is facing the brunt of its bad decisions.
It all started with the two things that motivate all venture capitalists: 1) a crippling fear of missing out on the next big thing and 2) greed. A decade ago, new companies started pouring out of startup schools like Y Combinator, asking to be valued at millions of dollars before they even made a dime.
high profile breakdowns
To attract more promising startups, certain venture capital firms, notably Andreessen Horowitz, eagerly endorsed this high-stakes inflation and often allowed founders to cash out before proving their business models.
High-profile meltdowns like the Theranos blood test debacle and WeWork office-sharing have produced some binge-worthy television exposure, but it hasn’t led to the abandonment of that money mentality.
Instead, venture capital firms and their new rivals such as SoftBank Group and Tiger Global Management continued to struggle to invest and raise prices all the time. “There was a lot of money available at every stage and everywhere you looked,” says Jeff Clavier, managing partner at Uncork Capital, an early-stage business investment fund.
Understandably, many founders took all the cheap money they could get. Some large startups have raised several rounds of funding a year, with founders offloading portions of their personal stock for upfront payments and employing risky funding schemes like convertible notes, in which investors could buy stakes even without knowing about future valuations.
The oversight built into the initial public offering process has managed to protect the broader markets from some especially unlikely IPO proposals, like that of WeWork in 2019, which collapsed after the universal derision of its financial disclosures.
“Blank Check” Offers
Quickly, private companies found an alternative solution in Special Purpose Acquisition Companies, or SPACs. These “blank check” offers paved the way for companies to go public, including lender SoFi, space companies Rocket Lab and Virgin Galactic, pet product subscription service Bark, and Grab (the “Uber of Southeast Asia”). ”).
All are trading well below their bid prices. “A lot of people have accumulated and diluted the SPAC brand by not being prepared,” says Yelena Dunaevsky, an attorney specializing in SPACs at the law firm Woodruff Sawyer. “Some target companies were not at a time when they should be going public.”
This misbehavior has been overshadowed by the bubbling cryptocurrency markets, which have blinded Silicon Valley, its industry counterparts around the world, and many others to the risks that come with their fierce game.
Speculators piled on digital currencies, shady exchanges and virtual assets. Web3’s pretentious speech sounds like wealth creation — decentralizing the internet and putting it on the blockchain, and thus creating a set of tools that restore people’s power and free them from dependence on tech giants and traditional banks.
But most cryptocurrency fads to date tend to involve quick withdrawals that leave the other parties with lots of fake money. There are initial coin offerings, non-fungible tokens, and stablecoin schemes such as TerraUSD, which recently plummeted in value after suffering the crypto equivalent of a bank run. Since the beginning of the year, the Bloomberg Galaxy Crypto Index, which measures the performance of major cryptocurrencies, has dropped 48%.
“Something is not right here”
The craze seemed to reach its sharpest “something’s not right here” moment during this year’s Super Bowl, when NBC aired cryptocurrency ads starring LeBron James, Matt Damon and Larry David. For coaches not old enough to remember the infamous sock puppet commercials that seemed to signal the bursting of the dot-com bubble, the Super Bowl ads gave a taste of what that would look like.
Despite similarities to past downturns, the 2022 burst also feels strangely unfamiliar, perhaps because it’s been so long since the last shock at this level. One ominous difference is that previous growth cycles lasted about eight years.
As a volcano is long dormant, pressure has been building on this one for more than a decade. In 2021, US tech startups raised three times the amount they raised in the year 2000, and this collapse is also global in a way that previous industry downturns have not.
Share prices and valuations have tumbled from Britain to China, where a Communist Party campaign to curb the power of tech giants like Alibaba, Tencent and Didi demolished shares and valuations of private companies last year.
The tech world also feels more political and divided externally than during previous crises, as if some of the same tools that exacerbated political divisions elsewhere are now being trained inward.
Nowhere is this more apparent than in Elon Musk’s quixotic takeover of Twitter, a purchase that may or may not be put on hold pending an analysis of the prevalence of bots on the social media site. Last month, Musk declared his allegiance to the Republican Party and accused people less likely to call someone a “pedophile” with falling victim to an “awakening-mind virus.”
This looks new. Steve Jobs and Bill Gates earned the deference of an impressive array of politicians, but they remained largely apolitical for a reason—they needed customers on both sides of the spectrum. Now, the technology monolith that money has hoarded for a generation is crumbling.
First, former President Donald Trump has forced tech companies to take sides on issues such as immigration, free speech versus misinformation, and his proposed ban on the video-sharing site TikTok. Even absent from Trump’s daily tweets (for now), today’s startup founders and funders still need to rely on the open politics of the likes of Musk, Peter Thiel and Marc Andreessen on issues like college loan forgiveness, taxes and who should be quiet.
This sourness has led to a wave of high-profile defections from Silicon Valley to Miami and Austin, cities that promise an even greater base of laissez-faire. The industry can no longer agree on a matter of universal consensus if the Bay Area is the center of its world.
One thing that is unlikely to change in this crisis is who suffers from it: regular investors and ordinary employees. Like the founders and institutional investors who unloaded their shares during the good times, venture capital firms earned hefty management fees no matter what happened to the startups in their portfolio.
These investors are still holding a record $300 billion in uninvested capital and will continue to receive management fees regardless of their track record or market performance.
Meanwhile, more than 13,000 tech workers around the world have been laid off since early April, according to tracking website Layoffs.fyi, which includes high-profile cuts at Netflix and stock trading site Robinhood Markets.
Towards catastrophe, first class
There’s probably a lot more to come, particularly if the recession drags on until 2023. “We haven’t actually seen any real carnage yet,” says venture capitalist Elad Gil, “the things that tend to happen when money really dries up. I think a lot of people are uncertain or in denial.”
Deny, of course, is a first-class ticket to catastrophe in any market downturn. That’s what this annual technology issue of Bloomberg Businessweek is here to dispel.
Our almanac will guide the reader through the peaks and valleys of the remaining tech landscape, including Facebook’s failure to beat TikTok at its own game, the costs of Google’s browser supremacy, a difficult assessment of the app economy, and the fate of all. those scooter companies — remember them? — those that rose to prominence during a less turbulent period.
There are also examinations of a new type of online prediction market and the controversial popularity of the polygenic risk score, which aims to help parents undergoing IVF reduce the risk of cancer, diabetes and other diseases in their children.
These technologies, and others like augmented and virtual reality, are keeping many industry veterans optimistic, even under the steely grip of a new crisis. “Oddly enough, I’m quite optimistic,” says Michael Moritz, a partner at Sequoia Capital.
“This shock will bring a powerful cleanse to many companies, and some will be able to tolerate the consequences and some will not. Those who do will be fine.”