The End of Silicon Valley As We Know It

Many people think that they ring a bell at the top of a bull market. Ding-a-ling-a-ling.

That is indeed often the case. The bell was rung at the top of the dot-com bubble.

But sometimes there is no bell, no catalyst, no story to tell. A bull market becomes a bear market, and it happens just like that.

Silicon Valley has been in a food fight for about three years now. Everyone knows it’s going to end, except for the folks in Silicon Valley…

But this time, we may face a slow and painful downturn rather than a sudden crash similar to the dot-com boom. And I think we are already watching the beginning of it happening right before our eyes.

Look at Square, for example. The company got a round of financing in 2014 at a $6 billion valuation, and recently went public.

If you pull Square’s balance sheet, you will see that the market cap is $4 billion.

As Square was making the rounds in the roadshow, investors decided they didn’t want to overpay just to make the mezzanine round investors rich.

So there wasn’t much demand for Square at a $6 billion market cap, the valuation of private investors.

No catalyst. No bell ringing. The price simply got too high, and people pulled back.

But you know what this means. If one deal can trade below private valuations, they can all trade below private valuations.

That could be the case with Uber, as the biggest unicorn of Silicon Valley is trying to raise another billion — at a $70 billion valuation.

I don’t think anyone is in the mood to pay $70 billion for Uber. Uber is stuck.

How mutual funds can make things worse

One thing’s for sure, unicorns are overvalued. This should eventually lead to a series of corrections in the market.

And as strange as it might sound, mutual funds may very soon trigger one.

You may not know this, but Fidelity owns shares of private companies in some of its funds. And it has to figure out how to value these things.

To do this, they use the services of third party valuation firms, whose valuations tend to be more conservative.

But valuation firm A that Sequoia is using is different than valuation firm B that Fidelity is using. And Fidelity perhaps wants its valuation firm to be more conservative.

So Fidelity has been marking its private investments to market at levels that are below the most recent funding rounds. This puts the VCs in a bit of a pickle. Do they copy Fidelity or do they press on with their own higher valuations in the face of dissenting opinions?

Would you like to invest in a company at a higher valuation compared to that of Fidelity’s? This doesn’t make people very bullish on startups.

This is, folks, how insidious but fatal bear markets start.

Smells like a comeback for old tech

For full disclosure, I started calling the top (or at least asking hard questions) on Silicon Valley about a year and a half ago. But I think most dedicated observers saw what happened with the Square IPO and said, “Yep, that might be the top.”

So let’s do some brainstorming on what this could mean if it really were the end of the line for Silicon Valley (at least in the medium term).

• Could value start to outperform growth? (If I’m not mistaken, it already is.)
• Could large cap start to outperform small cap? (Boy, is it ever.)
• As new tech is in the process of topping, have you seen what old tech has been doing?

Check out the chart of Microsoft, at 15-year highs:

Now draw conclusions yourself…

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