Startup Craziness Deflates, Hits Silicon Valley & San Francisco

Venture Capital gets prudent – with consequences.

Few areas in the US are as dependent economically on the startup ecosystem as Silicon Valley and San Francisco. And the crazy boom that peaked in 2014 and 2015 lifted all boats, but then the tide went out.

It’s a larger US phenomenon, but San Francisco and Silicon Valley feel it particularly. Venture capital investments in the US “downshifted again” in the first quarter, according to the current report by the National Venture Capital Association and PitchBook Data. It was the sixth quarter in a row of declines, and the number of deals dropped to the lowest level since Q3 2010,

The startup funding industry “is likely reverting to 2012-2013 levels of investment after peaking during the past few years,” the report says. It represents a “more disciplined approach with a much more critical eye on investment opportunities.” With first financings declining and with VC-backed companies, such as Uber and Airbnb, staying private longer and thus not allowing their investors to exit, “venture investors are focusing more of their efforts on supporting existing portfolio companies,” rather than funding new ones.

Including San Francisco darling Airbnb’s $1 billion deal, startups raised a total of $16.5 billion in the first quarter, down 12% year-over-year. The number of companies being funded plunged 24% to about 1,800 – the sixth quarter in a row of declines, and the lowest count since Q3 2010.

Extrapolating from Q1, the full year 2017 is on track to hit the lowest level in terms of dollars since 2012, and in terms of deals since 2011. This chart (via PitchBook Data and National Venture Capital Association) shows the number of deals in the US, a bubble and its deflation:

“The pace at which total fundings are declining shouldn’t be overlooked,” the report said.




But it’s not for a lack of money. In 2016, VC funds raised $41 billion, the best year in a decade. In Q1 2017, they raised another $7.9 billion. The VC industry now “sits on record amounts of dry powder, plenty of which will be earmarked for follow-on deals at the late stage.”

And IPOs of VC-backed companies continue to lag: only seven were completed in Q1, raising $4 billion, including the now infamous Snap IPO with its non-voting shares whose price has plunged following the post-IPO spike.

This pullback by VCs is hitting Silicon Valley and San Francisco – with larger ramifications.

The San Francisco-Oakland-Fremont area saw 279 deals for a total of $5.12 billion in Q1. Silicon Valley saw 107 deals for $1.63 billion. Combined, 386 deals. That was down 7% from the already weak Q1 2016, down 31% from Q1 2015, down 46% from the peak Q2 2015, and the lowest since 2010:

The industry is sanguine about it. It’s their money, they need to make it work, and there are good reasons for the drop-off. The report:

For many reasons, a reversion in deal activity back to the mean is good. During 2014 and 2015, when activity at the stage was high, non-VC investors flocked to the industry to pour extra money into the stage, which caused valuations to soar. The slow exit environment and threat of prolonged illiquidity, among other factors, has pushed those investors back out, allowing VCs to get back to more sustainable late-stage investing.

In other words, the industry is relieved for now that some of the craziness is being leached out of it.

But for the local economy – for employment, commercial real estate, residential real estate, and a million other factors, this new focus is a mixed blessing. It ads to the other mixed blessings that are already out there.

Commercial real estate firm JLL, in its recent Silicon Valley Snapshot expressed these concerns. In the missive – titled, “Tightening belts: Valley Companies trim workforce, shedding space” – Research Manager Christan Basconcillo was doing some basic math:

Over the past 9 months, a total of 6,777 Silicon Valley employees have been put out of a job by way of company cutbacks or closures. Assuming 175 s.f. per person, this is equivalent to 1.2 MSF of space.

Though M&A and consolidation have played a part in the rise of sublease space, many publicly traded tech firms are also adding space to market despite solid performance in the stock market, potentially preparing for a slowdown due to economic uncertainty (emphasis added).

