Monday, January 25, 2016

That Bubble Bursting Feeling

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With the new year comes new concerns for the tech sector in San Francisco and Silicon Valley — and the strongest signs yet that the party, along with the free beer and free kombucha keg in the break room, may be ending.
A number of startups have seen their valuations drop significantly over the past few months, suggesting that investors are showing signs of reducing the millions of dollars thrown toward new technology companies. NoSQL database company MongoDB is leading the fall, down 12 percent since May and more than 50 percent since its initial valuation of $1.2 billion in October 2013, as Fortune reported in November.
This has stoked fears that the ease with which many fresh-faced founders have secured funding and stupendous valuations is coming to an end. It won't be as bad as the first dot-com bust, but most analysts and workers interviewed by SF Weekly accept that the good times of the boom are over.

The malaise is not limited to Silicon Valley startups or the more harebrained pitches. Mark Dempster, a partner at Founders Circle, a capital firm that purchases officially sanctioned secondary shares in companies and that helped Pinterest through its $186 million funding round, says that even larger, more established "startups" — including Palintir, Dropbox, and Flipboard, each of which is entering its fifth year of existence — are facing difficulties
Last year, Dropbox had hinted at an IPO that never materialized, leading to worries that companies may be overextending or are drawing back in an attempt to be profitable in the future. Square, the credit card-alternative helmed by Twitter cofounder Jack Dorsey, saw its valuation reduced by $2 billion and held its IPO priced at $9 a share, below the expected range of $11 to $13.
But as more and more companies see their valuations reduced, or push for an IPO at a reduced rate than previously expected, employees — rank and file and top company brass alike — are beginning to see a need to cash out, at least partially, in order to protect themselves, Dempster argues.
"Things happen in people's lives, and sometimes they need to ensure they have the money available for marriage, kids, college, and any number of things," he says. "Right now, there is a lot of insecurity with people who have a massive amount of valuable currency, but it's illiquid at the moment."
That insecurity is compounded by Fidelity Growth Company Fund's recent devaluation of a number of privately held companies, including Dropbox, MongoDB, Moderna, Intarcia Therapeutics, and Turn Inc. The Fund also includes blue chippers such as Snapchat. The millennial-friendly social media app suffered a 25 percent devaluation in that same time frame.
Analysts say this is a hint that tech companies are still trying to generate revenue, which doesn't impress established investment funds like Fidelity. In November, nearly all of the 24 new tech companies being tracked by Fidelity saw static or reduced valuations.
MongoDB took the biggest hit, but even other surefire Silicon Valley bets — companies centered on data and advertising — suffered. Turn Inc., a data-driven digital advertising company, lost 25.7 percent between May and the end of September, a 46 percent reduction from Fidelity's initial December 2013 investment.
Dropbox, perhaps one of the most recognizable startup names, was down 20 percent through the end of September — and has yet to file that hotly anticipated IPO — although the company remains notably higher in valuation than its original May 2012 investment.
The devaluations are leading to fears that there could be widespread layoffs. Yahoo has already begun that process, announcing it will cut 10 percent of its workforce — and that the cuts could extend to other tech companies.

What does this mean for San Francisco startups and tech entrepreneurs? According to Jonathan Cheung, a managing partner at a new data development and strategy company based in Mid-Market that's currently in stealth mode, companies freely burning through cash must reduce spending now "in order to make sure we survive, if there is a massive reduction of investment or if the so-called bubble bursts."
For Cheung and his company, accurately assessing the current market is vital. "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," he says. "We have to be aware of what is going on or face the consequences."
Tech analysts and entrepreneurs like Cheung claim many startups are falling into the predictable problems of overextending and relying on expansive funding, even before turning a profit of any kind.
"This creates problems for many people," he says, "including the employees, because they don't know if they will have a paycheck month to month, especially if we see an exodus of investors this year."
Dempster agrees, and urges companies "to take measures that will safeguard their future." Some firms already are. Many young companies are already curtailing their legendary "benefits packages" such as free lunches and corporate events. This is the responsible move, says Dempster, although he adds those cutbacks are coming slowly.
The key to success in the current state of devaluation, he says, "is to make sure the company is able to survive if an investor backs out of full funding. It means an end to some of the perks that many tech companies have become accustomed to in recent years. It's time to be responsible."

There are other signs the flow of capital may be slowing. According to Cushman & Wakefield, in the third quarter of last year, rent in SoMa increased to a record $69.94 per square foot. While office vacancy rates are at a record low of 6.1 percent, according to Colliers International, Cushman & Wakefield noted that fresh capital was no longer being poured in to pay for those prices. This is a sign that tech companies are finally unwilling — or unable — to dole out those rents.
If a company is not turning a profit or bringing in revenue of any kind — two common features of many investor-backed startups — the safety nets that exist at other companies to stay afloat when the bubble bursts do not exist.
This means that when funding runs dry, companies will begin to fold. San Francisco's record low unemployment will rise, and real people, including those holding one of the "five jobs created for every tech job," as Mayor Ed Lee has been fond of saying, will be hit hard.
And San Francisco, as well as greater Silicon Valley, does not appear prepared for a massive wave of unemployed tech workers.
Sri Patel, 36, a web developer who has worked with Apple, Facebook, and Twitter, is now working contract jobs month-to-month. Widespread devaluation of companies is the beginning of an overall reduction of money available. This means harder times are ahead for workers used to companies engaging in bidding wars for their services.
"It is a frustrating reality that many of us understand and are seeing right now," Patel adds. "I had a friend who recently lost a bunch of benefits that he had been getting and the company said it was a way to reduce costs and make sure everyone still had a job. That's a smart move for the company, but it hurts the workers like us."
Despite the obvious concerns and fears that the technology sector is facing a potential crisis not witnessed since 2000, there is hope that even if the bubble bursts, it won't be as devastating as it was last time.
Investor Peter Cohan, who made billions in the late '90s, wrote in Forbes that even if there is a bubble about to burst, it will create opportunities for many companies — provided, of course, that they turn a profit. Sounds basic, but bears mentioning in an age when companies in the red are valued in the tens of billions.
Cohan believes there is still much capital to be injected into the tech sector. However, it's those companies that can overcome devaluations and turn profits that will survive.
In other words, if your startup company isn't moving towards turning a profit — or, worse, generating any revenue at all — now may be the time to hit the kombucha keg before it's taken away forever. Or start polishing that résumé.

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