The great Silicon Valley shake-out
economist.com
economist.com
Sigh..I hate the internet these days.
Naturally, the first thing executives and managers do is review headcount and real estate to figure out which employees can be terminated and which locations can be closed without impacting revenues in the short to medium term. But then, they also:
* put on hold all software development projects, software license upgrades, hardware purchases, and other tech expenditures that are not critical to the business; and
* review all existing recurring expenses, including every SaaS subscription, with a fine-toothed comb, to see which of those expenses can be reduced or eliminated without impacting revenues in the short to medium term.
As a consequence, many startups selling software, hardware, and all kinds of subscriptions see their sales pipeline and a big chunk of their revenues evaporate overnight, seemingly out of the blue. Startups whose customers are mostly other startups suffer the most. It can be very painful.
The amount of preemptive firing and layoffs to extend runway is just beginning.
I wonder if this will benefit startups that are more bootstrap style. Does less funding necessary for anticipated future growth imply less damage during a recession?
Also, I wonder if we’ll ever see a return of enthusiasm and investment in tech related to the hard sciences. That’s what I originally went into, but career growth and earning potential couldn’t match soft tech so I ended up pursuing that instead. I really miss the physical sciences though. Is the problem that anticipated returns on investment are so far in the future that investors don’t think they would see any benefit in their lifetime? Or is it that we’ve already obtained all the low hanging fruit and what’s left is incredibly difficult?
I've seen this finance meme over and over again, and it's mostly an irrelevant argument. Yes, of course interest rates affect the valuation of growth companies, but a successful startup might grow 1000x from early investment rounds to the time when it's an established company with lower growth and a world-dominating role in its domain. An interest rate increase on the order of 2% is laughably small in that context.
What's probably going to happen is that valuations will be a bit lower at all stages, but why should that affect motivations and outcomes? The most motivated people aren't primarily in it for the money anyway, and there is plenty of room for getting rich.
Tens of thousands of people got rich after the dotcom crash, and interest rates were much higher back then. Interest rates are just a minor scaling factor.
When rates increase from 1% to 3%, the present value of a very long stream of future cashflows drops by a factor of three, which is not small. But you're right, it pales compared to the uncertainty embedded in the "1000x".
One of the fatal flaws of this kind of capitalism is that the only quantitative central management mechanism--lawmaking is central but qualitative, which wouldn't be a problem, except that we're in a state where the laws are written by rich people for the benefit of other rich people, so the qualitative nature of it enables willful obfuscation--is to vary the interest rate. If you lower it, you're giving connected people disproportionately more money; if you increase it, you're causing a capital strike. Either way, it's bad for the 99%.
This hurt my head to read. It's 200 basis points, which doesn't sound generally laughably small (and is materially not generally laughably small; see sibling comment). Using "2%" is unnecessarily liable to give wrong impression. Of course, your argument still stands.
cf. Powell's quote in https://www.cnbc.com/2022/06/15/fed-hikes-its-benchmark-inte... for example
This hurts the head only slightly less. Once a basis point figure contains two trailing zeros, it's time to switch to the percentage point (pp).
I led the technical team of a London startup for a few years and it was super exciting from a physics and electronics stance. We did did R&D into acoustics, vibration, materials sciences, 3D printing and manufacturing. We basically invented new kinds of surface microphones.
Slowly the smartphone and app ecosystem ate into our priorities. We shut down the lab, binned the prototypes, shelved the designs. Nothing got patented. I ended up saying in a meeting one day, "This isn't a startup any more. We're all just employees of Apple". Everyone nodded. Then carried on. I left when about 80 percent of the daily grind was jumping through legal and PR hoops to get things past the App Store gatekeepers, who I took to be hostile saboteurs.
Although the company lives on (and is doing well). looking back now I'd say the pathological fixation on smartphones and apps circa 2015 killed a very promising transducer tech project.
EDIT:
RE: Smartphones enable new things
I don't think there's anything new that smartphones have made possible actually. They've only made what was already possible popular. I had a very portable laptop with Wireless PCMCIA cards in 2010 (it was a hand me down from my dad and was made around 1999 so it certainly was available in 2006.) In fact I ran self hosting dev environments (plural) on it along with both Linux and Windows. Both OSes had overlapping window management and real multi tasking. It also had IRDA built in so you could (in theroy) send apps between them (I always just used the internet but smartphones can't even do that without going through an intermediary.) Tons of stuff smartphones can't do at all.
RE: Smartphones are a UI improvement
Compared to what cameras had? Maybe (I'm not entirely convinced of that even. Touch UIs are awful even without notifications and other modal UI elements popping and sliding underneath eachother while you're trying to do something unrelated.) Smartphone UIs are a massive regression from what the PDAs and PCs had before them though.
