We should have diligently followed the bursting of the second tech bubble and how it will affect the technology sector of industry (jobs, investment,the lot), but mainly due to the closing of our original blog platform and the distraction of events in Syria, the middle east and the EU, our small team has dropped off the pace. This is one of those big and long running stories that receives hardly a mention in mainstream media even though it will eventually affect everybody in the world. So to avoid missing another chance to say ‘We told you so’, here’s a late update.
In the space of less than one year has the technology sector of the global economy has gone from the “running of the bulls” (with crap startups like Uber, that have no revenue, no profits, no track record but only a smartphone app that introduces rapists and muggers to likely victims, being sold for $billions) to the “mauling of the unicorns“, mostly in the private markets but also for those rare few overvalued, under analysed tech firms who have made it beyond the IPO stage in the public arena.
The tech sector on the stock markets has always defied sanity, the standard measure for a firm’s quality is the P/E ratio, which measures how many years it will take for dividends on the share to add up to the price that was paid. Normal, sound companies usually have a P/E ration of between 4 and 10. The P/E ration for Facebook is over 80, in other words buy when you are thirty years of age and you are going to be over a hundred before you earn back your investment. Some tech companies have had a P/E ratio of infinity, they were selling shares but had no revenue stream or profit.
Confidence that technology would rule the world seemed boundless ind in spite of poor performance, broken promises and privacy scandals investors kept piling in, and customers kept happily paying though the nose for gadgets that were really not fit for purpose (to put it bluntly, do you really think it is sensible to do your personal banking on a digital technology that a forteen year old tech savvy chav can access without much difficulty?
No you don’t? Why are you doing online banking then? Oh, you use an https socket and have an anti virus package. Sorry, if I wanted to hack your computer I would aim way before than the level at which encryption starts to protect you and your anti virus package is useless against malware that does not have a known ‘signature’. Yeah, technology has been something of a massive, global con trick. Thing is, if people are going to build system designed to be simple for the NSA and GCHQ to hack, they are going to be simple for some spotty little nerd across the street to hack too.
Investors have been waking up to this for some time and in the couple of months months, this painful reality finally hit ground zero – Silicon Valley itself, as best described in “The Mood In Silicon Valley Is Like The “Moment After The Titanic Hit An Iceberg.” from Zero Hedge. As the Wall Street Journal summarized it:
Some companies are raising funding by selling shares at lower prices than they had in earlier rounds. Such “down rounds” can hurt a startup’s chances at recruiting and discourage employees who are often paid with stock options…. These changes are eroding the idea that drives Silicon Valley’s economy: Work hard, secure venture capital and get rich. With valuations falling, the other side of the equation is reappearing: Failure is often just around the corner.
In this case failure means much more than just a few billionaires and VCs resetting their bubble-level valuation marks back a little closer to reality: it means that for millions of ordinary investors who jumped on the second tech bubble bandwagon, the hangover from the party of the last few years is just around the corner.
But forget the investors they live in another dimension, in the real world the mass layoffs have arrived.
As TechCrunch confirms, a survey of recruitment consultants confirms what recent news stories about imminent layoffs in technology companies already imply: The market is softening for the startup world, as well as at publicly traded tech companies.”
It is not only the energy/shale sector where that has suffered since half way through 2015, well-paid workers (according to Credit Suisse estimates) are getting wholesale redundancy notices.
In October, for example, the technology sector accounted for 40 percent of all job growth in the UK, more even that the waitress / bartender sector or the personal carer industry.
“I think what we’re seeing is bigger than a small correction,” Paul Johnson, a recruiter who’s been placing technology professionals for more than 30 years told me.
This means that the Office of National Statistics will be busy coming up with even more ridiculous seasonal adjustments to mask not only the collapsing jobs in the steel industry, but also those resulting from the bursting of the “App bubble.” For those wondering why, the answer is simple: the money finally dried up for such high risk betting.
More on this story from Zero Hedge:
The current batch of tech companies claim to be disruptive, but they’re all derivatives of the rare unicorns that scaled globally right out of the gate and now dominate their space–and whatever new spaces attract their fancy.
It’s an article of quasi-religious faith in tech circles that a few of the hundreds of start-ups touting their “disruptive” potential will blossom into super-profitable giants like Google and Facebook, or fast-growing companies like AirBnB that may not yet have profits but which have scaled fast enough to dominate their space–and richly reward early investors.
Two recent Guardian (U.K.) stories on the Digital Gold Rush frenzy in San Francisco and Silicon Valley cite this faith in the inevitability of “the next big (and hugely profitable) thing” as the basic justification for investors and venture capitalists to spread billions of dollars over hundreds of new start-ups–many which started somewhere else in the world but which migrated to the Bay Area to tap the seemingly inexhaustible venture-capital vein of cash.
Silicon Valley braces itself for a fall: ‘There’ll be a lot of blood’ Wannabe entrepreneurs are still piling in to San Francisco, but there’s a sense that time is running out on the exuberant startup world
Is the dotcom bubble about to burst (again)? In Silicon Valley, millions of dollars change hands every day as investors hunt the next big thing – the ‘unicorn’, or billion-dollar tech firm. There are now almost 150, but can they all succeed?
The possibility that none of the current batch of start-ups will scale up and reward early investors with 100-fold returns is the darkest sacrilege in the Tech Faith.
The idea that tech has exhausted ideas that can create tens of billions of value almost overnight is so counter to accepted beliefs that it is akin to declaring the Earth is flat.
Yet there is nothing intrinsically causal in the faith that 5 “Unicorns” ($1 billion+ valuation) that scale up to tens of billions in valuation and eventual profitability will emerge from a field of 500 start-ups–or even from 5,000 start-ups.
Statistical odds are not a useful tool in assessing the likelihood of a Google or Facebook emerging from the current batch of start-ups. Read all >>>
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