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Summary:

There is a lot of talk about Silicon Valley being in a bubble. It takes a lot smarter people than me to figure that out. However, if you look back to 1999, there are some glaring differences, and not all are good.

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Adam Lashinsky, in a piece for Fortune last week, wrote at length about the question that has crossed the minds of everyone north of San Jose: are we in a bubble? He takes a nostalgic trip down memory lane, talking about the dot-com bubble and how we are starting to see similar behaviors again.

Like Adam, I too was around in the Valley during the crazy days, so a lot he said resonated, but I still am not smart enough to say that we are in a bubble. These days it is hard to tell. In 2000 it was fairly easy to tell.

We live in crazy times — that is true — and things have gotten crazier, but it still doesn’t feel like the turn of the century. Last week, another former colleague from Red Herring brought up the topic and wondered how different things are now versus the 1999-2000 madness. And then he answered the question himself: 1999 had a gold rush mentality, a sense of broader mania. This time around you see more of a gross entitlement; and that’s what is different about the Bay Area.

Bay Area/San Francisco

The difference is the scale and scope of everything happening around here. Back then people would show up, hoping that they could merely participate in this tech-internet thing. Now, many (if not most) show up expecting millions even if their companies fail. Just sit in a cafe — any cafe in San Francisco — and you hear stuff that makes you want to poke your eyes out.

Founders, instead of trying to forge relationships, are getting into a pattern of expecting funding without much effort. After all, if it doesn’t work out, no harm done and there is an acqui-hire around the corner. There is an expectation that even if they don’t build an interesting product, they deserve a nice exit for trying anyway: which is troubling as far as I am concerned.

Today, the babble is sourced from blogs; news blogs, expert blogs, investor blogs and founder blogs. Yes, I have overheard a conversation that combined wisdom from Jesus and Ben Horowitz. Back then it was my then employer Red Herring and The Industry Standard that acted as source of buzzwords. Those magazines existed because the mainstream media at that time didn’t much care about the internet and the broader technology industry; for them it was a niche.

Today, the mainstream (which includes Fortune and its competitor, Forbes) is once again back chasing the story. The reason why there is a boom in technology media today is because it is THE story. Technology is now part of the social fabric; it is what is causing dislocation. It is the cause of fear amongst all of us. The digitization of our society is a challenge that is both legislative and philosophical. And that is why we are seeing a greater demand for those who cover this industry.

In 1990s, we had a generally upbeat economic environment around the country and there was a sense of naive optimism around the internet. Then came the gold rush and later the malfeasance. Right now we have a country that is facing an unending economic uncertainty, especially for a large swathe of people. As a result, the Bay Area stands out and finds itself living under a microscope. There is no naive optimism; just gross entitlement and that is what’s wrong.

Our industry has boom and bust cycles that are much faster that any other industry and at the same time have unsaid but distinct barriers to entry. The internet-speed cycles lead to many more startups and more people becoming millionaires faster and at a much younger age than any other industry — even the older version of the internet industry. We also forget that the same speed which thrills, also kills. The recent retrenchment of technology stocks is a good reminder that the craziness doesn’t get to mania levels anymore.

IPO stock performance 2014

Source: Deutsche Bank Research

The 1999 bubble was driven by stock markets where insane valuations for crap stocks led to insane decisions by equally insane (and clueless) venture investors. This time around, the stock markets, after overpaying for initial public offerings from much of 2013 and 2014, have come to their senses and decided that bad businesses aren’t to be rewarded. A Deutsche Bank report pointed out that 86 percent of IPOs have broken issue and 91 percent are trading below their first day close. Clearly, the market has skimmed out the froth and continues to re-price stocks including Twitter, which has trended down in recent days.

The bad behaviors, like everything, get magnified too much by social media. I mean, last week in Italy people were asking me about Google buses, protests and what is wrong with the tech industry. I don’t know what is wrong except that the social norms and behaviors of players are different. The world looks at the gratuitous amount of profits made by a company like Google, and juxtaposes it against the lack of hope for a majority of the planet.

People dislike Uber, not because some founder is going to become a billionaire; the discontent comes from the visible disparity between those who have it and those who don’t. Google buses get rocks and eggs thrown at them mostly because they are a reminder of digital feudalism. As an industry, we are very fortunate; and that is why it is important to remember why we need to have compassion and understanding about the fears of the rest of the world. We need to remember that our actions now intersect and influence those who are not of our industry. Trying to be in their shoes isn’t a bad place to start.

I have been around in San Francisco for over 12 years and I have come to reluctantly call it home. The garishness of modern times is unsettling but it doesn’t mean we are fully in the grip of mania/madness just yet. And if being the old-ish guy in the valley has taught me anything, it is that booms turn into busts, cycles end and greed gets it comeuppance. And we start all over again.