RE: Smartphones don't have to be distracting if you don't install distracting apps
No. The whole UI is built around giving all your attention to a single thing and scrolling through it. The web browsers are even design to be anti-productivity.
https://consumerist.com/2014/01/17/the-smartphone-has-effect...
I love having my phone, but I only look at the screen for 10 or so minutes a day on average. Still those 10 minuets are really useful. Monday I showed up and saw a “we’ve moved” sign with a new address but no directions. I didn’t need to write it down then reinter into a cars GPS, that’s the advantage of an all in one device you take everywhere.
SMS isn't the main distraction: it's the internet connectivity. Turning off notifications is easy, it's compulsively checking whatever my dog brain is curious about at a given moment that is really hard to create effective barriers around.
To the extent that I need the functionality of any of those (and I don't have a use for all of them) then I would rather buy something that does one thing and one thing well rather than carrying something around with me that
- can interrupt / distract me at any time
- that is a single point of failure
- that is expensive and a target for getting stolen
- that spies on me
- that enables the manufacturer to push updates to it remotely without my consent
- and has planned obsolescence built in
- seems to have enabled this mass migration to "software as a service" where I don't own my data or my software any more
I've worked in tech for nearly 25 years. I used to be a very "high-tech" person, compared to my peers in the 90s and early 00s. These days my smart phone consists of a Pixel 6 with GrapheneOS installed, very few apps (the ones that are installed are open source) and I actually hardly touch the damned thing. I often forget it at home. And I like it that way.
For those who make judicious use of their smart phone, great. Live and love your life. To each their own. What I resent about smart phones is that they left me and those like me behind. The above bullet points are all deal breakers for me. I don't like the things. I don't have a need for them. I want a smart phone free life and that seems to get harder and harder as everything, including some government services, are starting to require apps. I don't like to be a black and white thinker who thinks something is all good or all bad ... sure there are a couple of conveniences that I can point to with smart phones. But the bad so far outweighs the good to me that I'm practically a luddite now even though I've dedicated my life to developing technology.
You can read about how that came about in Digital Vegan [1]. For many of the same reasons I now feel alienated from "smartphone culture", occasionally use a Nokia flip-phone and buy individual gadgets that I love and repair.
They've done a great deal of good, of course, but at least an equal amount of harm, psychologically and socially.
This is quite the take.
Compare what’s possible today because of smartphones that didn’t exist in 2006. Huge populations of the world have internet access and technology that would’ve been unthinkable 25 years ago. Half of HN is getting rich because of smartphones.
Yes, parts of the culture change that’s resulted from smartphones kinda sucks. But “mostly regressive” feels like a stretch.
But I also don't think they are all bad.
I spent most of my career in hardware-oriented companies, and was constantly discouraged by hardware people disparaging, and, sometimes, outright sabotaging, efforts to improve software and software-driven UX.
A lot of hardware people did it to themselves. Even though I was often the recipient of a great deal of fairly abusive behavior, on the part of hardware folks, I have absolutely no schadenfreude, at all. It's really fairly heartbreaking. These folks loved their jobs, they loved the products they made, and they sincerely wanted to do the best. Even though they were wrong, they really thought they were doing the right thing.
One thing that Apple has done right, is meld hardware and software/firmware into a cohesive unit. Each of their products reflects a really good result of tight-knit collaboration between hard and soft. There's lots of physics and science involved. I know someone that reverse-engineers Apple products (electron microscope-level reverse engineering), and they report that Apple really does badass work. This comes from someone that would rather they didn't.
I feel that smartphones are almost ideal "control panels," or dashboards, for devices. Some manufacturers are grokking that fairly well; others, not so much.
The problem is the "attention economy". It used to be that you made money mostly from selling something that people found valuable. In the past decade or so however, the market has been turned upside down and you can make more money just hoovering up user data and wasting their time with ads - a lot of consumer tech eventually became a glorified ad serving machine (right down to the world's most popular desktop operating system).
However that is clearly unsustainable - advertising is ultimately there to drive demand for real, paid products, and its value is directly correlated to how effective they are at doing that. The market has been propped up by VCs (you could start a company that would never become profitable and still get tons of VC money to live off as long as you could show "growth & engagement") but that's now coming to an end and the market is readjusting.
In general, I'd say it depends. If you're bootstrapped and are bringing in enough money to get by, you can continue in that mode for a long time. But if you don't have revenue, the piggy bank is likely going to empty faster.
As far hard sciences, typically more capital needed, harder to scale, longer time to revenue, etc. None of which makes it non-viable as either an investment or a career but it's not hard to see the attraction of pure software businesses. (Of course, as things scale up, especially for B2B, many of the costs associated with physical goods businesses apply to software as well.