So office space availability is suddenly piling up after years when the term “shortage” was the guiding theme behind all real estate decisions, and everyone went out to grab whatever was available, whether they needed it or not. But companies are cutting back and putting unused space on the market:

As much as 1.3 MSF of direct space and potentially 300,000 square feet of sublease space could hit the market by the end of 2017 as several large publicly-traded tech companies shed excess space. The result could be the pivot point toward a market correction, adding additional uncertainty to a market dealing with a rise in large block availability.

That sort of combined pull-back by the tech sector and by the startup ecosystem is a sea change for a region whose excesses, craziness, and prices have long befuddled rational observers.

The people in the Bay Area can already see the signs of a “signficant downturn.” And nearly half the millennials say they’re “likely” to leave. Read…  Bay Area Economic Outlook Buckles under Strains




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  50 comments for “Startup Craziness Deflates, Hits Silicon Valley & San Francisco

  1. Realist
    Apr 6, 2017 at 1:25 am

    Silicon Valley = Rust belt 2.0 ?

    • Apr 6, 2017 at 7:36 am

      It looks like the early stages of one of the down cycles the area has become infamous for. After it runs its course, there’ll be another uptrend. But it doesn’t look like the disappearance of an entire industry.

      • Paul
        Apr 6, 2017 at 9:49 am

        Bubbles seem to have one thing in common, A mountain of money looking for a rate of return. Wolf, what do you think the FED will do? They seem to be saying bubble at a time when the bubble seems to be deflating on it’s own. Have they ever called a bubble correctly?

        Are they going to panic raise rates? Cities are filled with owned but not occupied properties. If these come on the market as rentals, what will happewn to the rental markets?

        • Daniel
          Apr 6, 2017 at 12:53 pm

          It seems like the current bubble is just waiting for it’s black swan moment. The thing about bubbles is they usually keep growing in the absence of anything to pop them.

      • illumined
        Apr 6, 2017 at 10:20 am

        Entire industries didn’t disappear in the Rust Belt either, there are still car factories, steel mills, etc producing stuff. Just not nearly as much as before. Personally I am a bit skeptical about how much higher it will rebound, the tech booms in the late 90’s, the mid 2000’s, and now have been entirely products of Federal Reserve stimulus. If that stimulus didn’t happen, with the increased competition from other tech areas like the pacific northwest, dallas, etc, will it ever return to it’s highs without a bunch more stimulus? The last time a major American city rode Federal Reserve stimulus to such extreme highs was Detroit in the 1920’s…..didn’t end well for them.

        • Your Good Friend
          Apr 6, 2017 at 12:56 pm

          Precisely.

          Silicon Valley will mirror Detroit.

          It’s the way the world works.

        • Intosh
          Apr 6, 2017 at 3:33 pm

          Don’t forget China’s own Silicon Valley.

          It’s just a matter of time that things spread out more evenly across the globe. Such dense concentration in Silicon Valley is just ridiculously unsustainable and counter-productive.

    • Ethan in NoVA
      Apr 6, 2017 at 10:37 am

      Silicon Valley provides much of the technology we’re all communicating on. Sure app companies might hit some issues (Uber) but other companies that make things from processors to storage to networking aren’t going anywhere anytime soon.

      The bad software will always make every new fast thing slow.

      • Intosh
        Apr 6, 2017 at 3:36 pm

        Many activities for making processors, storage and networking aren’t even done in Silicon Valley anymore.

      • 728huey
        Apr 6, 2017 at 10:14 pm

        The true technology companies in Silicon Valley (Apple, Google, Facebook, Oracle) will do just fine. It’s the low-level service companies masquerading as tech start-ups that are going to get hammered. Companies like Uber, Airbnb, and Task Rabbit were able to sell a great story to investors, but their business models are leaving a lot to be desired.

        • Your Good Friend
          Apr 6, 2017 at 10:18 pm

          FB isn’t a tech company. Apple is barely a tech company.

          Do either earn a profit?

        • Jon
          Apr 7, 2017 at 1:27 pm

          Fb is not really a tech company

  2. Your Good Friend
    Apr 6, 2017 at 5:53 am

    This is a good start.

