Yeah, we live in Silicon Valley, home of the 20-somethings with million dollar homes and genius code junkies who are more likely to afford a new Porsche than they are to have graduated from college. It can get a little weird, a little intimidating, and a lot more volatile. Especially because memories of the dotcom bubble bursting in 2000 are often short, even nonexistent for many Ivy League or Stanford MBA wunderkinds who were in elementary school at the time. But these young, brilliant minds are where thousands of angel investors are betting millions of dollars on in the hopes of getting equity in the next Google. These groups are also, according to billionaire investors Mark Cuban and Bill Gurley, exactly who will be responsible for the next, and in their mind inevitable, big tech crash.
A Penny Spent Is A Penny Burned
“Burn rates, the amount of cash companies are losing every month to operate, are higher than they have ever been,” according to Gurley who says that spending by VC-backed startups is basically out of control. The type of financial outlay that Gurley suggests these early startups of committing is unsustainable in that they are spending in excess of their revenues in attempts to drive growth. This strategy exposes the company to burning out before it has established a solid, foundational business model simply by establishing risky business habits that are, according to Gurley, shortsighted.
But to all rules, of course, there are exceptions. The business software maker, Slack, is breaking even the wildest of molds in every single way. Not only has the company, originally founded as a failed gaming application, reached a billion dollar valuation in an unprecedented eight months, it is doing so while producing admirable revenue with strict adherence to sound financial operations. Purported to only be burning $100,000 a month, the company is rising at a meteoric rate of 7% growth, each week. Yes, it’s true that this type of growth is unsustainable, but having had this growth for most of a year combined with fiscal discipline and a $1 billion bankroll is a reliable recipe for long-term stability.
FOMO Struggles are Real
FOMO, or fear of missing out, as the kids are calling it, is another contributor to what the mega-investors are saying will lead to a possible bubble burst. Mark Cuban made his fortune with getting out near the top of the 2000 dotcom bust with Broadcast.com and has remained a cunning investor ever since, even launching his reality show, Shark Tank, which allows him and other angel investors to capitalize on trends and innovation in any market. Cuban is claiming that, unlike the public companies that failed in 2000 where investors could still sell (though often at a massive or total loss) their stake in failed companies, the current private equity that fuels Silicon Valley is a risk greater than that of merely sitting on the sideline.
With investors lining up to throw money at the newest startups to try and get into the ground floor, there has been an increase in the number of actual accredited investors to over 225,000 such capitalists. Because most people can’t achieve actual VC status, though, there are new opportunities to invest in the burgeoning tech scene in today’s Silicon Valley and beyond. Operations like Angel List are new investment aggregators where for $25,000, anyone can get in the game. The problem, Cuban contends, is that there is no liquidity nor escape hatch for these amateur investors to kick the plug with should their investment go south. With private equity, there’s no public market for their stake in a company so, should their darling startup falter. This unprecedented marriage of middle-American wealth with volatile venture capital is exactly why Cuban believes the effects of a tech correction could be massive.
Hedge Early, Hedge Often
For companies of any size or description, simple steps can be taken to ensure long-term financial stability in the face of market volatility. In this case, the best offense is definitely a good defense. Companies like Slack that are disciplined in their expenses have the best chance of combatting any threats to their business, of course the billion dollars doesn’t hurt, either. For companies that don’t have those coffers to rely on, though, simple steps, like vetting utility providers, can prove invaluable. Flexible payment plans, modifiable options and features, and pooled resources are all characteristics of a solid service partner. Not coincidentally, those are just some of the benefits of VirtualPBX’s award-winning Anywhere Plans.
A commitment to reliability and service is what has seen VirtualPBX through recessions, depressions, and corrections. The unprecedented value of services like the Anywhere Plan is what has helped our customers do the same.
Slack CEO Stewart Butterfield said that, “It’s difficult to call a top, but it’s pretty obvious we’re far from the bottom.” This is couldn’t possibly be more true. However, though we don’t know if we’re actually staring down the next tech bubble or not, we remain committed to staying true to our core values and to providing industry-leading innovation at prices that are right for every budget. No matter what the future holds, you can count on that.