Thoughts on Business and Technology

What’s worrying Silicon Valley

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1. China slowdown and its domino effect on world economy 

    If you are not familiar, Chinese economy is slowing down, many fear, much faster than the Chinese government is admitting.What’s worrisome is the breadth of countries, companies and people that are affected by a China slowdown. The impact of the Chinese slowdown will be severe in commodity exporting countries like Australia, Chile, Brazil and Africa and South Asian economies.

2. Turmoil in the US shale industry and its impact on U.S and global economy

     The US shale industry is in the firing line and billions of dollars of investment could be lost.Tempted by big returns companies big and small borrowed a lot of money for fracking their aggregate debt is now estimated to be around 200 billion dollars, raised mainly through bonds issued on wall street. At current oil prices many companies won’t be able to finance that debt. Economists say default on that debt as well as the risky bets that banks and corporations have probably made could have an impact on the global financial markets and U.S real estate, especially in states like North Dakota that experienced high economic growth due to shale revolution.

3. Signs of Tech bubble deflating in the Silicon valley

   Some of the VC’s I know shared concerns about the current valuations among tech startups in the silicon valley, they expect things to slow down as investors ( i.e. institutions, mutual funds and hedge funds ) are either pulling their money out of the valley or demanding lower valuation. One of the VC’s said some of the entrepreneurs who were hard to get are now approaching him. To summarize following signs might indicate that the tech bubble is bursting.

#1 IPO market for tech companies has slowed down considerably

According to Renaissance Capital, 60% of IPOs that went public in 2015 are trading below their IPO price; average IPO returns were down 4% from their IPO price in the third quarter, the first negative quarter since 2011; and the number of IPO deals was down 43%.

#2 Non Venture capital money is leaving the valley

Past few years has been difficult for hedge funds and mutual funds to beat S&P 500 and they have rushed to the valley to fund pre-IPO deals. The amount invested in venture-backed tech companies in the first three quarters of 2015 at  $42.5 billion — has already eclipsed the total funding of any of the previous five years, according to investment research firm CB Insights. But with the IPO market window slamming shut, mutual funds like T. Rowe Price and Fidelity may find themselves writing off more of those investments than celebrating big short-term wins.

#3 Startups are aggressively sweetening the pot to attract fresh capital

As one of the VC’s I spoke to said startups are finding it harder to attract new rounds of funding as investors  are demanding more protections. more board representation in exchange for their money.

4. Is there a bright spot in the global economy   

        Some of the investors and VC’s I know are optimistic about India. Recently some of the value investors I follow ( Prem Watsa and Mohnish Pabrai ) announced plans to invest in India, you can find about their plans here and here. I also gathered that many of the top Silicon Valley VC’s are now quite active in India, in fact one of the entrepreneur I spoke to shifted his market focus to India in order to secure funding. I published my interview with couple of entrepreneurs in India (Bangalore) on my blog, we discussed about the startup ecosystem in India as well as VC’s and angel investors in India. I hope you find it useful.

Predicting the future ( especially in the context of financial markets ) is a fool’s game. I believe investors or entrepreneurs have to play the hand that they are dealt and be prepared to face adversities. I have observed companies and startups in the valley hunkering down and the mood is somber. I have heard about slowdown in hiring and layoffs in few startups. As investors and entrepreneurs this might be one of the rare opportunities to learn and gain better understanding about the economy and ourselves. I look forward to your thoughts and feedback.

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