The way I deal with it? Avoid the spectacle of technology and instead focus on technology and science solving real problems. For me, it is always about the possibilities.

Featured image courtesy Aksenova Natalya via Shutterstock

  1. the blind following the blind, there seems to many advances by too many companies trying to solve the same issue, almost repeating the same song but using a different instrument, it is only a matter of time before common sense re engages, and it’s getting close. the advancement of the web is the story of over trading, going too far without proper backup, i see this in the energy tech industry, the ipad too, basically said, why would you dump good technology for a car that did an extra 5 miles per gallon, good article

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  2. The San Francisco bubble most cited here and elsewhere is a Social and/or Media bubble. These are companies that use technology (hardware and software) to deliver services. They aren’t tech companies even though their services are highly dependent on “tech”. They are as much “tech” companies as Ford Motors is a “tech company”.

    This conflation of “online” (now Social or Media or related) with “tech” is a bad trend. Suppliers like networking companies, server companies, and storage companies, are all “tech”. Snapchat and Twitter and Facebook and Instagram and all these other companies are simply Social Networks (i.e. services).

    Is Amazon (the retailer, not the AWS side) a tech company? NO. They use technology to deliver sales over the web. Is Walmart.com a tech company? NO. Is Twitter a tech company? Of course not.

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    1. Derrick Harris Monday, May 12, 2014

      I disagree that web companies can’t be tech companies. On the web, at least, Facebook is responsible for a large number of technological innovations, from programming to hardware design. Same goes for Google and, to a lesser degree, Amazon (especially w/ AWS), Twitter et al.

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      1. @derrick thanks for weighing in. I agree on that front.

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    2. Thanks for your astute comment. I think if you look at the investment patterns, the “attention” grabbers pass for tech. We have an excess in tech enabled services.

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  3. Haley Jindal Monday, May 12, 2014

    On possible tech bubble, in today’s NEW YORK POST lead Business section story:
    http://nypost.com/2014/05/11/soaring-prices-for-tech-startups-stir-bubble-fears/

    “When it comes to buying that hot startup, price is no object.
    Along with surging shares of newly public tech outfits, Silicon Valley CEOs in search of the “next big thing” are driving up prices for private tech companies, giving rise to talk of another bubble. Companies spent way more to acquire private US tech companies last year even though the number of acquisitions was down compared to the previous year’s peak, a new report from private-companies Internet data company PrivCo shows.”

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  4. Trying to be in their shoes isn’t a bad place to start. Maybe its the only place to start from….

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  5. Wow. So well written. Nicely said.

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    1. Thanks @semil.

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  6. Very insightful piece, Om. At a recent social media conference, I met a young tech founder who had dropped out of college in Boston and moved west with an app idea that he found funding for. What was shocking to me was how cavalier he was about returning emails to the very people who had funded his company to the tune of $750K. I found myself lecturing him the way I might one of my own teenagers, but he just laughed it off. I happen to work for a tech start up in Reno, Nev. (I left San Francisco for Reno during the first tech wave) and have to say the attitude here, even in technology, is much different. There are things I dearly miss about my native Bay Area, but the entitlement vibe you write about is definitely not one of them.

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  7. Isn’t at least part of the issue around the buses that they use public infrastructure without paying adequate fees? That would seem to reinforce your point about wealthy tech companies being tone-deaf to the communities around them.

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    1. A lot of the issue is that established San Francisco renters feel that they should have the benefits of owning real estate – meaning being shielded from cost increases – even if all they commit to is year-to-year leases. They also oppose building new housing units, and then they rail against the logical consequence of restricted supply, namely higher housing prices and higher rents.

      So I’d say that much of the problem is a group of San Francisco residents who feel entitled and are quick to protest, and support counterproductive or unrealistic policies because they are economically illiterate.

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  8. It seems to me that this bubble/boom whatever definitely involves larger sums of money. The funding rounds for companies that barely exist are much larger than in the previous bubble/boom. I live in SF and I too have heard conversations in cafes that make me want to poke my eyes out. The most obvious issue is that so many “social” apps seem to have no revenue model other than to get really big really fast and then figure the money part out later, yet they are being “valued” at astronomical numbers (and often double in “value” for no apparent reason). There is only so much money to be made selling advertising aimed at chatting teenagers. As much as Webvan and Pets.com became symbols of the first “dotcom bubble” the basic business models might have made sense, and might still make sense (and in fact the grocery delivery “space” seems to be coming to life). Maybe I’m missing what the really smart people see, but I can’t see how things like Snapchat and Whatsapp (let alone Whisper and Secret) could ever justify their implied valuations.

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    1. Alan Graham Monday, May 12, 2014

      I’m such an old dumbass that my startup over here in the UK actually has a revenue source and will make money on day one and not from advertising. It’s crazy, I know, but I’m old school that way.