    The only way out of this moribund stagnant economy is falling prices to dramatically lower and more affordable levels.

    • polecat
      Apr 6, 2017 at 11:24 am

      Time to short gold pans ……..

  3. William
    Apr 6, 2017 at 6:48 am

    The tightening of the H1B process will make an impact. It is driven out of D.C. where they have little sympathy for California.

    • TJ Martin
      Apr 6, 2017 at 9:07 am

      Like to place odds on just how ineffective this ‘ so called ‘ tightening process will wind up being ? As of 4/5/17 this is a policy with zero teeth .. going after the symptom with ICE doing onsite searches for which they are both ill prepared and untrained when it comes to the complexities of high end industry as well as the abuses being difficult at best .. impossible at worst to spot within the workplace … rather than going after the disease itself which are the blatant loopholes and policies along with the Department of Labor’s blatant complicity in the abuse of H1B loopholes .

      Suffice it to say the ‘ so called ‘ changes this week are nothing more than a load of lip service in order to silence the critics [ such as myself ] pointing the finger at the ‘ so called ‘ president’s Executive Orders ( for focusing solely on the individual rather than the corporations etc hiring and recruiting them ) as well as distracting attention from the real immigration issues .

      So as far as the odds are concerned ? Other than a minor exception here and there as they make scapegoats out of a bottom feeder or two .. 200 to 1 nothing changes in the slightest with H1B abuses . Fact is I’ll lay odds they only increase .

      And though the new DC Wrecking Crew may have little sympathy for California … they are beholden to the point of near servitude to Silicon Valley in light of Silicon Valley containing four of the Davos Great Eight .. and we all know … money talks … with ( censored ) taking a long walk off a very short pier

      FYI; And lets be clear . Health Care and Big Pharma are almost equally to blame when it comes to H1B abuses none of which are based in Silicon Valley or CA for that matter

      PS; I’ll also lay odds at this very moment when it comes to this ‘ new ‘ policy the elite at the top of the Silicon Valley crowd are feasting on a plate of schadenfreude for breakfast washing it down with a cup of Jamaican Blue Mt coffee laughing their heads off before hopping into their EV’s

      • akiddy111
        Apr 6, 2017 at 10:06 am

        You are exactly right TJ.

        People should stop reading MSM headlines. Have we not learned that much from the recent election ?

        Think of it this way; Bannon out, Jared in. Jared IS the swamp.

        His economic advisors are Bill Gates and Elon Musk. What else does anyone need to know ?

        So as far as H1b etc, the Indian tech dominance in the USA is all but complete. The Trump team were easily lobbied to get on board.

        Personally, i cannot think of a more strategically important industry for America than technology. Alas, America no more.

        Sadly, educated and professional Americans dare not talk up about this grim handover of their crown jewels to South Asians because they dare not be branded racist or Xenophobic.

        Ironically, they talk up about practically everything else under the sun.

        • Intosh
          Apr 6, 2017 at 3:59 pm

          “Sadly, educated and professional Americans dare not talk up about this grim handover of their crown jewels to South Asians because they dare not be branded racist or Xenophobic.”

          They already spoke up by voting Trump.

          It has more to do with American culture itself, not the fear of being branded racist or xenophobic. Americans’ religious faith in capitalism and individualism. When workers of the manufacturing industry and the “low-wage” services industries (e.g. tourism and food business) protested about their situation, they gathered very little sympathy or support from anyone else. Everyone else go about their lives, enjoying the low prices for goods and services; who cares about these “lowly manual workers”?

          White collars and IT workers, in particular, ridiculed those people, telling them they should just work harder or change jobs or go get a better education or acquire more skills or start their own company or whatever — basically, to say it’s the workers own fault.

          Well, guess what? Now it’s happening to the IT workers. We can’t blame anyone else but ourselves. We let this happen before our very own eyes. Chances are, it’s gonna be the same thing with the environmental issues. Blame our own stupidity and selfishness.

