In Silicon Valley, a boom era feels like it’s ending

Silicon Valley is getting a reset — some could also call it a comeuppance — after the past 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 big revamp going on in Big Tech and other large publicly traded tech firms, which have been cutting jobs, selling real-estate assets and reducing office space in response to Wall Street’s concerns, which included massive overhiring during the pandemic. Smaller, privately held startups have not drawn as much attention from the Street, even though they are important to the overall economy of Silicon Valley and other tech centers across the U.S.

With Silicon Valley Bank at the core of venture-capital funding, though, more attention is now being focused on startup companies, which had been taking more money out of their accounts there when they could not get more equity-funding rounds. That turned out to be one factor contributing to the bank’s swift demise.

Last May, Sequoia Capital — which has become a bit of a soothsayer of Silicon 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 amounts of money was poured into startups. While the five Big Tech companies — Alphabet Inc. GOOG, +1.38% GOOGL, +1.30%, Amazon.com Inc. AMZN, -1.09%, Apple Inc. AAPL, -0.55%, Meta Platforms Inc. META, -4.55% and Microsoft Corp. MSFT, +1.17% — 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, which developed 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 of 2001-’03 and the financial crisis of 2008-’09. During those 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, enabling 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 six-month runway. “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, favoring the fittest and leanest. 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 additional investment stakes 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.

Those scenarios were already 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 the tech sector is on much more solid footing now. While growth in some sectors was starting to slow before the pandemic, COVID-19 accelerated the use of technology for nearly everything, particularly cloud computing, e-commerce and mobile apps, and led to another mini boom in hiring and spending on core infrastructures, such as data centers, for both remote work and e-commerce.

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