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    2. That’s a decent point, Wonkster, but there’s a bit more too it (and YES to the eye-poking conversations here! Though I admit sometimes it’s not my eyes that are tempting targets).

      A big difference between the booms is the scale of general-public money invested in all this flummery. That’s not at all to justify any of the tulipmania or any business plans or MBA entitlement, but this is a bit hopeful in that the bust won’t take down so many private individual investors, as it did with Pets.com et al. As for institutional investors, I don’t really know; CalPERS may still be vulnerable, which would be awful.

      As for the “get big fast”, I’m still pondering how that is like or unlike the “first mover” fetish in the first dot-com boom. Steve Blank chronicles that fallacy and its discontents well in his “Four Steps” book (I think the first few chapters are available online for free).

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  9. Bryan Goldberg Monday, May 12, 2014

    I think we should be careful painting in broad brush strokes either way. The entrepreneurs I know are amongst the most hard working people I have ever encountered, and most of them sprint to the finish line… working six or seven days per week (and skipping vacations) for many years at a time. The ones who have been fortunate to achieve an acquisition continue to work hard even when they have no skin in the game, because they believe in their products, employees, and in delivering value to their acquirer. I know many tech millionaires who still wear Casio watches and continue to live in small neighborhood homes.

    I have no statistics to point to, nor can I say if my sample size is representative of the whole… but I lived my entire life in Silicon Valley (even before Web 1.0) and can say, with confidence, that the humble, hard-working, inconspicuous, grateful, caring, millionaire is the far more common occurrence… if their worldview is tainted, then it is from an over-exposure to crazy technological theories, not from an over-exposure to First Growth wines, yachts, and Swiss watches.

    Many of the people who are millionaires today sewed their businesses during the cold years of 2003 – 2009, and have their favorite memories from the quiet and productive years when Silicon Valley was bemoaning a “farewell to good times”. They will do just fine if the markets take a turn for the worse.

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    1. Bryan

      Thanks for the comment. I definitely agree on all fronts and yes, painting by the broad strokes isn’t the intention — what I wanted to point to is that there is a slight difference in everything from expectations and the self correcting market behaviors. I have been around long enough to know that rough times bring out the best ideas and they work well as a result. I wrote about the downturn-born companies a few years ago. Today we are on the fringes of irrational behavior but like I said, the markets self correct much faster now.

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      1. Ammiel Kamon Thursday, May 15, 2014

        I think both Om’s and Bryan’s above comments are spot on.

        Speaking of broad strokes, the actors in the current boom are a different generation than the last… So it is interesting to see the generational characterizations come into play — The negative aspects of the gen-x led late 90’s boom are painted as “greed”, while the negatives of the current, Millennial led boom are painted broadly as “entitlement” . Not saying either one is worst than the other, true or not, etc. just that the actors, as a cohort, are noticeably different.

        Same can be said about the positives of each generational cohort — e.g. Gen-x label of “self made”, and Millenial label of “collaborative”.

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  10. Alan Graham Monday, May 12, 2014

    I’ve worked in tech and new media for over 20 years. Over 10 disruptive technologies and platforms. I was in the Valley before the previous bubble burst and it was a pretty wild time. I was lucky enough to get out the last time with the shirt on my back.

    A year and a half ago, disillusioned with where things were headed, my wife and I pulled up and moved to London and I’m doing a startup here. That meritocracy crap that seeped into the Valley doesn’t exist in that same insidious way over here in Europe. Theres a sense of cooperation/collaboration and excitement that I’ve missed from the SF tech community for quite some time. People love good ideas, they recognize them, and want to help make them a reality.

    I think there is a bubble in the Valley and it is a creation of the great migration of people to the area who are then living within a bubble and have no sense of what is going on in the world outside of Silicon Valley. The Kool Aid has been replaced by Soylent and they are all high on their own sense of self importance. They all talk about changing the world, but with what? Dick pic apps?

    I think there is a bubble burst coming, but that’s not the same one we saw before. This one is a disconnect from reality and a self feeding idea loop of an economy built upon freemium models and advertising that is unsustainable. One dip in the economy and that all comes crashing down. I’ll be glad to be outside when that implosion occurs.

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    1. Agree with Bryan and those recognizing that this is an asset bubble. As such, many of the same traits apparent in the last cycle appear again in Silicon Valley (& San Francisco).

      On another note, Silicon Valley increasingly appears to be an ‘isolated system’, or a bubble community, producing a consistent and similar view (arguably limited) of the broader market. Probably not necessary to note that expansive thinking begets innovation.

      Regardless, whether the buzz cycle propagates a bust (behavioral finance), the rapidly increasing (reckless?) risk tolerance from the venture community propagates one, or otherwise…we will have to wait and see.

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