We are about to witness a culling of heroes.
The brightest minds in America have gone West over the past 20 or so years to prospect for ideas in Silicon Valley. Not to gain riches, we were told, but to solve urgent problems and make things we could use. All we needed to do was get enough seed money to the right minds to develop the right technology, and we could solve everything from mobility to climate change to inequality. This idealistic gold rush minted new billionaires, tech titans who captivated investors and entranced the public with promises of a better tomorrow.
But now these vaunted tech geniuses are watching their empires crumble in the face of changing economic winds. Interest rates are rising from historic lows, and it’s become clear that a wide array of tech companies — from the most lionized to the most ridiculous — cannot survive without easy money. Silicon Valley’s inability to weather this inevitable shift is both a disappointment and a wonder. We’ve seen a tech bubble expand and pop before, bridging the end of the 1990s and the start of the 2000s, but what makes this time so different is the sheer scale of the destruction this will leave in its wake.
Jim Chanos, founder of Kynikos Associates, made a name for his short-selling firm by calling out the excesses of the last tech boom, earning him a forever spot in the Wall Street pantheon of “people who saw it coming.” This time around, he told me, the companies that could crumble are even bigger — and they make up a bigger slice of the economy.
“Our typical short in early 2000 was a $2 billion to $3 billion company that was going away. This go-round it’s a $20 billion to $30 billion company. That’s why we call this the dot-com era on steroids,” Chanos said. “I think lots of companies are going to get vaporized. A lot of them are going to go to zero.”
For the past couple decades, Silicon Valley’s luminaries told us that money was just fuel for their innovation. What the market is showing us now — as once seemingly stable businesses degenerate — is that money was also the engine, the captain, and the destination. In the next few years, many of the hottest tech innovations of this market cycle will simply disappear. Consider this an extinction-level event.
It was a good time
Take your mind back to 2012. It was an amazing time for tech. Facebook (now Meta) went public and reached 1 billion worldwide users. Facebook and Twitter had been crucial tools that helped citizens fight for democracy during the Arab Spring. Mark Zuckerberg’s promise to connect the world didn’t seem threatening. Elon Musk was collecting massive government subsidies to start an electric-car revolution — and that was a good thing. Uber and Lyft were starting a competition to see who could get us around for the cheapest prices. Crypto seemed like a fun toy for hobbyists. Celebrities were tweeting about what they had for lunch.
All of this enthusiasm was powered by an economy set up to aid Silicon Valley’s fast-growing companies. The 2008 crash was behind us, and central bankers around the world were laser-focused on making sure there was enough cash to go around. They kept interest rates at zero to make it easy for companies to borrow debt. Money was pouring into the stock market and Silicon Valley’s promises attracted not only investors looking for positive returns, but a society looking to climb out of an economic catastrophe.
Ten years later and our world is so different it deserves its own verse in “We Didn’t Start the Fire.” We’ve started to wonder if we’re a little too connected. Social media has been used to taint elections, poison relationships, and plan an insurrection. No one — customers, drivers, or even the companies — seems to have come out ahead in the ride-hailing wars. Crypto turned into a religion. Elon Musk keeps tweeting.
While the shine around Silicon Valley’s promises to provide social good have been fading for a while, now its promise to provide financial returns has also begun to wither. Those low interest rates that made high-growth startups and tech companies look attractive are gone. Aches and pains are appearing for tech firms at every point of the life cycle. Startup accelerators started drafting “Black Swan” memos warning founders to plan for “the worst.” The biggest venture-capital firms, such as the ever-avaricious SoftBank, plan to cut investments in half or more. Salaries at even the biggest companies — Roku, Pinterest, Uber — look completely unsustainable as the stock market nose-dives.
This is the moment where all the talk of social good evaporates, and investors accept the fact that SIlicon Valley’s business models are not powered by technological genius but by hype. Chanos told me that it was the same situation when the last bubble burst. Certain words had become magic to investors — you could sell anything as long as there was a dot-com associated with it. In this cycle the magic words are “blockchain,” “machine learning,” “AI,” “algorithm.”
