Sooner Or Later The Bubble Is Going To Burst

San Jose, California, USA --- Silicon Valley around San Jose --- Image by © Charles O'Rear/Corbis

In this week’s article Kehlan looks at why sooner or later the bubble is about to burst in Silicon Valley and why the Irish start-up community needs to take notice.

Before the great stock market crash of 1929 on Wall Street Roger Babson, an investor at the time produced what has become one of the most prophetic quotes on the crash. “Sooner or later” Babson “ a crash is coming and when it does it will be terrific”. This is where Silicon Valley is headed right now. It’s knock on effects will be felt here in Ireland as investors look out for their cash. We’re headed for yet another bubble burst.

If you asked me about this even a year ago, I would have said that this was different. The raft of billion dollar start-ups was reflected in the time. How it was never easier to reach hundreds of millions of people around the world. The valuations were about the potential and the real estate. Even with a free app or software, customers are worth something.

However, over the past six months, it has become apparent that something is desperately wrong in the start-up community. Valuations are becoming ever increasingly alarming. The amount of VC money being poured into non-performing companies has gone past the point of insanity. The Valley still worships at the altar of the entrepreneur and their gut instinct.

All of this in an environment that has made accountability a dirty word.

The media has become increasingly stagnant in its questioning of these types of practices. They all want the exclusive with the next big thing. Foregoing even the simplest of questions like ‘So how are going to make money?’. Instead what you get are fluff pieces orchestrated by PR companies and carried through by titles. Designed almost entirely to pour flames on the hype of a company, rarely a detailed look at how it’s all going to work.

All of this in an environment that has made accountability a dirty word. To question the legitimacy of companies like this is met the usual response. ‘Don’t listen to the haters’ or ‘People always try to pull you down’, the phrases of smokescreen artists. Everything is answered in retorts.

The Silicon Valley system of VC funding has been redefined. Rather it being an expression of the art of the scaling of a start-up, it has become reliant on the kindness of strangers. A place where companies can shuffle down the road without any discernible plan and keep asking investors for huge amounts of money. Coherent plans seem almost non-existent. Let the spirit of the entrepreneur roam free, don’t bung it up by mentioning nasty things like business plans or sales strategies. Free range entrepreneurs are what Silicon Valley is all about.

Those same investors are flaming the hype around these companies. Announcing wherever they can the company they just put money into is the next Uber. Funny how a lot of companies are the next something or other. Never a statement of this who we are and therefore we’re different. It’s all a VC roundabout. The constant search for yet more capital as ‘scaling’ moves quicker. More and more investors put their money in as a company scales and scales. Over one hundred employees and a hundred million later there is still ever more money being pumped into an enterprise that’s four or five years down the road with no serious income to speak of. Too big to fail, too big to stop investing in.

I recently read an article about Medium.com, the popular blogging platform, has had $134m invested in it. Taking the rule that investors expect ten times what they put into a company, it means medium.com needs to create the best part of $1.5bn to pay that investment back. For a company that started to avoid the need for advertising in a media market, it’s going to be tough to see them getting anywhere near that. It’s insanity and no one is stepping in to create accountability.

An entrepreneur, no matter how good they are, will only get so far with gut instinct

Uber is one of the world’s most valuable companies. One of the fastest growing start-ups in the world at over sixty billion dollars is still making losses in a big way. Last year alone saw them lose over three billion dollars globally. It looks like Uber will soon go for IPO, selling shares to raise more capital. It’s hoping those staggering losses won’t scare away investors. Asked about these big losses in 2015 the company responded with “Shock, horror, Uber makes a loss. This is hardly news and old news at that”. Investors seemingly infinite patience with Uber isn’t going to last forever.

That ‘gut feel’ is where the trouble starts. An entrepreneur, no matter how good they are, will only get so far with gut instinct. Elon Musk, Richard Branson or Bill Gates wouldn’t even be anywhere near the pantheon of business if they didn’t make sales. You see even if 100m people download your app, it isn’t worth anything until they start giving you money. That means that a sales strategy is kind of essential to development. Capitalism is a bitch.

Put this together with what has been essential to the rise of the billion dollar start-up, the mobile industry. Mobile sales globally, particularly in the U.S., have begun to fall. The market is nearing saturation point and that points to the market levelling off. Last year global mobile sales were just over three percent. Down from eleven percent in 2015 and nearly thirty percent in 2014. Wearables, VR, and augmented reality are nowhere near making the impact that needed to replace the mobile as the place to filter your life through. That creates problems for any company where mobility is key to the scaling of their business.

Here is the biggest problem of all. Investors want to make money, that’s a natural law. Founders want to create a successful business, that’s a natural law. However, the problem is that nobody holds either to account. Accountability seems to be the lowest priority on the ladder. There is nothing that seems to click that a vast amount of money is poured into something that is non-performing. If neither has the objectivity to see what’s really happening, can we really be surprised that something is seriously wrong?

Sooner or later the bubble is going to burst in Silicon Valley, and when it does it will be big. Big not only for them but for Ireland as well. So many of our best start-up stories have roots with investors in California. If they go belly up or become naturally more tight with their money it could make a big impact on our own start-up scene which has been one of the shining lights here recent years. If we’re not watching this intensely then we’re going to find ourselves in trouble. We should be deeply concerned as we move into a new year that all is not well in The Valley. Something is rumbling below the surface and it’s been doing so for some time. A reckoning is coming and it will be terrific.

  • Kehlan Kirwan writes for The Hustle and Irish national newspaper The Irish Examiner. He owns and is Chief Content Producer at RedEye Media@KehlanK

An edit of this article appeared in the Irish Examiner on 09/01/17