The Increasing Cracks In The Silicon Valley Mirror

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There’s probably no other place more enthralled with its own state of being today than Silicon Valley. Now probably more than ever the tech capital just might be believing their own hype more now, than in the “glory days” of the 90’s.

Today the belief is so strong, so internalized that the coding kingdom is where the new rulers of the universe reside, that it would make the Kadashians think about trying to keep up with the “Coders.” (does anyone need anymore proof than the new Kim Kadashian app?)

The problem with mirrors is just that – they’re mirrors. And unless you take your gaze away from it and look around once in a while, what happens more times than not is you miss all that’s happening around you. Till one day you either walked smack dab into a wall, or worse – never left the couch as the city around you fell into chaos.

This is where I believe a great many in the “disruptive” world are going to find themselves. No, not them disrupting – but the world they now inhabit is about to be – disrupted. i.e., The valuations, the deals, the whatever that were once taken for granted as a “never-ending story” is seemingly not only coming to an end. That end – might already have taken place.

Personally I read a lot of tech blogs, tech sites, and more. One reason is I’m just plain interested as well as curious. The other is that I’m in the “entrepreneur/business advice” business. And nothing has fascinated me more than some of the “pie in the sky,” “unicorn and rainbow” type thinking and metric measuring than what I both read and hear from the tech world.

This area is so audacious in its shunning of pure true business models (i.e., making real money via repeatable commerce transactions as opposed to the singularity event of IPO-ing) it would make a Krugman-ite proud. However, as I alluded to earlier: there seems to be cracks appearing in the looking-glass.

There’s an underlying truth when it comes to business. And I do mean – all business: When times are good those at the top are jubilant – when jubilant fades and testiness begins to appear, regardless of how faint – that is the time to begin paying very, very, close attention.

Recently I read an article that is becoming more and more prevalent within both the investing world and in particular the tech arena. The article was titled: “The Thin Skin of the Venture Capital Market”

One of the quotes that caught my eye was this. It was in response to a point on a valuation…

“And then I promptly got Twitter flack from one of the people who works at one of the company’s investors.  They seemed annoyed that I said anything in the first place.

What was said, who’s right, etc., doesn’t much matter.  The fact is, it’s just not cool to criticize the investing side of the venture capital market.”

Remember my assertions – It’s not about making a profit in business, it’s now only about the business in making an “investment” profit. As I’ve reiterated repeatedly, the business per se is irrelevant – it’s all about can the business “story” be sold to Wall Street. Then who gives a rats arse how the story ends, that’s for the poor saps that bought into it, not us. We cha-chinged out!

Increasingly the proverbial “cha-ching” machine is growing more silent. One would think with the markets once again pushing beyond stratospheric levels into black sky territory that the deals would just keep coming. Well, they are yet again there seems to be something a little different in the ways these deals are coming forward than previous.

To the casual observer one might think “they’re doing more deals than ever before!” Yet, what may seem as an uptick might be more of an illusion. More in a shorter time span doesn’t necessarily mean “more.” What it could be signalling is a rush to get as many in as soon as possible because there just might be “no moar.”

Recently a few articles have caught my eye. One showing up on Pandodaily™ as reported by their West Coast Editor Michael Carney. What I found quite telling was the headline along with the timing: Does the shrinking time between early stage rounds signal market bullishness or disaster planning?

Is it not precariously illuminating that suddenly, what some may think as “out-of-the-blue” the investing meme once thought of as “unstoppable” is suddenly causing those within the very industry itself to contemplate?

And why would this meme even be questioned? For are we not in a glorious time for investing? Especially in new and never-ending “disruptive” agents? What would cause any change in this meme?

How about the meme killing realization that QE, the once unthinkable, unstoppable, buying spree fuel additive has been throttled. (for how long is anyone’s guess, but for now – the valve is closed)

That is the (and I do mean “the”) only variable that has changed. And with it, there seems to be an undercurrent of possible disruption coming to the royalty-class aka the “disruptive” class.

Another article that is also quite informative into what maybe transpiring within the VC arena along with its overarching mindset is the Q2 2014 Halo Report.

Highlights of the Q2 2014 Halo Report include:

  • Pre-Money Valuations Climb to $3M.  Median pre-money valuations rose to $3.0 million in Q2 2014 from $2.7 million in Q1, and after several steady quarters at $2.5 million.
  • Angel Round Size Falls.  Median angel financing rounds fall to $600k in Q2 2014 –  down 40% from Q1; remain flat versus Q2 2013 where the median round size was $595k.

Again, at first glance I found it quite interesting that today, when the markets are hitting upward prints of nearly 1% per week that the median financing round would fall 40%.

I can’t stress this point enough: The markets are rising, and investment in median financing rounds are falling by double-digit percentages?

Sorry to repeat ad nauseam but (and it’s a very big but), all that’s changed in this period of time is QE has stopped.

Is this causation or correlation? That’s the call. For my money – it’s causation. However only time will tell for if one thing is clear, I never dreamed we could get up this high based on QE, but here we are. Although too not pay attention to these possible cracks would be ludicrous. Especially when paired with the timing of their appearance.

There are two more glaring signs that things have changed. First is what I warned to watch for in this latest earnings cycle where the once “darlings” of Wall Street might be met with more of a cold shoulder than open wallets with the realization QE was in actuality going to stop. e.g. Facebook™ and the concern about whether or not this new reality of “no QE” will be expressed via investor concerns.

From my article “The Shot Heard Round The Valley World” I opined…

“Let me go on the record here and point out what I believe will prove my point in the coming weeks and months.

Currently Zuck and crew have been lauded over with the prowess in its acquisition choices. You will know everything has changed when the calls to rescind Mark Zuckerberg’s authority in having carte blanche via not needing board approval for acquisitions going forward is demanded by Wall Street.”

What transpired during the most recent earnings call? At first it was heralded as “hitting on all cylinders” then it was revealed – it was also going to spend at just as impressive rate.

Suddenly “woo-hoo” turned into “WTF!” and the shares gapped down and as of yet – with the ever rising, incessant push higher, and higher in the markets, where both the indexes for everything tech as well as the S&P are hitting “never before seen in the history of mankind highs.” Facebook not only hasn’t filled that gap (which by all accounts should be viewed as on sale) it hasn’t basically moved at all.

Again, as everything else is roaring higher. Suddenly it seems that ability to “spend” is coming under far more scrutiny than the once “blind-eye” it was turned just a few months prior. And it’s only the beginning in my view.

For those wanting to see what may be coming and dig a little deeper the article by Todd W. Schneider titled, “The TechCrunch Bubble Index: Parsing Headlines to Quantify Startup Hype” breaks down this idea of growing changes in an easy viewable form.

There’s nothing wrong with pushing the needles when it comes to business, entrepreneurship, and more. However, it’s once you not only start believing your own press, but you look to place mirrors around you as to get an even grander view is when you just might be having more in common with the Kadashians than you do with creating and maintaining your business.

© 2014 Mark St.Cyr