As a tech startup worker and a millennial, it has been reiterated from the conception of my career that startups are risky. It’s true, the competition is steep, regulations are non-existent and funding is ripe for the picking -- a recipe for disaster. I wholeheartedly believe that many of the newly discovered minds are meant to be here, to create amazing products and services that will help people globally, but there’s a big speed bump coming and everyone is still looking in their rearview mirrors.
I see a lot of peers writing about every new and improved product or platform that just came on the scene, seemingly out of nowhere, that will make life so much easier and better. Don’t get me wrong, I write them, too, I work in this industry. I am virtually every company's target consumer and this whirlwind that we're experiencing is really an exciting place to be. I’ve been able to connect with a lot of incredibly intelligent and talented people.
Sadly, some of those people also make very poor decisions when it comes to resisting immediate gratification. Startups are tough, they take a lot of blood, sweat, and tears to start and run, and when it’s done right it can truly shape industries. This fact, along with low interest rates, started an investment frenzy -- so companies with no revenue, but big dreams, went from six-figure companies to billion dollar companies overnight. And those lucky few, with a price tag of a billion or more, became what the tech industry calls “unicorns”. That’s why, just like the ghost of bubble-burst past, all of us are about to feel the hit of this crisis-- some more than others, but we all will.
When it comes to speaking about the inner-workings of private funding, buyouts and IPOs (Initial Public Offering): investors, financial advisors, economists, and veteran business journalists have dominated the pages and TV screens. That isn’t something I’m dumbfounded by; I am not a economist, I was 10 years old when the dot.com crash happened. Therefore, my knowledge boils down to hours of research and passion -- not decades of industry experience.
That shouldn’t stop anyone of “us” from voicing our opinions, because when this voluptuous bubble of ours bursts, which it will, who will get hurt most? The employees (most of which are under the age of 35), the founders and the young hopefuls still in school, working tirelessly to get the training needed to hit the jackpot in tech.
The scary thing, and what I can’t possibly start to fathom, is the lack of preparedness or plain old acceptance that the economy’s back is up against a wall. Those who deny this fact are either lying to themselves in order to continue sucking that billion dollar teet, or are naive enough to think that endless growth is possible. But if any of us, old or young, have been alive and paying attention, we also know people don’t care much for the truth. It’s poison to their bliss, which has honestly turned into somewhat of a putrid high.
“What are the odds that people will make smart decisions about money if they don’t need to make smart decisions—if they can get rich making dumb decisions?”
Michael Lewis, The Big Short
Having watched multiple friends go into large tech a couple years ago, it was hard not to be jealous. They’d call me after their first day, saying, “Rachel, you won’t believe it, I just got a new MacBook and a $500 gift card!” Just as a hiring gift. The catered lunches, the fancy “team building” trips, the all-expense paid apartments. It seemed unreal at the time, now it seems absolutely certifiable. It should take decades for a company to build up that kind of revenue.
The Wall Street Journal reported that in 2015, Airbnb projected their total gross revenue would be at $850 million, with an expected net loss of $150 million, meaning their cost of operations alone were to exceed $1 billion, yet, it’s valued at $25 billion. Unless I’ve lost my mind, those numbers don’t add up...but I’m no numbers guru, so maybe 1+1 does equal four.
Uber on the other hand brought in $2.131 billion in “booking” revenue in the 2nd quarter of 2015, which is quite good, considering the size of their operation; but they ended up with a massive $602.1 million in the red, according to leaked documents published on Business Insider. One may ponder how these companies are valued so highly, or even more terrifying, how each founder has a personal net worth in the billions. The sad truth of life is, as most of us found out at a young age, monopoly money doesn’t actually buy anything.
Private funding in tech has become so extreme, founders and employees alike are swimming in “free cash.” I’ve read countless articles about how this bubble is different than any other we’ve seen in the past, and in a lot of ways it is...instead of “mom and pop” investors losing their livelihoods because of unethical stock trading, we have billions of dollars unethically flowing in from private funders (e.g. VC’s, mutual funds, hedge funds, and crowdsourcing). The big red flag is that they invest with the assumption that the company will go public, especially after late stage funding; or alternatively, would be acquired by a larger/well-established company, at which time they would reap the rewards of their investments. But it’s not happening.
“The biggest of all losers will be anyone who has borrowed money to invest in private companies. You were stupid. You blew it. You lost. That simple.”
Mark Cuban, Business Leader
The number of companies that are planning to go public, or filing for their IPO in 2016, is a measly 4, compared to the 12 to 14 that usually declare their intentions by this time of the year. There are, give or take, around 156 unicorns, or tech companies valued at a billion dollars or more. In the U.S. today, according to CrunchBase, these unicorns have a total of $527.9 billion, yes billion with a B, in valuation. The truth is, why would someone be inclined to agree to a semi-drastic value cut if they can grow exponentially without an IPO or acquisition.
Does anyone else smell the bulls***? This alternate universe, where unicorns exist, and apparently piss money, is built on high hopes and blind faith that we’re all in never-never land. Let’s be honest, people are getting arrogant, and it’s not just the investors, it’s the founders. To them, they aren’t just playing hungry, hungry hippo with billions of dollars...they truly believe they are the gift sent from above that this world so desperately needs. In 2013, Fortune reported that one of Airbnb’s executives, Chip Conley, stated he’d be happy to see them win the Nobel Peace Prize...YES the same prize that Nelson Mandela won for his part in ending apartheid in South Africa, or say someone like Martin Luther King Jr.
Do I deny that large private tech companies are creating and filling a need that most people would never want to live without? Absolutely not, they are most extraordinary innovators. It’s just asinine to assume that said companies and executives are, or should be, above the cold hard facts. The money is nowhere to be found – these are subprime mortgages all over again, except with billion dollar technology mega-monsters.
“It’s only when the tide goes out that you can see who’s been swimming naked.”
Warren Buffett, Investing Magnate
Their day of reckoning, which unfortunately is attached to many individuals, is coming up fast. We’re already seeing mutual funds like Fidelity cutting their funding on multiple companies.We’re starting to see layoffs, and all those pretty buildings with entourages of cranes will stop moving, slowly, then all at once. When companies put off going public because it will decrease their value, the “money” that built their valuations (and companies) will run dry -- and the thing about cold feet is, they’re contagious. Minor worry turns into major panic faster than a penny can drop. This once plentiful well, will be as dry as dry can be, and the only ones that will survive are those who’ve actually produced a sustainable business plan and are able to maintain revenue.
The hard truth of it is there will be cuts, bangs, bruises and some casualties. All of those fancy perks and attractive equity offers will go *poof* into thin air. In the end, it’s not that funding only goes to those who are most innovative or successful, it goes to those who play up their worth to get rich quick.
The silver lining around this dark cloud is there are still hundreds of companies out there with groundbreaking visions, which also happen to have founders with good heads on their shoulders. Those are the ones to look out for when this is all over. Those are the ones that have made decisions for the good of their company and the good of technological advancement, which in turn will make them relevant well into the future.
“The survivors will be the long-term planners, the problem solvers -- those who don’t get lost in the cyclical redistribution of wealth.”
Adam Broadway, Near Me Co-Founder
So for those of you reading, take the opportunity you have, with whatever amount of time you have left, to reevaluate your plans. Make sure your financials are sound, don’t take money you won’t be able to pay back, and wait for the revenue to come to you. If any of us can count on one thing, it’s that when the bubble bursts there will be a fountain of highly qualified, highly motivated talent on the market, eager to take your business to the next level. In this situation patience truly is a virtue.