  4. michael Engel
    Apr 6, 2017 at 6:50 am

    Silicon is a great product. When it’s old it deform, behave like
    a glue, melt like a gel. You cannot use it anymore.
    Since the 1950’s it serve our country and the rest of the world,
    well. Lately, it became a media center, making huge profits from
    ads.
    They don’t innovate much. They operate like a relay station.
    Receive signals, amplify, send it into a mixer and transmit.
    Little research of their own, not too much originality.
    DARPA became a side show.
    Their biggest skill is how to tell a story. How to become, to their
    fan, trustworthy. Government fell in love with those guys.
    Their mixer became the most important component.
    They can shape public opinion, polls, elections.
    When sili cone are on your side, it guarantee a sure winner.
    With such a powerful ally, sili cone valley had an important
    MOAT. Yes, like Warren Buffet M O A T !!
    From that dominant position they launched deadly attacks on
    weaker and faltering industries.
    Like LOCUS.
    They came, feast, and when they moved on they left a barren
    land.

    • akiddy111
      Apr 6, 2017 at 12:41 pm

      Very good post.

      Big question is :

      What will Silicon Valley look like (or indeed, America) in 10 years after Google, Facebook and Apple are looked upon by the media – and by extension – everyone else, as being as about as exciting as IBM and Dell ?

      I do not see any big Kahunas coming down the pike to fill the shoes of smart phones, search and social media.

      • Kent
        Apr 6, 2017 at 3:03 pm

        A whole bunch like today. Which, come to think about it, looked a whole lot like 10 years ago. Only the cell phones are prettier.

  5. Gershon
    Apr 6, 2017 at 8:40 am

    Global debt explodes to 170 TRILLION GBP – heckova job, central bankers.

    http://www.telegraph.co.uk/business/2017/04/04/global-debt-explodes-eye-watering-pace-hit-170-trillion/

  6. Gershon
    Apr 6, 2017 at 8:45 am

    Half of America’s working families are living paycheck to paycheck, with the Fed’s debasement of the currency relentlessly eroding their purchasing power. Heckova job, Ben & Janet.

    http://nypost.com/2017/04/05/half-of-us-working-families-are-living-paycheck-to-paycheck/

    • Your Good Friend
      Apr 6, 2017 at 8:49 am

      Why is that?

      Because the majority of them are getting crushed under the weight are huge mortgage payments.

      • TJ Martin
        Apr 6, 2017 at 9:14 am

        And who’s fault is that ? For the most part the consumer / homebuyers themselves for going in over their head buying $400k + homes when in reality they can barely afford $300k . Ahhh .. but for a mere modicum of fiduciary common sense

        So have a good long look in the mirror before searching for a scapegoat to blame .. following the Good Book’s principal … ( paraphrased ) ;

        ‘ Deal with the two ton steel I – beam in your own eye before looking for the speck of saw dust in another’s ‘

      • Gershon
        Apr 6, 2017 at 9:14 am

        The majority of them are renters. They are getting crushed under the weight of unaffordable housing, soaring medical costs, and the cost-of-living inflation that the Fed purports not to see. But hey, Yellen’s cronies on Wall Street are getting huge bonuses and stock options, so it’s all good.

        • Your Good Friend
          Apr 6, 2017 at 10:36 am

          Renting from the bank or mortgage payers…. characterize them at your leisure.

      • JZ
        Apr 6, 2017 at 10:54 am

        I have always wanted to sing this song to Janet.

        “Angel smile on your face and glory nails on your finger tips. Honey you give MONEY a bad name”.

        Three ways to do wealth transfer
        1. Coersion means like slavery.
        2. Debt slavery
        3. Rent seeking.

        1 is not possible because there are 300million guns out there.

        They did 2 in 2006 by printing money and let the slaves compete each other to death.

