By James Poulos.
Market watchers have keyed in to a series of statistics suggesting breakneck growth in Silicon Valley has begun to slow down.
“Tech companies in San Francisco and San Mateo counties lost 700 jobs from January to February and tech employment has dropped by 3,200 jobs since hitting a peak last August,” the New York Times observed, citing chief San Francisco economist Ted Egan. “Venture capital has peaked and has been going down steadily since 2015,” said Egan. “A lot of the employment in our tech sector is in companies that are not profitable. If they can’t secure new venture funding, some of them run out of cash. If we see a real downturn in the tech sector we could be in a situation where the U.S. economy is doing better than San Francisco’s.”
For months, Bay Area businesses and investors have had to adjust to unfamiliar economic terrain. “The drop continues a year-long slowdown of the economic machine that powers Silicon Valley’s tech sector, leaving some startups resorting to layoffs and other cost-cutting measures to make ends meet,” the San Jose Mercury News reported. “But analysts say they’d better get used to it — investment activity isn’t going to return to the highs the industry saw in 2014 and 2015 any time soon. Instead, they say, the lower numbers represent a new, more sustainable normal as investors become more selective.”
The Valley’s outsized importance to California’s economic fortunes has shifted expectations for tech nationwide. “Nationwide, the number of angel and seed stage funding rounds — which generally mark a company’s first fundraising efforts — dropped 62 percent in the first quarter of 2017 compared with the first quarter of last year,” the Mercury News noted. “Though startups closed fewer funding deals, the amount of money investors spent actually ticked up in the first quarter of this year compared to the quarter before — largely thanks to Airbnb raising $1 billion this year, and Instacart and online personal finance company SoFi each raising more than $400 million. Smaller, early-stage startups suffered most in the slowdown.”
But larger, established tech firms have encountered new problems, too — including fierce challenges in potentially huge markets, like the one for driverless cars, that are now crowded with heavyweight competitors. “Google’s lawsuit alleging that Uber straight-up stole its autonomous vehicle technology won’t go before a jury until October, but Uber already finds itself on dangerous ground,” according to a Wired report on the conflict. Last week, the magazine observed, “the judge presiding over the civil case said he might just grant Google’s request for a preliminary injunction, which could force Uber to rein in or even stop testing its robocar technology testing until the case is resolved.”
Pumping the brakes
Prognosticators have altered their outlook accordingly. “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,” Business Insider noted. “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.”
According to some analysts, the combination of big war chests for funds and more modest pathways for founders was likely to translate into slower but more sustainable growth. Eric Buatois, veteran venture capitalist at Benhamou Global Ventures, told Marketplace that while a crash was unlikely, a cooling-off period would probably help avoid a hard landing. “Like most people in Silicon Valley, Buatois doesn’t use the words ‘tech bubble’ or ‘bust’ when describing the recent tech economy. Instead, he describes it as ‘frothy,’” according to the program. “‘Froth’ is the Silicon Valley term for when startups are valued at much more than they’re worth. Unlike a bubble, froth doesn’t pop — it subsides. Buatois thinks that could be a good thing for Silicon Valley.”