Silicon Valley: Bubble, Bubble, Toil and Trouble

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The refrain in William Shakespeare’s Song of the Witches from Macbeth was originally written: “Double, double toil and trouble; Fire burn and cauldron bubble.” It was a scary scene, and the title of this article portends an even scarier moment in the world of tech upstarts and their crazed mega-fund deal seekers. Silicon Valley, and every other place that’s incubating razzle-dazzle technology models, is becoming one big bubble that’s sucking in unfathomable amounts of capital and inflating it to its popping point.

I give The New York Times writer Erin Griffith kudos for her article: “$100 Million Was Once Big Money for a Start-Up. Now, It’s Common.” She provides an ample enough number of facts and anecdotal information to support my prediction.

It’s absolutely nuts what’s going on. First, if you’re an old-world, tech-newbie guy like me, the phrase “mega-round” is just now making its way into my vocabulary. Circa 2015, it used to describe a rare $100 million investment into a tech-driven upstart. Today, a global firehose of money from gazillions of funds with gazillions of dollars is racing after almost any startup that can prove it is breathing. CB Insights has debated revising its definition of a mega-round to $200 million or more. Why not make it $300 million, and really go nuts?

According to Crunchbase, there have been 268 mega-rounds invested during the first seven months of this year, almost equal to a record 273 mega-rounds for the entire year of 2017. And during the month of July alone, there were 50 financing deals totaling $15 billion, a new monthly high.

So, there is more and more capital sloshing around looking for almost anything to throw money at. A lot of new investors are flooding the U.S., including Japan’s SoftBank, sovereign wealth funds and Chinese companies, all hungry to own chunks of the tech world before the upstarts get big enough to go public (of which nine out of ten will never come close).

In fact, and more incomprehensible, there is more supply (capital) than demand (startups) can make immediate use of. For example, Mike Massaro, founder of payments startup Flywire, sought $40 – $75 million in funding from investors he knew personally. Word traveled so fast that other investors frantically flooded his inbox with offers totaling $200 million. Massaro turned half of it down.

Another example is Gusto, a payroll and benefits software company, which raised $140 million, but could have raised five times that amount according to its founder Joshua Reeves. Real estate services startup Convene raised $152 million recently, turning away $100 million of additional investment even when more investors continued to bombard Convene with offers of millions more.

It’s a wild thing. According to The Times article, in the last 20 days Letgo, an online classifieds ads company, raised $500 million. Actifio, a data storage company, took in $100 million. MyDreamPlus, a co-working space startup, secured $120 million. And Klook, a travel activity booking site, received $200 million.

How the Bubble Expands

So, as more and more capital is frantically chasing upstarts, the upstarts must get bigger, faster to absorb that capital and put it to use — to do what? To get even bigger, faster. But what if their businesses are not ready to deploy more money to get bigger, faster? The valuation of the business is increasingly based on funding as opposed to revenues and profitability. Does this not look like the inflation of a bubble, or mega-bubbles?

This expanding bubble is also described in The Times article by Bill Gurley, a managing partner at Benchmark Capital. He said, “If your competitor is going to raise $150 million and you want to be conservative and only raise $20 million, you’re going to get run over.”

Think about this colossal fact: many of the new investors, including SoftBank’s $93 billion Vision Fund, manage funds so large they dwarf the entire traditional venture capital market in the United States. Do you think they want to write thousands of small checks? Heck, no! Just tell them your heart is still beating and you’ve got a new tech gizmo and $100 million is yours. And of course, as the mega SoftBanks of the world suck in more investing capital, their competitors are forced to suck in and spew out more and larger investments in these upstarts. Furthermore, as the competition races for these upstart funding opportunities and as the up-starts race to gain the funding, deals are happening even faster, from about six months down to two.

The Times article describes the insane push to get bigger, faster: “Softbank’s Vision Fund team pushed Tina Sharkey, chief executive of e-commerce startup Brandless to share the most grandiose, ambitious version of her business roadmap. ‘They were like, come on, show us your real plan,’ she said.” Brandless had been operating for barely a year before Ms. Sharkey outlined an expansive vision to use machine learning, data, curation, and community-building to create efficiencies. “We didn’t have the gumption to say that to anyone else,” she said. In July, SoftBank invested $224 million into her company. “In today’s hyper-connected world, companies need to hire, scale and enter new markets faster than ever before or risk being surpassed by others,” said Jeff Housenbold, a managing partner at SoftBank Investment Advisers.

Here Comes the Bubble

Many experts have stopped talking about a bubble because there seems to be a limitless amount of capital. Benchmark predicted in 2015 that there would be “dead unicorns” in the future, referring to startups valued at $1 billion or more. According to CB Insights, there are 258 unicorns today, up from 80 in 2015.

Is this dance with investors who are frantically seeking for more and more funding opportunities going to end with a startup popping sound? Remember in 2007 when former Citigroup CEO Charles Prince infamously referred to the firm’s leveraged lending practices saying, “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

As so many experts agree, if roughly nine out of ten upstarts are unsustainable with inflated values based on funding vs. revenues and profitability, what is going to happen? I am beginning to hear that distinct popping sound. The only question is when will the bubble burst?



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