(For those who say I just don’t get it…get this)
As we’re about to enter both the year-end as well as final holidays I thought it would be fitting to delve into a topic where the act of “throwing stones” by my detractors begins to mingle with the holidays. No, not where they take on a more festive mood and try to be more conciliatory. No, this is where “being in the season” means putting down their stones – then picking up and hurling chunks of coal instead. Yes, the holiday spirit is certainly upon them. And why shouldn’t it be? After all: why worry about business when there’s an office party to attend! For no one throws a party like a Silicon Valley tech player. Whether they’re profitable or not. For the holiday meme is: Who cares about profitability. We’re “killing it” via Non-GAAP! Where’s the champagne?!
Yet, don’t look now, but I believe there’s a few signs that many of these party goers will suddenly realize like: true business fundamentals actually does apply to them, and not just others. Many of the warning signs that have been in place for quite a while are going to accelerate far quicker than many within the “Valley” ever thought possible.
One of the main reasons for this is when anyone dared read them or bring them to light (such as yours truly) the rush to hit a microphone, TV camera, or keyboard as to dissuade others from seeing them was only matched in fury as well as speed by the next in-rotation-fund-manager to proclaim “everything is awesome!”
Back on November 30th of 2014 I penned an article titled, “The Increasing Cracks In The Silicon Valley Mirror” In that article I made the following point:
“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.”
Remember, this is a year ago when we were still on the upswing in stock valuations. The “everything is awesome” along with the “It’s different this time” tropes were all but screamed at anyone who dared challenge the premise. And the chanting as well as disparaging innuendos at those of us that did only grew in tenor and voracity as the year went on.
Again, as the year went on and markets climbed ever higher the memes themselves continued not only in more lockstep, they also seemed to codify the premise that if one wasn’t “in” the Valley – you had no clue about it. And if you tried to express why “they” didn’t get it using true fundamental business metrics or acumen such as; net profits that could be verified as building a sustainable business using 1+1=2 math or accounting methods? It was you who were the charlatan along with whose reasoning’s and babel should be avoided at all costs.
I’ve been expressing my opinions about “The Valley” for many years however, this year, now that there was no longer any QE (quantitative easing) all those “cracks” are morphing into chasms. And they’re getting wider by the day. Yet, once again I must point out – they were there to be seen all along. The problem? No one cared (or dared) to see them for what they were. And now they are growing at an ever-increasing rapid pace, as well as increasingly more being formed.
If you think I’m trying to just throw about some hyperbole as to describe just how self-absorbed as well as how “Silicon Valley” viewed itself, let me share an another article I penned this past April as the markets continued their assent. From the article, “Bubble Confirmed: From Sock Puppets To Action Heroes” To wit:
“Which brings me to today’s possibly next installment into the annuls of historic “bubble marking” memes. With a depiction so telling it can be used on its own as an example to explain just how – a picture says a thousand words. And where should it come from? None other than the one place synonymous, along with being the poster child of marking bubbles and manias: Silicon Valley.
Currently Silicon Valley is still believing they are breathing rarefied air, when in fact – they’ve been inhaling their own exhaust.
This is a place that now believes multi-billion dollar valuations are so yesterday. After all we’re talking about “The Valley” where unicorns and rainbows adorn the stationary for Non-GAAP earnings reports. So today the goal of every new or old start-up (whether you can show an actual net profit or not ) is to espouse valuations of tens of billions! Of course that’s regardless if you lose or have a cash burn rate faster than a HFT laser signal can front-run a competitors microwave signal to the exchanges. For in the valley of silicon “everything is still awesome!”
So just when you thought you’ve seen it all. Where you wonder if there ever could be a moment in time which could rival the current iconic poster-child of the earlier tech boom bubble like the sock puppet mascot of Pets dot-com. Comes not only one to rival, but quite possibly to surpass it.”
Again, if you think I’m just trying to overstate – here’s the photo that caught my attention originally posted at CB Insights™:
A lot has happened since then. The tech space went on to post even higher highs taking out the once thought “never again in out lifetime” highs of the dot-com era. And with that assent came ever more stone throwing at anyone (again such as yours truly) who dared question “The Valley” its models, valuations, business premises, and a whole lot more. Which of course I continued (as well as continue) to do throughout this past year. But (and it’s a very big but) as the year rolled on the ever-increasing effects of no QE became more, and more apparent. However; everyone only wanted to point out that the vehicle was still rolling along quite nicely thank you. Nothing to see here, please move along.
