The amount of money flowing into the tech sector has remained a steady tsunami, which is causing some people to declare the existence of a Silicon Valley startup bubble. Shira Ovide from Bloomberg article titled “Silicon Valley Needs Startup Drano” describes the problem that tech companies face in today’s environment.
Basically, a bunch of money is flowing into the sector from venture capital funds. They’re buying up shares in these “young companies” at breakneck speed, but the money isn’t similarly flowing out of tech companies because of slow activity in Initial Public Offerings (IPOs) and startup acquisitions.
Essentially, IPOs and acquisitions are how investors get their money back. Without that, their money remains parked in tech companies whose worth is merely speculative.
With a weak environment for cashing out their investments, if things don’t speed up in acquisitions and IPOs, startups attempting to cross-over and become a traditional company could find themselves in sticky situations.
Startups can’t remain startups forever, and must get bought by a permanent investor or become a publicly traded company through an IPO. They can’t remain in limbo, even if they’re massive household names, and they eventually need to formalize their existence through some sort of sale.
This is because investors, while they can be patient for sometime, will eventually demand their money back. After all, they’re chasing returns on their money, not permanent ownership in a company.
It doesn’t help that many of these startups are burning through cash just to stay afloat. In Silicon Valley, there’s a mainstream philosophy that ignores the long-term viability of a business. Essentially, investors aren’t concerned about making money or monetization in the short-term, but are hyper-focused on rapidly scaling a company’s user base.
In short, get users now, figure out the money later. Like all things, they must eventually wise up to the fact that they at some point will have to turn a buck like everyone else to keep their doors open.
Throwing around the word “bubble” isn’t a term that people use lightly. Nevertheless, what’s going on right now in Silicon Valley, at least to some extent, seems to fit the bill. According to Investopedia, one of the symptoms of speculative bubbles is many more buyers than sellers.
That is precisely what’s occurring in this case: People continue to buy companies based on lofty expectations sometime in the future, while they can’t easily unload what they’ve already bought.
If you around during the real estate mania of 2004-2008, this phenomenon should sound familiar.
In reality, there’s no way to know whether there’s a bubble in tech right now. IPOs and acquisitions could pick up significantly, and investors could cash out their dough with little effort.
On the other hand, with this much money sloshing around in the tech sector, someone is bound to get burned. Considering the insane valuations of many companies that have yet to turn a nickel, it would be hard to imagine that all Silicon Valley investors will emerge scot-free with all of the cash they’ve already invested.
This article was originally published at GenFKD.org
Header image: Shutterstock
David is the Editor of Bold. He's especially passionate about millennial economic empowerment. A former local news reporter, David is originally from the Little Havana area in Miami, and later became a pioneer resident of the Disney-inspired town of Celebration, Florida. David holds a Master’s in Public Policy from the Harvard Kennedy School.
I would say yes. I think most technology has reached its peak. You will just have minor tweaks or improvements, that make products better.
That doesn’t mean programmers will be out of jobs, or programmers will be the equivalent of someone serving fast food.
It just means science will have to keep up with growing demand of technology. We need more SCIENTISTS and less geeks!
If you have a lot of money sloshing around in the tech sector… I would tell you how to invest, but since you have more money than me you probably now how to burn it faster than I do. 😉