        Now they are doing 3rd.
        Elite rentier dynamics are associated with many society conflicts/collapses. Those “elite” who can borrow at 0% and take control over assets and wealth transfer by collecting rent will do well. RE is just part of the rent. The health care, insurance industry are all rent seekers.

        We are only at the early stages of the rent seeking dynamics. More will come, get used to it.

        • Kent
          Apr 6, 2017 at 3:07 pm

          Many thanks to the Robert’s Supreme Court and the Citizen’s United decision!

        • economicminor
          Apr 6, 2017 at 3:13 pm

          JZ, you really think we are in the early stages?

          My assessment is that we are in the late stages.

          They have been creating debt at an increasing rate.. went parabolic for a while and now has started to slow way down.. I guess it could be a plateau getting set up for another run up but who is it that is going to be the borrower?

          Not the home owners.
          Not the Corporations.
          Not the car buyers.
          Soon not to be any of the pension funds.
          Maybe the students?
          Or the old farts?

          Even though government can borrow more, that either costs in more inflation or higher taxes. Either of which take money from the consumer and reduces all of the above use to be new debtors..

          So how does that happen..

        • JZ
          Apr 6, 2017 at 5:53 pm

          The debt slavery part may have tin out of steam, but the elite rent seeker dynamics have a long way to go. It will take another 10 years before people realize, another 10 to figure out what went wrong, and before they figure out a solution, another election will happen and they will go there and vote and felt something has been done. and it continues.

        • economicminor
          Apr 6, 2017 at 6:30 pm

          So JZ, just curious as to your forecast.

          You seem to project that the ability of the consumer to be played will just go on and on for at least 10 more years?

          You do not think that the massive amounts of consumer and business debts will collapse and we won’t see wide spread defaults and bankruptcies?

          I can’t make that math work in my head.

          That seems to me to presume that there are no Black Swans, Rogue Waves or 10 Sigma events.. No major corrections. No body will make a mistake.

        • Your Good Friend
          Apr 6, 2017 at 8:01 pm

          The important thing here and the only path forward is falling prices to dramatically lower and more affordable levels.

          There is no other cure.

        • JZ
          Apr 6, 2017 at 8:19 pm

          I am NOT for casting any economics because i am not one of them, and i admit i do not know shot although i have a munch of opinions that do not count.

          All i am saying is that wealth transfer will go on, for ever. It is in human blood and stayed true across history.

          I said there are 3 wealth transfer mechanisms. Coercion, debt alavert and rent seeking.

          The great founders of America get rid of the first by gum rights and they get rid of the debt salvory by promoting sound money backed by tangibles. Rent seeking was removed by private property rights.

          Now the America is corrupted into united states and wealth creation became wealth transfer like all other nations. This trend will not stop soon until the life of United states is done on earth.

        • JZ
          Apr 6, 2017 at 8:36 pm

          Oh i forgot the back bone of the wealth transfer and that is manipulation of money, which is the job of the fed. The ultimate wealth transfer is simply hyper inflatie the money into oblivion.

          there are folks who thinks deflation will happen and that is a good thing. i agree but that is not what will happen because deflation do not transfer wealth into .gov and wall street, it transfer wealth into W2 earners and that is precisely why it will NOT happen, at least not long enough to form a trend to let everything heal.

          What ever happens, wealth will be transferred into the hands of the few. It is like casino.
          The economy is literally wealth transfer economy supported by fed.

  7. michael
    Apr 6, 2017 at 9:54 am

    Wolf,

    Why are you so sure there will be a rebound other than that has been the historical cycle?

    It seems very different to me this time.

    The leverage in the system is very high. If the FED Rate emergency measures were .25% can .75% really be a recovery?

    No offense but playing devils advocate here.

    • Apr 6, 2017 at 10:03 am

      I’m not sure :-]

      I’m just guessing, based on what I see and have seen in the past.

