A trader works at his post on the floor of the New York Stock Exchange, Wednesday, June 1, 2022.

Silicon Valley is preparing for the end of the good times

Silicon Valley is also arguably more sensitive than some other industries to changing economic conditions, including rising interest rates, given the number of tech companies that depend on easy access to funding to pursue their ambitious projects before making a profit, or in some cases, even generating income.
In recent weeks, investors and industry veterans have tried to sound the alarm about the economic environment with a number of memos, tweets and other public statements. “The boom times of the past decade are unambiguously over,” venture capital firm Lightspeed, one of Snapchat’s earliest backers, said in a recent blog post. “No one can predict how bad the economy will get, but things don’t look good,” tech startup accelerator Y Combinator warned in a letter to founders, before adding, “The decision the it is safer to plan for the worst”.
Bill Gurley, a prominent venture capitalist, summed up the changing mood in a Tweeter last month, seemingly aimed at tech startups who might be in denial: “The cost of capital has changed dramatically, and if you think things are the way they were, then you’re headed for a cliff like Thelma and Louise.”
While no one can predict the length or severity of the current market downturn – and most industry watchers don’t expect it to be as damaging as the tech crash of 2000 – brand new rhetoric a brutal reversal of tone for a high-flying industry. The technology sector, already dominant in our lives, only seemed to grow even more as the pandemic drove people to work, shop and socialize through a screen. The number of unicorns, or startups valued at $1 billion or more, topped 1,000 globally in February, roughly doubling from pre-pandemic levels. Access to easy money, thanks in part to low interest rates intended to support the economy, only seemed to fuel even more buzzy and energy-intensive businesses.
Then came a seemingly perfect storm: inflationary pressures, the ongoing Russian invasion of Ukraine, rising interest rates and recession warnings wreaked havoc on the stock market, and on the tech sector in particular. The S&P 500’s information technology sector is down 19% year-to-date on Wednesday, and the tech-heavy Nasdaq index is down more than 20%. In a sign of the times, Apple was knocked down last month by oil giant Saudi Aramco as the world’s most valuable company.
There are also indications of weak spots for private tech companies, from reports of depreciating valuations to tougher fundraising. There has also been a wave of layoffs across the industry, including at trading platform Robinhood, fintech unicorn Klarna and several super-fast delivery startups.

“These corrections are always vicious and sudden, and it’s amazing how quickly all the pundits, pundits and gurus change their tune,” Vasant Dhar, a professor at the Stern School of Business at the University of New York, told CNN. York. “The market is still amnesiac.”

Dhar, who has worked in technology for decades, said he had been through several ups and downs in his career, including the dotcom bubble in 2000 and the financial crisis in 2008. But, he said. says, “It’s always the young people coming in who, as Bob Marley says, don’t know their history and get ahead of themselves. And then things turn around – and things turn around very, very suddenly.

“A major radical change”

It’s been so long since the last protracted downturn in the tech industry that some elderly Silicon Valley statesmen are using their platforms to try to remind the many tech workers who may never have worked in this environment what it looked like.

“No one can predict what’s going to happen over the next 12 months, but we haven’t seen a real tech downturn since 2000,” wrote Mike Schroepfer, who founded a startup in 2000 and then held the job. of CTO at Facebook. Twitter feed last month. “I have no idea if now will be the same, better or worse than the crash of the 2000s. But the bad times can last for many years and if you can make decisions now that extend your trail, that’s probably the right one. decision.”
For much of the past decade, access to easy money combined with the rise of smartphones has helped propel a wave of ambitious and disruptive tech companies able and willing to spend millions, if not billions, on venture capital looking for quick and global solutions. growth. A host of tech startups, from Uber to WeWork, have become household names without ever generating consistent profits. This era has inspired several recent Hollywood productions, all glamorizing the excess enjoyed by the founders amid what seemed like an endless bull run. But in another sign of the times, Uber signaled last month that it also intends to cut costs and “treat hiring like a privilege” as investor optimism recedes.
A trader works at his post on the floor of the New York Stock Exchange, Wednesday, June 1, 2022.

“This is a sea change,” said Matt Kennedy, senior IPO market strategist at Renaissance Capital, a provider of pre-IPO research and IPO-focused ETFs. “For years, startups have generally followed the same playbook, which was to grow as quickly as possible regardless of burn rate. That’s what their investors wanted to see. Capital was cheap, so losses didn’t matter.”

“But that has changed. Again, profits matter,” he added. “I think investors are looking more closely at the bottom line.”

A tougher start-up and fundraising environment isn’t necessarily bad for all businesses, though it can be “worse for bubblies,” Dhar said. Riskiest companies and early-stage startups tend to suffer in tough economic times, Dhar said, but later-stage venture capital-backed companies might find the sudden evaporation of “pesky competition.” advantageous.

Kennedy added that many fast-growing tech startups “need funding to survive” and some may suffer more. “They’ve only operated as high-loss businesses, and that’s a tough pivot to do,” he said. “As a result, I think we’ll see layoffs and rounds. Some of these companies will fold, some will be acquired.”

Tougher than the Dot-Com era

While many comparisons have been drawn to the angst over the bursting of the Dot-Com bubble, the tech industry is much more developed today than it was in the past, according to Dan Wang, associate professor at Columbia Business School.

“Big tech companies, even if they are tightening their belts, are still in a financially advantageous position,” Wang said. “And in addition, many of the services provided by technology platforms, in particular, are those that consumers consider essential.”

This “makes it very difficult to compare the two eras, or to suggest that what happened 20 years ago could be predictive of what will happen in the coming months,” Wang added.

Despite the chilling rhetoric and worrying daily headlines in the tech world, Dhar said he still sees the sector rebounding. “Long term, technology is the future,” he said.

In the meantime, the corrections may even be good for the tech sector, both by ensuring that more financially viable companies eventually go public and by removing some of the scum and excess in the market.

“To be honest, some of the arguments I’ve heard over the past year have sounded completely absurd,” Dhar joked. “I have no idea why they would have ratings like that.”

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