Tech Caucus 1/20: How Gentrification Killed My Favorite Coffee Shop. And What’s Going to Happen to Valuations?

1) Will Startup Valuations Trend Up or Down? Tech’s Leaders Weigh In.

2015 was a record year for venture capital. VCs and private firms invested an astounding $128.5 billion into private company deals last year. $38.7 billion changed hands in Q3 alone.

But it’s 2016 and the startup climate is decisively different. Venture deals dropped significantly in Q4. The markets have begun to punish public and private companiesalike for their high valuations. Twitter, Snapchat, Instacart, Dropbox… almost every big name seems to be affected. Even NYT’s most recent piece on the subject, “Expect Some Unicorns to Lose Their Horns”, is ominous.

I asked the Tech Caucus about the current market climate. Specifically, I asked them where they see startup valuations trending over the next six months. Their opinion was 100% unanimous. Seriously! Out of all ~40 Caucus members, not a single one thought valuations will trend upwards in the next six months:

“With capital in public markets contracting, investors feel like they have less to spend,” says one member of the Tech Caucus. “It directly affects the money they are willing to invest in startups, and with less money investing, valuations will go down. The real questions are: how much will it go down, and when?”

The entire Caucus shared this sentiment. “The market feels like it is cooling off,” says another member. “Unicorns turning to unicorpses will exacerbate that and keep investors on the sidelines a bit.” From another member: “The ecosystem as it is moving today is not sustainable.”

The only difference in opinion among the Caucus was how bad the market correction will be. One member thinks things will get better sooner, rather than later. “Market trends are often based on sentiment, and there’s a domino effect that can and will set in. Overall, I don’t think it will have a particularly negative effect on the tech industry as a whole, let alone the world.”

The days of easy venture rounds are over for now, but whether we’re at the beginning or the end of a downturn in the tech industry remains to be seen. In the meantime, the Caucus remembers that entrepreneurs focus on their “core metrics”, but they “matter now in a way they didn’t in previous bubbles.”

2) Gentrification Destroyed My Favorite Coffee Shop…

This is a photo I took inside The Brew, my local coffee shop on Polk Street in Russian Hill, San Francisco. I’ve worked from here for years. But on January 25th, The Brew will close its doors for good because its kind, caring owner could not come to an agreement with the landlord on rent. Instead, the landlord is forcing out my local coffee shop for a client that will pay much higher rent. It f*cking sucks because I love The Brew.

This is the direct, real impact of the gentrification of San Francisco and Silicon Valley, fueled by the rise of the tech industry and the influx of people that have come here in the last five years or so. Gentrification is one of the biggest problems facing the tech industry and its unofficial capital in SF.

I asked the Tech Caucus a simple question: what should the tech industry do to combat rising rents and gentrification in the Bay Area and other tech hubs? They were not unanimous on the solution.

Several mentioned the recurring issue of housing supply and demand. “I think [San Francisco] needs to do more to allow for development of residential and commercial buildings,” says one member of the Caucus. “It is too difficult to build in SF based on the current regulations.” Others agreed, but thought it wasn’t a tech industry problem. “Tech companies are not responsible for real estate. If they are, then they start to build company towns, which can have lots of long-term problems.” Instead, this Caucus member says the solution is for tech companies to “provide resources to local communities, so they can skill up with technology skills.” — Zuckerberg’s investment in local schools was cited as a positive example.

Some had a more technological solution. “Tech should be open to having workers be remote and come in every couple of weeks so they can live other places,” suggests a member. “They should also want to do something to help local business owners stay in the same places. Perhaps a fund to support that?” This particular member also cited bad public transportation systems as part of the problem. Another member over coffee suggested that faster public transit — hyperloops for example — could help alleviate the problem by making living outside a city more reasonable.

Finally, some Caucus members had the opinion that there was nothing the tech industry could or should do to fix the gentrification problem. “The public would view anything tech companies try to do as self serving anyway,” one believes. Says another: “The only real ‘solution’ is probably a readjustment for the whole tech industry, which obviously nobody wants.”

To sum up: housing scarcity has to be addressed. Tech has to get more involved in local politics (GO VOTE!). And investments in technology that can improve public transportation are advised. It won’t be enough to save The Brew, but maybe we can prevent more local businesses, teachers and community members from being forced out.

(Email me if you want to talk to the owners — they know how to run a great coffee and tea shop.)

