If it was not obvious by 2022’s sharply lower financial results for most tech companies, the shocking collapse last week of Silicon Valley’s go-to bank marked the bitter end of the last decade’s big tech boom.
The near Lehman-like collapse of Silicon Valley Bank last Friday was a massive blow to the startup and venture capital ecosystem, where new ideas and companies come from. And earlier this week, more layoffs and limited hiring at Meta Platforms Inc. META and Apple Inc. AAPL, respectively, pointed to a potentially longer economic downturn than expected, as companies deal with a more stringent, cost-focused reality.
Silicon Valley is getting a reset — some could also call it a comeuppance — after the last 12 to 13 years of insane growth, often irresponsible spending, hubris and swagger. Big Tech has grown astronomically, and there were real successes in companies developing social media, cloud computing, mobile apps and electric vehicles. But there were also frauds and debacles like Theranos and WeWork.
The reset is happening, but it has happened before and will happen again.
“The valley is a roller coaster. There will be big ups and big downs,” said Lise Buyer, principal and founder of Class V Group, which helps startups prepare to go public. “We have seen this movie before, in many ways.”
So far in this downturn, investors have been focused on the revamping in Big Tech and other large publicly traded tech firms, which have been cutting jobs, real estate assets and reducing office space, in response to Wall Street’s concerns, which included massive over- hiring during the pandemic. Smaller, privately held startups have not drawn as much attention from the Street, even though they are important in the overall economy of Silicon Valley and other tech centers across the U.S.
With the bank at the core of venture capital funding, though, more attention is now on the start-up companies, as they were recently taking more money out of their accounts in Silicon Valley Bank, when they could not get more equity-funding rounds, which has turned out to be another factor contributing to the bank’s swift demise.
Last May, Sequoia Capital — which has become a bit of a soothsayer of the valley after its infamous “RIP Good Times” presentation in 2008 — again predicted gloom, and advised belt-tightening. The venture firm warned startups that as the Federal Reserve was hiking interest rates fast, the era of free money was over.
“We believe this is a Crucible Moment, one that will present challenges and opportunities for many of you,” Sequoia said in its 52-page presentation entitled “Adapting to Endure.” It also noted that the era of “growth at all costs” was no longer being rewarded. “Given every dollar is more precious than it was, how are you going to change your priorities?” the firm asked.
In the good times, huge money was poured into startups. While the five Big Tech companies – Alphabet Inc. GOOG, +4.68% GOOGL, +4.38%, Amazon.com Inc. AMZN, +3.99%, Apple Inc. AAPL, +1.87%, Meta Platforms Inc. META, +3.63% and Microsoft Corp. MSFT, +4.05% – grew to peak profits in 2021, with combined revenue of $1.4 trillion, venture capital hit new heights as well. According to PitchBook, which tracks venture capital data, there were 18,521 venture deals in the U.S. in 2021, with a whopping $344.7 billion invested by venture capitalists. Last year, venture funding fell 31% to $238.3 billion, with 15,852 deals.
“I think there was too much capital flowing into the industry,” said Punit Soni, founder and CEO of a startup called Suki, a developer of a voice-enabled AI app to help doctors save time on paperwork. “That led to inflated valuations and a focus on growth at all costs, not something that has not happened before….it happens every decade or so.”
Tech has gone through two big downturns since the dot-com boom of 2000, the bust in 2001 to 2003 and the financial crisis of 2008-2009. During these times of crises, the startup community was more vulnerable to failures and more reliant on a partner like Silicon Valley Bank for loans.
Andy Rappaport, a former partner with August Capital and a former investor in the semiconductor industry, among other areas of tech, said that starting in the 1990s, just years after it was considered a startup bank itself, SVB would loan its clients funds based on purchase orders from customers, with the startup’s credit as collateral, that would enable a company to buy the materials it needed.
“It wasn’t pure innovation but it was a willingness to be more involved in the development of the business,” Rappaport said. He also remembered during the dot-com bust when one of his companies had been recapitalized countless times, he was able to get an SVB loan that gave the troubled company a runway of six months. “We needed help a few times to keep the company alive,” he said. “That company was sold for close to $1 billion and it was a good outcome, everyone did well.”
