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Not to worry
Hi all, it's Eric. “You have to adjust to the reality and play the game on the field,” investor Bill Gurley told Erin Griffith for a story this week about the proliferation of $100 million private investment rounds. If Gurley, Silicon Valley's closest thing to a doomsday clock, has stopped issuing warnings about a bubble and finally joined the party—it might just be time to worry.
Griffith's thesis, that Silicon Valley is handing out hundred-million-dollar checks like they're free t-shirts at a tech conference, just added another piece evidence. DoorDash, the food delivery startup that raised $535 million in March, announced Thursday that it had nabbed another $250 million.
The sky-is-falling crowd, of which I've been an occasional member, will have to keep eating crow. Investors, meanwhile, seem happy to dance while the music is playing—and it's been playing very loudly for quite some time now. Investors have been sending out wire transfers. Elon Musk has been dating Grimes. The only people that can't seem to hear it anymore are the crypto folks.
There are ample indications of exuberance. While new startup financing and deals are down, according to Bloomberg's Startups Barometer, the amount of money going into them is way up, as are the number of exits. A recent report found that the 10 wealthiest startup founders are sitting on $60 billion (in paper anyway). And multi-billion-dollar megafunds have proliferated across the venture capital industry. Yes, SoftBank is cutting humongous checks, but it's far from alone.
On the public side, the NASDAQ Composite Index is up 13 percent since the start of the year, despite taking a dive in early February. Even Facebook—which got crushed in July, falling 20 percent in a day—is only down 1 percent for the year. Equities overall have been on an epic run since 2009, and technology stocks have been one of the driving forces behind that ascent.
I'm not going to attempt to guess the timing of a broad market retreat. In March, the consensus among institutional investors was that they were 'somewhat concerned' about a 20 percent stock market correction in the next 24 months, and half said they thought he current boom was nearing its finale. It's called an economic cycle for a reason. It goes up; eventually, it goes down.
But we don't have to know when the go-go days will come to an end to say that companies born in the past decade have grown a to a world where capital is cheap. Uber, founded in 2009, couldn't be better positioned to represent the promise and perils of free-flowing investment capital.
My colleague Shira Ovide wrote a thoughtful column this week arguing that Uber has never had to prove that its core ride-hailing business makes sense and can generate positive cash flows. Instead, the company just raised more money and moved on to the next thing—self-driving cars, food delivery or logistics. This quarter, after a brief flirtation with turning a profit, Uber was back to its cash-burning ways, tallying an $891 million loss.
It's a similar story for of the tech high-fliers that have raised billions while operating in the red. Tesla's recent travails could be the ultimate test for whether investors are taking in enough oxygen at these altitudes to think rationally. Tired of getting held to high public market standards, Elon Musk recently tweeted that he would attempt what would be the largest-ever corporate buyout. Despite his assurance of 'funding secured,' it seems clear that it wasn't particularly firm. Now, the SEC is investigating Musk's comments. Whistleblowers are coming out of the woodwork. And the board seems ill-equipped to handle the drama. And yet: On Thursday, Tesla's shares were resilient, up nearly 8 percent from the start of the year. So far, the bull-market mentality trumps all.
Silicon Valley got whipped into a frenzy debating whether it was in a bubble in 2015. Naysayers were half right. Our startup barometer slid for much of 2016, only to rebound stronger than ever. But Gurley tweeted Tuesday that cash burn rate, a good proxy for risk, is still ominously high.
“The most likely time to have some type of correction, or change, or realization of the cycle turning, is when you’re not talking about it,” Gusto CEO Josh Reeves told Griffth. Indeed.—Eric Newcomer
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