The problem was (as myself and a few others were trying to point out) the vehicle was doing nothing more than the equivalent of a car which continued to roll down hill powered only by the vapors left in the tank, along with the initially fueled momentum. As far as “gas” goes – the QE refueling stations were closed. And sooner, rather than later, they had better hope their unicorns can also double as a beast-of-burden. For if not the carts many hitched-their-wagons to are going to not only find themselves in a ditch with no way out, but rather, they may actually get swallowed up by this ever-growing sinkhole of reckless funding.
As the year progressed a few things began to change. First: All that IPO magic and unicorn pixie-dust began to lose its sorcery as one after another “It’s different this time” narrative was broken as investors increasingly began paying more attention by looking at their charts and income statements. The meme seemed to be losing its luster. As well as outright cash value.
No where was this more obvious to me than the highly touted announcement that Jack Dorsey would not only return to Twitter™ as CEO, but simultaneously run Square™ as the same. All while simultaneously bringing Square public with its IPO.
In an article I penned at the time titled “Crying Towels Silicon Valleys Next Big Investment Op” I stated the following:
“There are two issues that are very different for both a company as well as the narrative of a whole industry supported by the wings of such a “canary.” And both of these go a little more than unrealized by those not familiar with them. For it hits right at the heart of how a meme or, a presumptive “It’s different here” attitude takes hold when true business principles, disciplines and more get lost on those desperate to not see their world view crushed. But business in its purest form has a way of doing just that – crushing naive or wishful assumptions.”
It seemed this observation touched a nerve too far when a reader alerted me that I was being lambasted by many of Silicon Valley’s aficionados. One in particular took place on Twitter itself by Paul Kedrosky via his Twitter™ feed.
Some of the comments were “But the author uses bold and bold italics. It must be true.” Along with others such as, “and he has BEEN A CEO.” I guess the caps meant being retired is a bad thing? And in regards to ZH there were shots like “I only read it for the pictures.” and so on. I would imagine the hilarity of this Twit-storm was had by all. And I have no problem with that. If you’re going to play at this level it comes with the territory. However, let’s look at a few facts and “pictures” to see if there’s anything funny contained within shall we?
The problem? The “pictures” were anything but pretty. Here’s just a couple:
Another problem? Unlike wine these charts or “pictures” haven’t gathered any improvement with age. As a matter of fact the term “turning to vinegar” might become more of an appropriate analogy. However, surely both Twitter as well as Square must have made amends for such a calamity. After all Silicon Valley aficionados imply it is they that get it – not us mere business people. Right? Well lets look at today’s family album picture that’s adorning Silicon Valley’s latest Christmas card shall we?
Here’s Square as of this writing:
Then there’s Twitter:
And since we’re showing off “pictures” I thought I’d just throw in just one of the original members of the family album I posted back in October. After all, “My how they must have grown by now.” To wit:
GoPro has gone from near $30 when I first penned that article to only a few months later is sporting an $18 handle. That narrative of “from 30 to 18” might work if your selling face cream. Not so much if your selling investment advice. Again, but what do I know. For I’m not a “Valley” aficionado.
And if one thinks “just wait – It’ll turn around” I offer the latest installment for backup into the FTWSIJDGIGT files. Again – to wit:
As we get ready to close this year out I would just like to state that nearly every warning sign that has shown its hand over the last few years which has been either ignored or, explained away – is now coming back full circle as to “back hand” any and all that thought “it’s different this time” or “everything is awesome” when clearly it was not.
I’ll just finish with this. Many over the past year have also pointed to Marc Andreessen’s quote in his Twitter bio from Martin The Martian (one of my personal all time favorite cartoon characters I’ll add) “Where’s the kaboom? There was supposed to be an earth-shattering kaboom!” When talking about another bubble bursting.
Well, there was. It happened over a year ago in November when QE did indeed end. The problem for nearly all of Silicon Valley was: They decided to explain away the noise as nonsense. The real issue now is: they can’t explain away both the continuous after shocks, as well as, the compounding destruction happening within the investing world.
And what’s really worth repeating? It’s not subsiding – it’s only just begun. But again, what do I know. I’m not a “Valley” guy – just a businessman.
© 2015 Mark St.Cyr