When speaking about investors, one has to differentiate between passive capitalists (i.e., the people whose money is being invested) and the career decision-makers. They have very different sets of incentives.
As for what passive capitalists want, it doesn't matter all that much, 95 percent of the time. They have objectives (X amount of annual income, Y growth rate of principal) but don't really care how those goals are achieved. It's important not to piss them off, but they don't decide on strategies.
The career decision makers, notably, are optimizing for their own career goals. Corporate capitalism would be bad enough if it were oriented toward profit maximization (paperclip maximizer) and from the outside, it looks as it's so; but the internal experience of a worker in capitalism shows something else entirely--that managers and executives care about one thing--staying in charge, advancing their personal reputations--more than anything else.
A twenty-year investment might make sense to a company or to a nation-state, but it makes no sense at all for an individual manager, whose definition of success is to be two levels higher than he currently is in one quarter of that time. He can't make the case for himself as someone who deserves (whatever that means, in this degenerate context) to be a career decision maker if it's going to take 20 years (or even 2 years, in many cases) to know how his decisions played out. In any case, for a project of that size and duration, attribution becomes difficult: it's impossible to know whether the results (whether successful or otherwise) were caused by one set of decisions and circumstances vs. another one.
In sum, it doesn't matter what passive capitalists (the principal investors) think, and the decision makers (agents) aren't interested in long-term wins because there's no career benefit. I don't know how to fix this. Capitalism is obviously a dead end--invariably, it becomes corporate capitalism (corruption), which itself becomes managerial capitalism (stagnation). However, in terms of proposing what will be better, we are to some degree speculating. A gradual transition to democratic socialism (as in Scandinavia) seems optimal, but (a) the world right now is going the other way (toward inequality and nondemocracy), and (b) there's no guarantee that fixing our social and economic problems will suffice to restore Cold War levels of innovation and dynamism.
If future cash inflows are more uncertain, or known to be less than they were estimated to be than before, or if the discount factor to present value (interest rate) is higher, then the value of the business is lower, regardless of financing method.
Probably the folks in the best position are those that just raised a ton of money but haven't committed to spending it yet. Bootstrapped startups may be subject to the same economic headwinds, but have less of a cash buffer than VC-funded startups. The funded startups that have a high burn rate may need to cut costs dramatically to make it through, but the ones that just raised may have the longest runway and biggest buffer of them all.
They may still have a challenge avoiding a downround in their next raise, if this one was done in a frothy environment.
Without a source of income, these retirees - the wealthiest generation in America and much of the world - will shift their investments to less risky assets. This, along with higher interest rates, will starve the world of cheap capital.
Wonder how much of an impact this has had. The risk profile of a 60 year old senior exec at a Fortune 500 company looks different from the risk profile of a 65 year old retiree.
I'm not gonna lose any sleep over the money chasing safer returns. God forbid some questionable business ideas at the margin don't get funded.
Feels like a misallocation of capital if I'm honest that will just create more unequal and unhealthy societies.
Uber is a perfect example of this. Not only did they create a market that they controlled all the levers to in order extract the value, they started partnering with auto lenders to get drivers into nicer cars with the promise of earning extra through their premium service. So they effectively became the lender and the employer, which is frankly unconscionable in a modern and free society.
The suicide rate of rideshare drivers is a severely under-reported crisis in the US. But to your point, the big money doesn't care about that.
I think you have the causation backwards. Rising income/wealth inequality is what leads to capital chasing the lucrative top x%.
I would say automation and technology and their resulting economies of scale inevitably lead to income/wealth inequality, and wealth redistribution is a political problem with political solutions. There is nothing a VC fund is going to be able to do about it.
For example, consider a 60 year old retiree with a 529 plan. Their daughter got into an expensive college but received a merit scholarship, so they only need to use 1/2 of the plan’s balance. The 529 is inheritable by the beneficiary, who will have children going to college in 25 years. The time horizon of the investments in this portfolio just went from near-term/conservative to long-term/risky.
Similarly, there are many boomers who have more money saved up than they could reasonably hope to spend in retirement. They are no longer investing for their future selves, but for their children or grandchildren, who have long time horizons.
Also, most of the LPs in big venture funds are institutional capital (endowments, family offices, etc), not personal capital.
The argument that appetite for more risky investments will dry up (say, decline by 50%) is flawed if it hinges primarily on demographics and interest rates, IMO. These asset classes are far removed from the retirement strategies of everyday people.