Now startups won’t have a partner like that to help them, and it will probably lead to a quicker weeding out of the thousands of startups, to the fittest of young companies with the best ideas, as well as the leanest, those listening to the calls to halt excessive spending. Morgan Stanley predicted that a high proportion of startups will fail, as a result.
“It is not systemic,” said Soni. “It’s not like ideas are not going to stop flowing. I tend to be the optimist. I think the next couple of years will be really hard, it will be hard to get funding. But the ones standing at the end of two years will win…You are seeing Darwinism in play.”
“This is a necessary correction,” said Kyle Sanford, a senior analyst at PitchBook. “That $345 billion in one year is not something we should expect on an annual basis.” The future for startups and the VC funding community will depend on interest rates going forward and when the IPO market returns.
The biggest pressure now is on the later-stage companies that need to go public and could face a tough time getting a last round of funding unless they agree to funding or getting acquired, both at lower valuations. That will affect venture capital firms and other investors. “A company expecting to exit at $10 billion but only exits at $1 billion, that return is going to be much lower to the general partners,” he said.
Already those scenarios were starting to play out. Stripe, a privately held fintech company, said Wednesday it got a funding round that valued it at $50 billion, almost 50% below a funding round that valued it at $95 billion in March, 2021.
But compared to the turn of the century dot-com boom and bust, and the financial crisis, most of tech is on much more solid footing now. While growth in some sectors was starting to slow down before the pandemic, covid-19 accelerated the use of technology for nearly everything: cloud computing, ecommerce and mobile apps, and lead to another mini boom, in hiring and spending on core infrastructures, such as data centers, for both remote work and ecommerce.
With most staffers working at home over the last three years, companies made many hires remotely, and some employees never met their bosses or colleagues in person, during their entire tenure. In one sign that the spending on tech hiring had reached excess levels, some workers were able to secretly draw two salaries while working from home, employed full time by two firms, with one software engineer telling the Wall Street Journal he did three to 10 hours of actual work a week.
That type of excess is now going out the window, in some cases quickly. Companies like Twitter, now owned by Elon Musk, laid off at least half of the company’s workers, including contractors, and ripped out perks like yoga rooms and coffee bars. Co-founder and CEO of Salesforce.com Inc. CRM, +2.40% Marc Benioff recently told Business Insider that every CEO in the valley is watching what Musk is doing and asking themselves if they need to “unleash their own Elon.” Salesforce, too, laid off thousands, is consolidating offices, and more people are going in the office. It canceled its contract for a worker offsite retreat in the redwoods in Scotts Valley, that it dubbed the Trailblazer Ranch, where remote workers could connect.
“This isn’t my first recession,” Benioff told MarketWatch last month, while noting that Salesforce’s oft-touted Ohana family-like culture is also a performance culture, where the company demands high performance from its employees.
Meta Platforms co-founder Mark Zuckerberg is also embracing a new austerity, with a second round of layoffs, which included reducing the size of its recruiting team and plans to hire an additional 5,000 employees, calling this year a “year of efficiency.”
Companies with employees who moved away from the high expense of the valley or California during the pandemic are, in some cases paying them less, depending on their geography, one tech recruiter said. “They won’t pay someone in Austin the same as someone in New York or San Francisco,” said the recruiter, who asked not to be named. “Some are doing 20-30% less across the board.” She added that some companies have cut pay instead of doing layoffs.
At companies that are still faring well so far, they are still touting typical valley type perks to draw in new hires. Roblox Corp. RBLX, +6.11%, for example, in a recent job posting on LinkedIn listed some additional benefits: catered lunches, a fully stocked kitchen, an onsite gym and an annual CalTrain Gopass to commute to its San Mateo headquarters. Shuttle buses from San Francisco to Alphabet, Meta, and Apple headquarters have returned, albeit at fewer frequencies, every day.
The latest big boom in tech seems like it’s coming to an end, and big changes are afoot. What the next growth rates will be remains the biggest question for Wall Street, going forward. But ultimately it will represent yet another big cycle of change in the ever evolving Silicon Valley
This article was originally published by Marketwatch.com. Read the original article here.