3) Bitcoin’s Crisis of Confidence

Bitcoin has gone through countless challenges and persevered, but it’s never faced a crisis like this.

Mike Hearn, one of the best-known and respected developers and advocates in Bitcoin, has quit the “Bitcoin experiment”, sold all his coin, and predicted the end of Bitcoin. The former Google engineer wrote a must-read piece on Medium that explain his rationale. To summarize: the politics of a few have overtaken the Bitcoin democracy, almost all the hash power is controlled by two Bitcoin mining operations in China, and nobody can agree on a solution to fix Bitcoin’s capacity issues. Entrenched interests aren’t implementing the necessary changes to the “Bitcoin Core” code, and a fork of the code will require incredible consensus that has not yet arisen because of politics.

So I asked the Caucus, which includes Bitcoin entrepreneurs and investors, what they think will happen to Bitcoin. Will it survive and thrive, or will the cryptocurrency crash and burn?

The outlook isn’t good, according to the Caucus. 42.9% of the Caucus thinks Bitcoin will survive, but always remain niche. 21.4% think an altcoin or fork will take its place. And 14.3% think Bitcoin will outright fail. Only 7% of the Caucus thinks Bitcoin will thrive.

Many of the Caucus members were once supportive of Bitcoin, but have grown pessimistic about the cryptocurrency. “Mike Hearn’s comments made me sell $2k in bitcoin,” says one Caucus member. “As a former super supporter and employee in the Bitcoin and its industry, it really makes me sad to say that I’m in agreement with Mike [Hearn],” says another member. “It’s a super tough time for the internal politics of the industry, and the companies in it have failed to access the mass consumer market. I have hope for blockchain technology to be used for other purposes beyond Bitcoin.”

Speaking of which, confidence in Bitcoin may be down among the Caucus, but belief in the blockchain is as strong as ever. Says one member: “I think the fate of bitcoin is uncertain, but the underlying technology — blockchain — will revolutionize entire industries, markets and perhaps even societies.” Almost every respondent to this question mentioned blockchain as the real value. One says “blockchain could be used in interesting ways,” while another believes “blockchain is just starting.”

Bitcoin may die because of a few selfish players who don’t have to answer to anyone, but the consensus is that the blockchain itself will thrive.

4) What’s Next for Foursquare?

In March of 2009, Foursquare took the SXSW conference by storm, quickly endearing itself to the tech gliterati. Checkins became all the rage and Foursquare’s valuation skyrocketed. Founder Dennis Crowley started and led the company until last week, when Foursquare announced it had raised $45 million at a valuation lower than its previous $650 million round. At the same time, Crowley switched from CEO to executive chairman.

The Caucus weighed in on Foursquare’s future, and the vote was evenly split. 42.9% of the Caucus think Foursquare will get acquired for more than $325 million (half its previous valuation), and 42.9% think Foursquare will sell for less than $325 million. Only one member thought Foursquare will eventually IPO.

Reading through the Caucus’ responses, I found consensus. For the most part, tech’s leaders think Foursquare think its two products — discovery app Foursquare and check-in app Swarm — “haven’t nailed the incentives” for regular people to use them daily, but that Foursquare remained valuable because of its “ubiquitous location API” and its troves of location data.

“[Foursquare is] still the richest source of location data on the planet,” one member argues. “With the right stewardship it can become one of the best ad products of all time. Nothing says intent like location. Dennis is a brilliant product CEO, but it’s time for someone who can build and monetize the ad products Madison Avenue needs.”

On the flip side: “Foursquare had its day in the sun and failed to take advantage of it. Its current valuation is still higher than any reasonable expected revenue stream can support. The number of potential acquirers is very small and the value to acquirers is less than its current valuation.”

Me personally, I believe in Dennis Crowley and Foursquare. I hope lowered expectations give Foursquare room to breathe and grow without the pressure of unicorn hype.

5) What Are The Biggest Problems Facing the World Today?

I asked the Caucus a big picture question: “What, in your opinion, are the biggest problems facing the world today?”

Here are some of their responses. Many of these problems are to be expected, though a few are sure to be controversial (see the last one):

“Climate change by far. It’s the root of all the shit happening right now in the world.”

“Inequality. It drives many of our problems. If everyone in the world felt [like they had] equal opportunity, there would be less violence, less unrest, and greater security for all of us.”

“Water crisis. Refugee crisis.”

“Terrorism and lack of stability are the biggest problems in the world.”

