Blog

What Goes Up… (well, you know the rest)

03/21/16 | uptrending

For many, these are the good times in Silicon Valley, arguably the best of times. The NASDAQ closed at a 15 year high today, and the S&P 500 is very close to its all-time high set very recently. Real estate prices in the Bay Area are out of sight, fueled by big option paydays and soaring corporate valuations. If you’re an individual or corporate professional services provider, like we are, and you’re not really busy (we certainly are) you have to seriously ask yourself what you’re doing.

Take a look at this chart, lifted from a report issued by the Brookings Institution on March 17 about the high and growing  levels of income disparity within the top 50 cities in the United States (the full report is here):

figure2

Incomes in San Francisco so outpace the second place city, San Jose (not to mention all others), that just looking at the image suggests you almost don’t need to read the report to know that something remarkable is going on, and it can’t be good. This is about the growing problem of income disparity in the US. Is this growing disparity a precursor to a bubble bursting? It seems that a new bespoke luxury commute service is announced every week in San Francisco, replete with fresh-pressed organic juice and Blue Bottle coffee. One has to ask, how many can my home town support?

A few days ago at SXSW, Bill Gurley of Benchmark Capital, regarded by many as one of the deans of the VC business, predicted that in 2015 we will see dead unicorns (plural, mind you; you can read his comments here). A unicorn in Valley-speak is a private company with a valuation of at least a billion dollars; there are at least 80 of them (a recent list is here). We’ve also seen the emergence of decacorns, or dragons, which are private companies with valuations of at least ten billion dollars (the are at least 8, lead by Uber).

These companies have raised many hundreds of millions of dollars. Imagine the earthquake if Gurley is right and one or more of those companies goes poof. Investor psychology is an interesting and temporal thing. Everything’s great. Until it isn’t.

The point of this ramble is that all markets move in cycles, they always correct at some point, and when they do the exits can get crowded in a very big hurry. Remember March, 2000? Or September, 2007? I’m not saying a crash is imminent, because who am I to know? But it’s absolutely certain that the good times don’t last forever.

If you’re a CEO, you’ve got to have a very well thought-out Plan B on the shelf, ready to put into action on very short notice. Cash and customers can be very hard to come by for a long time. The name of the game is survival while VCs launch into triage mode on their portfolios. For a trip down memory lane, you might find the infamous Sequoia Capital “Doom Deck” a useful history lesson.

Times are great. But get prepared.

by Jeff Kuhn

Tags: ,