I know you're just throwing out an example and I'm going off on a tangent, but as somebody who just went through the college admissions process, this scenario is about as realistic as the retiree's daughter visiting an alien civilization on her flying unicorn. Merit scholarships for expensive (i.e. "prestigious") colleges barely exist - you might get $1000 (of the $70K annual tuition).
Another got 50% merit, 50% student loans, and qualified for a Pell grant. But this was almost 10 years ago, no idea if the norms have changed.
But these were people in maybe the top decile of their top 1000 high schools. If you factor that in as a prior (which wouldn’t be uncommon for a well to do family), I think the odds of a good merit scholarship improve.
Which assets are less risky, exactly? Bond prices are tanking. Cash is inflating. Real estate is probably next. I would argue it is best to stay diversified to be risk averse.
Its interesting that institutional investors have sold off assets for cash. that's not a defensive position. that's a highly offensive one because everyone knows you can't stay in cash. it's a hot potato: you need to get rid of it before inflation eats you alive. i can't wait to see where they dump all that cash. but you know it'll be some combiantion of equities, gold, real estate and bitcoin.
When I was getting my MBA at SCU, one of the assignments was to estimate the correct "fundamentals price" of various company stocks and what cash flow would be required to sustain that stock price.
The technique is simply: the current stock price is the NPV (net present value) of future revenue cash flows. Because of the effects of discounting, you only really need to go 10-20 years into the future (the present value of future money approaches zero as time goes to infinity but it's already effectively zero at 10-20 years).
The simplest solution is to assume constant revenue into the future so each each for 10-20 years is, say, $1M and that gives you a NPV that depends on an effective interest rate.
But a start up starts at zero revenue at day zero and must increase that revenue and generally markets require exponential growth (which is what "X% growth" announced each year actually means mathematically - non-exponential growth would be 0% growth per year by mathematical necessity). So you have to give an "interest rate" of growth as another parameter in your estimate.
How big is that? Well isn't NOT 5%, 10% or even 15% or 20%. Because if you wanted modest ROI like that, you'd NEVER invest in startups at all. You could invest in consumer credit card companies instead.
No. You need 30%-100% growth per year of ACTUAL money revenue. Which is what makes startups so great for founders if they do well. The ROI is enough for everyone involved but more so for founders. In Silicon Valley's past, this was possible even with hardware. But in the 90s it became passe to require or expect that apparently.
So what about Dot Com and later internet startups? Well, we did the analysis on Amazon back in the day and to justify their THEN stock price, you could set revenues growing at 100%-200% per year for the entire 20-30 year event horizon of the analysis AND STILL NOT COME CLOSE to justifying the stock price at the time.
Fast forward to 2022, and note that companies like Twitter are still not profitable or having revenue growth levels to sustain its even now depressed stock price. The wrong lesson is to say that "Obviously fundamentals pricing doesn't matter" - instead it means they current wishful thinking of "animal spirit" pricing is dangerous.
The main reason for the discrepancy is these irrational exuberance pricing driving the price: these are "value stocks" (as long as a bigger sucker, I mean buyer, can be found) BUT they are NOT investing in ANYTHING that can build greater revenues in any effective way. The problem is that the South Sea Corporations and Tulip markets were exactly that as well.
The poster child for this lack of fundamentals is WeWork, which was NOT EVEN a growth tech play (with Moore's Law based value multiplication) but simply a real estate business no different from any REIT or property management business (fixed size pie) AND had anti-fundamentals (risk creation and wealth destruction at its core) baked into them financially in their core business model. But if you say "Moore's Law" enough times.... you get a Cargo Cult of delusion.
Twitter and most other internet players are effectively similar in that it has no real value creation but plenty of risk-creating features to its business model with a high operating cost. And now even Amazon is floundering in many ways with it only sustained by its prior destruction of competitors.
The Achilles heal of destroying your competitors is there are circumstances when customers will simply say no to buying what you are selling _without direct product substitution_ or by having them completely changing their economic allocations and choices entirely outside the market. That's already happening thanks to economic destruction and inflation - when people cancel Netflix accounts, often they are NOT substituting another streaming vendor - often they are changing what they do with their time!
If these companies ACTUALLY provided value, they'd have some immunity to economic downturns if they were truly essential. But they are weak financially and they are far from essential so the result becomes dire. AND DESERVED if you haven't been focused on the fundamentals due to unethical get-rich-quick schemes and political distractions. Having "good times" for too long has also made them "fat, dumb and happy" and destroys the instincts and even core knowledge to insulate themselves to the current reality.
That was the VALUE of cyclic economies pre-1980 - bad times forced to you remember and learn how to prepare for that reality. Just one of the many reasons why eliminating business cycles causes more harm than good.
at this point its just cash looking for a place to go and it has to go somewhere.