“That’s the big parallel here, business plans got funded that made no sense. And people threw money at anything with technology in it,” Chanos said.
Now that the crash has come, only cold, hard cash and a clean balance sheet will save your company — not cool software, not the blockchain, not your favorite black turtleneck. Unfortunately, those basic business fundamentals are not what Silicon Valley has been built on for the past 10 years — not by a long shot.
If the financials don’t work, don’t use them
A Silicon Valley startup founder with a connection to the vaunted Y Combinator startup accelerator told me that in their world it has always been a bad look to discuss a tech company’s financial metrics. It is like asking a woman if she’s pregnant, or asking a New Yorker where the Empire State Building is. It demonstrates that you are not from the Valley and that you do not understand how value is measured there.
“You look pedestrian if you can’t see the BIG PICTURE and instead focus on a silly thing like revenue,” they told me. According to this founder, the standard retort to questions about profitability for the last decade or so has been: “Amazon wasn’t profitable for decades … yada yada.”
This strategy works when financial markets are flush with cash, asset prices are going up, and new customers are still flocking in. But that’s not happening anymore, so the CEOs of chronically unprofitable companies are finding the religion of sustainability. Uber’s Dara Khosrowshahi told employees that it would be cutting costs and hiring in an effort to keep investors and “show them the money.” Snapchat — which has only posted a quarterly profit once in its 10-year life — caused tech stocks to tank last week after it warned of a weak sales market and announced a hiring slowdown. Coinbase — the largest US cryptocurrency exchange — had to tell investors it was not at risk of bankruptcy … but that if it did go bankrupt, well, yeah, its customers may lose all their assets.
Even 20-year-old Tesla is getting smoked in this market. Musk’s electric-car company finally started making money in 2020, but even its biggest fans on Wall Street are starting to shy away as problems pile up: new competition from major car manufacturers, issues in China, Musk’s weird bid to take over Twitter. Chanos, who has been publicly short the stock for years, calls it “the America Online, the Cisco of this cycle” — companies whose stock went vertical when they were heralded as the future of technology during the last boom, but then just as swiftly led us to the bottom.
For the past two decades the market has rewarded growth over stability, and the tech gods have played that to their best advantage. They could not prove that their businesses were profitable using traditional financial metrics, so they came up with their own metrics instead. The most infamous of these was WeWork’s “Community Adjusted EBITDA,” a made-up hoodoo metric that was meant to wow investors by demonstrating the company’s awesome growth. Uber has its own metrics, as do all social-media platforms that emphasize user growth. Francine McKenna, author of The Dig newsletter and an incoming accounting professor at the University of Pennsylvania’s Wharton School of Business, told me that, of course, all of these metrics are internal and may or may not have any connection to financial performance.
“They’re taken on as a holy grail among social-media people, yet they’re completely unvalidatable,” she said. “If you’re buying the company based on a metric it makes up itself, like daily active users, well, then you’re a complete idiot.”
Not only did these tech titans mesmerize investors with jargon-filled promises of the future, they mesmerized their own employees. By paying employees in stock rather than cash, tech companies compensated workers with a promise that they were building something great, something profitable. There was more to it than goodwill, though. Stock-based compensation keeps labor costs from hitting a company’s bottom line, turning losses into gains on paper. Silicon Valley has been especially aggressive with this nifty tool this market cycle. Companies like Tesla, Twitter and Square employed it to dramatic effect for years. And while the trick is outside of GAAP (generally accepted accounting principles), as long as the companies disclose they’re doing it in a part of their financial filings labeled non-GAAP, it’s all fine and perfectly legal. The problem for both the companies and the employees who relied on those stocks becoming valuable is that stocks can go down — hard.