“The plutocracy. Capital is too concentrated in too few hands to drive innovation.”

“Communication. If we as a human race could communicate better — in relationships, political discussions, education, etc. — the world would be a better place.”

“Education. Our schools aren’t built for educating people to survive and thrive in this century.”

“Faith creates some of the biggest problems in the world. Believing in something that is not proven, from God to climate change, creates a decision-making process that muddies the water of truth. I grew up in a religious household but still found it remarkable when people touted a belief as fact.”

Over the next few weeks, I will ask the Caucus about the solutions to these daunting problems. If you’re an entrepreneur tackling one of these issues, email me.

6) The Tech Industry’s Favorite Subreddits

I always ask the Caucus a fun question. Last week I asked them about what they would do if they won the $1.5 billion Powerball. This week, I asked them about their favorite “subreddits” — the mini-communities that make up Reddit.com.

“Reddit scares the shit out of me,” was the first response I read. It seems like much of tech’s leadership doesn’t use Reddit very often — more than I expected. Still, many Caucus members use Reddit. Here are some of their favorite subreddits:

• /r/tinder — “/r/tinder is amazing for funny dating exchanges and video. It always has something cool to watch.”
• /r/aww.
• /r/technology.
• “I prefer the homepage, really, as it gives me a mix of the most popular stuff from the most popular subreddits and that’s good enough for me.”
• /r/relationships. — “It’s addicting.”
• /r/InternetIsBeautiful — “It’s like a weirder version of Product Hunt.”
• /r/spaceporn. I know why the Caucus love this subreddit. Here’s why:

Photo credit: Jawanda on r/spaceporn.

Interesting Links of the Week:

• Jason Calacanis believes we’re nearing the end of a “controlled deflation” of the tech bubble / market correction.
• Investors: Listen to 500 Startups’ Elizabeth Yin! Stop sending one-line rejection emails and send actual, helpful feedback.
• NBC’s execs are delusional.
• Caucus member Sarah Buhr details her scary experience with a taxi in Las Vegas. She makes a compelling arguing that regulators should be favoring Lyft and Uber, not taxi companies.
• GM acquires the Sidecar team. The car companies aren’t sitting still.
• If you can’t manage a sandwich shop, you can’t build a startup.
• Some of Github’s top contributors and developers are not happy with a lack of progress on a range of issues with the core product, so they banded together and wrote an open letter.
• Woot, Tinder babies!
• Can Tumblr save Yahoo?
• The Ranadivés are building an impressive indoor/outdoor stadium in Sacramento. It’s going to be one of the most high-tech stadiums on the planet.
• Slate discusses why Al Jazeera America was destined to fail.
• Sometimes it’s easy for the tech elite to forget that Donald Trump’s supporters are people who feel disenfranchised by the current system. This is a worthwhile read from Kaddie Abdul.
• I’m teaching a new Skillshare class on Captivation Marketing, based off my book Captivology. Check it out if the topic interests you!
• You should subscribe to Caucus member Loic Le Meur’s newsletter before he launches his new startup Leade.rs. Thanks for being part of the Caucus, Loic!
• Congrats Steph and Andy on your promotions! It couldn’t have happened to better people.

Commentary From the Peanut Gallery:

Every week, I will try to share the most insightful responses and insights I receive from you, the subscribers! I got a lot of great responses to last week’s newsletter, but one idiot decided that he needed to write me a long email about how the women in tech issue is not real and how the real problem is that there are women in tech.

Yes, seriously:

Congrats, douchenozzle! I’m giving you your 15 seconds of fame because you’re demonstrating the problem far better than I ever could. F*ck you.

Next week, I’m going to ask the Caucus about unknown and underrated entrepreneurs in tech. If you know one you think I should talk about, shoot me an email (or just reply to this one). And please, share this newsletter with your friends!

~ Ben

This week’s Tech Caucus is sponsored by the Hogwartz School of Witchcraft and Wizardry, the premiere school for witches and wizards in all of Europe. Hogwartz has a rich history of producing legendary wizards/wizards like Harry Potter, Hermoine Granger, and Severus Snape. Plus Hogwartz has the best butterbeer on the planet. Enroll today!

(We miss you, Alan Rickman.)

Have a question you want me to ask the Tech Caucus? Have a suggestion for a new member of the Tech Caucus or an Interesting Link of the Week? Reply to this email or email me directly: ben@benparr.com