    • Frederick
      Apr 6, 2017 at 10:05 am

      Michael that’s because it IS different this time

    • economicminor
      Apr 6, 2017 at 3:27 pm

      I think it won’t be the same as before because the levels of debt. Once it starts rolling over I picture it like the down side of a roller coaster.. The biggest one you’ve ever seen… And when it gets to the bottom it will roll over a few times and continue to scare the sh@$ out of you some more.

      And yes, just like any roller coaster, it will start again but it may be a while before anyone is willing to get back on. Especially after it is ruled as being unsafe and unhealthy.

      I think this is going to be such a big thrill that few are going to want to ride again. Might be a generation. Or the country might just decide to go in some other direction.

      There are so many trillion$ of debt and so many multiple leverages, and yes, this is different than ever before..

  8. michael
    Apr 6, 2017 at 10:34 am

    Fair enough…Thanks!

  9. JR
    Apr 6, 2017 at 11:17 am

    The secret history of SanFran GeekDom – and I always thought those radio telescopes were for searching for aliens! Nope the valley will always have quiet contracts and contacts with the spooks – that is where it started and probably where it ends – the elasticity of demand is such that price is no object for the spooks…

    https://youtu.be/8uA2bLrl_9Q

    • Michael Fiorillo
      Apr 6, 2017 at 12:02 pm

      The entire industry rose amid and as a consequence ofCold War hysteria and lies (since the Soviet Union, having lost over twenty million people in WWII, was never a military threat to the US or Western Europe), so it should be expected that they should function as an indirect arm of the National Security State.

  10. Tom Kauser
    Apr 6, 2017 at 11:37 am

    Is president Xi here to buy into or cash out of the American dream?

  11. Karl
    Apr 6, 2017 at 11:50 am

    Just noticed a TV ad for Chewy.com that sells dog food at a discount with free shipping. It has over one hundred million in financing (VC and Debt) to emulate a failed business (Pets.com). I guess the slow down in the Valley could be to the lack of new ideas.

    • Frederick
      Apr 6, 2017 at 12:33 pm

      Reaching saturation point evidently There’s not much they haven’t thought of and done already As well as competition from other areas of the country and indeed the world

    • Coaster Noster
      Apr 6, 2017 at 12:52 pm

      It’s not a “lack of new ideas” that is causing the slowdown, it is the fact that within a 24-hour period, over 365 days a year, you can only make use of so many ideas….the angle of repose comes into play. You can pile on “new” or “revisited” ideas, but they will slide off the pile…all of the new ones…after a while.
      Good example: Farm to front-door organic food. I got pressured into signing up, but after one delivery I quit. I still had to go to the grocery store, so what good was the home delivery? It saved me zero (or, negative) time, and they included vegetables I rarely eat.
      All the latest (e.g. Chewy) seek to be the “next Dollar Shave Club”. There is a physical limit, though the Apple App frenzy of years ago would make you believe 100,000 new ideas are “worthwhile”.

      • Kent
        Apr 6, 2017 at 3:16 pm

        I think the “farm fresh to your front door” thing is a great example of what Silicon Valley has devolved into. That is not technology. The only technology part is your trading picking up a phone and calling someone with an app that does essentially the same thing. But the business is the same: delivering an ordered product to your front door.

        Silicon Valley is no longer about creating technology. It’s about trying to take what are inherently local businesses and scaling them globally using technology. But, unlike the scalability of software, this new paradigm requires actual people to do actual work. And that takes out all of the profit. See Uber.

  12. LeClerc
    Apr 6, 2017 at 1:46 pm

    IPOs are back.

    The decline in availability of dumb or crazy money for late-series funding rounds translates into fewer ‘greater-fools’ to buy out early investors.

    VCs (and their LPs) will now take their distributions from the public markets.

  13. Ehawk
    Apr 6, 2017 at 3:43 pm

    Twitter still handing out 150K jobs and 100K for wellness coordinators even though they don’t have profits to sustain that.

    Twitter is just one example of the 100s of stoopid App companies that don’t bring much value like delivery apps and the like.

  14. Gershon
    Apr 7, 2017 at 3:30 pm

Comments are closed.