“You lavishly pay everyone in equity and it’s not an expense until your stock collapses,” Chanos said. “Then either you have to issue a million shares or you have to pay people in cash.” Cash is something many of these companies do not have, and issuing shares would only help push the stock down further. To Chanos, as far as tech stocks have fallen this year, they still have a great distance to travel before their prices accurately reflect their true financial metrics.
The gods must be lazy
The longer the market tumbles, the harder it is to accept the narrative that continuing to pile more money into Silicon Valley will eventually result in solutions. Take, for example, the newfangled buy-now, pay-later companies. Putting stuff on layaway isn’t some new revolution, but companies like Klarna and Affirm promised that their algorithm’s special sauce can predict who can reliably pay for what and when (the most important question in finance), helping consumers get the goods they need while keeping companies from chasing missed payments. It sounded so magical, it turned some of these companies into unicorns. But now some of these companies are laying off workers and seeing their valuations cut in thirds as the market figures out that magic does not a profit make.
“For a bunch of Silicon Valley guys to say, ‘We figured this out when no one else has,’ is the height of financial arrogance,” Chanos said.
But at least the buy-now, pay-later folks were looking for a solution to a real problem. Crypto, and its biggest backers in the venture-capital world, are still looking for a problem to solve. Crypto is a stunning waste of capital and the clearest proof yet that a lot of money in tech has run out of useful ideas to chase. It has proved that it is not a safe store of value nor a viable payments network.There is constant crypto robbery with no consequences, and it is obvious that further integrating this fantasy funny money into our financial system would be a mistake. It is a Ponzi scheme, as FTX founder Sam Bankman-Fried basically admitted on an episode of Bloomberg’s “Odd Lots” podcast — a box that is only valuable if more people keep putting value in the box.
Back in 2011 venture capitalist Marc Andreeseen (cofounder of Andreeseen Horowitz) wrote that software would eat the world. Fast-forward to 2022, and his firm just raised $4.5 billion for another crypto fund. This is not software eating the world, it’s software for software’s sake. In his essay, he says people should stop “constantly questioning their valuations” and extols the virtues of a “new generation of technology companies” like Groupon, FourSquare, and Twitter. It’s a fun game of “where are they now.”
Ultimately Andreeseen got what he wanted, and the questioning from Wall Street turned into cheerleading. But instead of using this period of easy money and credulity to solve real problems, the self-indulgent tech gods and their “new generation” of companies are slamming back down to earth with a very stupid-sounding thud.
Everyone talks about Elon Musk because he is the richest (on paper) and the whiniest (on Twitter) of these billionaire tech CEOs. But the one who perhaps most embodies this de-deification is Meta’s Mark Zuckerberg. The company conceived in a Harvard dorm room is now considered a haven for racism, conspiracy theories, and negativity. The company has relied on acquisitions and copycatting instead of innovation. So Zuckerberg decided to bet his company on a half-baked sci-fi concept called the metaverse. There is little evidence the rest of the world will follow him on this massive cash-burning adventure, and it’s unclear what problems the technology will actually solve.
We have flying-car startups, ultrafast grocery delivery, and rides to space for rich people — but it doesn’t feel like that was the change we were promised. These are big ideas, no doubt, but they don’t add up to a revolution, and a revolution is what we were sold.
There is a price to pay for all this excess that is worth more than money. Blowing bubbles in runaway bull markets — which are always wracked with corruption and lead to enormous instability — is starting to feel normal. “We’ve built up this enormous tolerance for really horrible losses and bad behavior, and there’s so much of it,” McKenna said. “We’re getting numb to significant destruction.”
And what do we have to show for it? We are more connected than ever, but more divided than ever. We are lonelier. Inequality is still growing, our housing crisis has worsened, the climate crisis rages on. We gave the tech gods 20 years of unfettered capital to solve these problems for us and they didn’t even come close. There will be new gods — the market can’t help but create them — and hopefully they are people who can provide real solutions to the problems in our lives rather than the old pantheon of trend-followers whose time is coming to an end.
Linette Lopez is a senior correspondent at Insider.