Is Silicon Valley’s Tech Bubble About to Burst?

Muchaneta Kapfunde | @FashNerdEditor

For the tech inclined, the 1,800-square-mile area known as Silicon Valley is mecca and a place that has shown great potential in generating world-changing companies. Home to about 3 million people, it has garnered a reputation for being ‘the’ place were tech start-ups are courted by venture capitalists seeking to invest in the next “great” idea.

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Although many cities have attempted to emulate the innovation powerhouse that is Silicon Valley, not many have managed to reach the same success of the Californian tech space. Why? Well if you take a closer look you will quickly come to realise that most of Silicon Valley’s success has been mainly built by high-tech founders born outside the valley and many outside the US. It has become an environment genetically made up of people with entrepreneurial talent who have packed up and moved to California to be stimulated by the dominant players who are re-inventing and innovating the technology industry. Bragging private start-ups with valuations that are at or exceed $1 billion, Silicon Valley is still holding onto its reputation of being ‘the’ place that births a large pool of tech talent and is still the first stop for capital investors looking to sustain the next trendy start-up. So with many success stories under its belt, then why are we hearing whispers of bubble bursting trouble in Silicon Valley’s tech paradise?

In order to understand all the chatter one has to first define the word ‘bubble’. On its definition Jay Ritter, a professor of finance at the University of Florida’s Warrington College of Business Administration who studies valuation and IPOs, defined it as, “A bubble is something where assets have prices that cannot be justified with any reasonable assumption. It is also when billion-dollar unicorns, as they’re known among venture capitalists, begin to insist that their ultra high growth rates should not be subjected to conventional P/E-based valuation analysis”. Which brings us to the question, is the tech bubble bursting inevitable? Well Vikram Mansharaman, who writes for pbs.org and is a lecturer in the Program on Ethics, Politics & Economics at Yale University, believes that the tech fantasy is truly over and that the bubble is going to burst, it is just a matter of when. In his article for pbs.org he shared, “One of the tell-tale signs that the end of a bubble is near is the popular obsession with get-rich-quick investing opportunities.”

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So as those with authority continue to discuss the end of Silicon Valley, Peter Cohan, Forbes.com contributor, keeps it simple by pointing out that to predict the burst one needs to be on the look out for 4 warning signs. They are; (1) The IPO market is screeching to a halt, (2) Tourists taking the bus out of Silicon Valley, (3) Money-losing startups being over-valued and (4) Private companies aggressively sweetening the pot to attract fresh capital. If the end is nigh, we wonder is there anyway we can prevent it becoming a complete Armageddon. Well Jonathan Cheung, a managing partner at a new data development and strategy company believes that to prevent the negative outcome, many are predicting that companies should not be freely burning through cash, they should instead reduce spending “in order to survive”. So although there has been a massive reduction of investment, should the so-called bubble bursts, it does not necessarily mean the end. On this Cheung shared, “We saw almost every startup tech company in the last round of investing see their valuation reduced, whether the big name companies or those like us who are trying to get a little piece of the pie. We have to be aware of what is going on or face the consequences.”

Some opinions seemed to have been based on the fact that last year (2015) the biggest names in tech suffered noticeable declines. Microsoft fell 8.4%. Apple and Facebook both fell by 8.8%, Yahoo fell by 9% and Twitter fell by 11%. With such numbers it is no wonder Time magazine asked “Should tech investors brace for even worse declines ahead?” I do not think Silicon Valley will go down so easily especially with technology showing such promise when it comes to improving our everyday life from fashion to health, so it is on that note that I think we need to delve a little deeper.

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Today a few start-ups are now securing finance and then getting out of Silicon Valley to set up camp elsewhere. These actions should not spell doom and gloom for a place famous for breeding winner-take-all attitudes among young tech entrepreneurs nor should Silicon Valley’s slow-down conjure up memories of the past dot-com bubble burst that not only wiped out $6 trillion in household wealth but also saw many companies either drying up or vanishing completely. The two bubbles are very different. Peter Cohan (Forbes) points out that there are 7 differences between this bubble and the dot-com bubble and they are; (1) Rising IPO standards, (2) Aversion to public markets, (3) Lower entry barriers, (4) Galloping unicorns, (5) Semi-public companies, (6) Less industry diversity and (7) Less debt. 

So as a number of start-ups are starting to see their valuations drop significantly over the past few months, I believe that there are obvious factors that are also most likely playing a key in role in Silicon Valley’s decelerate such as the innovation economy requiring cheaper labour, Wall Street’s lust for growth at all costs, frustrated investors becoming more cautious when it comes to parting with their money and the lack of affordable housing in the area which has meant that residents are now leaving for lower cost tech friendly cities like Austin.

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Overall I think that Silicon Valley is on the verge of being reborn as opposed to being on the edge of declining into nothing. The reborn might come in the shape of a bursting bubble wake up call that will not wipe out everyone, but will instead wipe out those who don’t see it coming. I am confident that such a storm will mark the end of the kind of startups whose big ideas were based more on raising a mountain of money first instead of figuring out what the business plan will be. The ‘new’ Silicon Valley will most likely be less about hot unpredictable startups and instead become the place that fuels other tech community renaissances taking place in cities like Austin, NY, London, Amsterdam and Berlin.

Lastly, I think Dave McClure put it best when he said, “Silicon Valley is a state of mind, not necessarily a real place”. He perfectly capturing what the new Silicon Valley could represent. So it is without claiming to be an authority on the matter that I truly wonder whether Silicon Valley’s tech bubble is really about to burst? And whether it will be a necessary burst? Well I am going to continue to hold onto the belief that Silicon Valley is simply evolving and that it will not be blown up into smithereens. Instead, the predicted burst could potentially have the power to stabilize its eco-system and give like-minded individuals the opportunity to establish their tech ideas on their home turf without feeling the need to catch the next plane to California. As an observer, all I can hope is that with so much innovation still to be achieved, the innovators with tech dreams will come to understand that although Silicon Valley made a lot possible, it was never about the place, it was always about the people with the great ideas .

Share Your Tips & Corrections

  • guster00

    I think there are a few other factors to think about: Silicon Valley also is closely tied to two world-class education centers (Stanford and Cal) which bring in people and ideas especially from overseas. Also, the weather and environment (minus the traffic) is pretty amazing in this part of the world. So you will likely always see some level of talent and growth in this area. That said, rarely in history do we (the human race) easily adapt. Often it comes through hardship (collapse of a civilization, real estate market, stock market, etc). So it may be that the evolution will come only after another bubble or down-turn.

    • Mano10Napel

      Good stuff. I think a bursting bubble is the sum of many factors coming together. From certain factors it isn’t even clear to what degree they had an relevant influence. Any expert is generally only an expert in his/her field which makes it that most research results are just another shot from the hip.

  • guster00

    I think there are a few other factors to think about: Silicon Valley also is closely tied to two world-class education centers (Stanford and Cal) which bring in people and ideas especially from overseas. Also, the weather and environment (minus the traffic) is pretty amazing in this part of the world. So you will likely always see some level of talent and growth in this area. That said, rarely in history do we (the human race) easily adapt. Often it comes through hardship (collapse of a civilization, real estate market, stock market, etc). So it may be that the evolution will come only after another bubble or down-turn.