The Slaughter of the Tech Unicorns

October 25, 2019

After nearly two triumphant decades marked by an unprecedented accumulation of both wealth and power, our tech oligarchy seems to be running out of luck. Newly issued IPOsUber, Lyft and Slackare losing values at breathtaking rates, while others in the on-desk circle, such as the once widely anticipated We, are headed back to the bench.

Silicon Valleys new form of capitalism had seemed to promise insiders enormous gains even as companies lost money. Now the unicorns are crashing on the rocks of reality. Hot companies such as Peloton Interactive, Uber and Lyft may have grown enormously but they did so largely on the backs also of enormous losses; enthusiasm for newer IPOs has dimmed as investors discover, once again, that results finally matter more than hype.

People at venture capital firms, notably Japans SoftBank, and its $100 billion investment fund, wont be missing meals, but likely wont be adding zeros to their net worth either. Analysts generally see a downturn and some predict another searing crash, with the potential for massive losses like those associated with the busting of the dotcom bubble in 2000. There are certainly parallels: 81 percent of companies with IPOsin 2000 failed to turn a profit in 2001. Out of 160 firms that went public in 2017, more than 60 percent failed to turn a profit in 2018.

The impacts were felt throughout the economy, as nearly $1.7 trillion in equity evaporated and employment in tech industries plunged17 percent in Silicon Valley alone. Students even stopped focusing on computers, with a nearly one-third drop in students getting bachelors degrees in computer science in the years after the crash.

The parallels are too great to ignore. In the run up to 2000, tech stocks, aided and abetted by an adoring media, shot up to five times their 1995 levels. Then, as now, many of the companies that went public were hemorrhaging money. Like today many founders and venture capitalists, including the fund I worked with, lived as if they already had cashed in their chips, moving into lush headquarters, holding lavish parties and generally spending wildly.

Like today, many of these companies had great hype, but little actual cash, recalls former tech executive and Dallas Maverick owner Mark Cuban, who believes the next crash could be even worse than the last turndown as investors realize that many of these firms are not likely to make money into the foreseeable future. In 2000, he notes, most of the money lost was on private companies; today many of these firms are propped up by private investors now losing interest in these firms ever going public. The only thing worse than a market with collapsing valuations, he notes, is a market with no valuations and no liquidity.

A NEW COMPLICATION: POLITICS

Many analysts suggest that a repeat of the 2000 disaster is unlikely. They point out that stock-to-earning prices are not as unbalanced now as they were then, capital is cheaper, and that some lessons have been learned. Certainly the volume of IPOs is far lower than at the millennium.

But there are some additional risks facing these companies, many of them political. In 2000, tech firmsflaky or notenjoyed excellent public reputations. Even as late as the Occupy Wall Street movement in 2011, the death of Apple founder Steve Jobs was widely and openly mourned. The tech oligarchs were widely seen as benevolent moguls, sharing progressive values and fighting to change the world for the better.

This kind assessment played huge dividends, notably in fending off antitrust action by both the Bush and Obama administrations, which had exceedingly close ties to companies like Google. But this shield no longer functions in the age of Donald Trump, a politician who has openly tussled with the tech elite on issues as diverse as China, jobs, and censorship of conservative views.

But the problem is much deeper and protracted than Dr Demento. In two decades since the dotcom implosion, tech firms have become increasingly unpopular with both the public and both parties. Once the darlings of the media, industry leaders are now subject to critiques of their overweening power both from the right and left. Just five years ago, 70 percent of Americans thought the tech companies a positive force in the country; today, according to Pew, that is down to 50 percent. The number of Americans who see them as a negative force doubled, from 17 percent to 33 percent.

Once exemplars of risk-taking, the face of tech is increasingly not that of the courageous risk-taker, but the capitalist monopolist that F.A. Hayek was so concerned would soon become predominant in formerly competitive economies. It was amid concerns of too much control that Mark Zuckerberg this week felt compelled toannounce his support for free speech. Increasingly these firms reflect the worst of American capitalismsquashing competitors, usingindentured servants, attemptingto fix wages, and avoiding paying taxes while creating ever moresocial anomie and alienation.

Big tech may not be nearly as unpopular as big banks or oil companies, but over two-thirds of Americans, irrespective of party, now favor breaking up firms like Amazon, Google and Facebook. Critically, this tide is likely to keep rising if the Democrats take power. Senator Elizabeth Warren, for example, is both fiercer and more specific than Trump in trying to curb the tech firms by, among other things, breaking them up. At least one progressive, Oregon Senator Ron Wyden, has even suggested that Facebooks Mark Zuckerberg face the possibility of a prison term.

WHATS AHEAD FOR TECH FIRMS? A BORING NEW WORLD.

Recent legislation in California, for example, limiting the use of contractors poses a potential existential threat for at least two of the largest recent IPOs, Uber and Lyft, which rely heavily on gig workers. This kind of legislation would likely never have passed two decades ago, as California Democrats have moved left and the once pro-business Republicans have moved steadily towards extinction.

This regulatory trend is unlikely to weaken in coming years, creating a difficult environment for both unicorns and startups. Generally speaking, increasing regulation tends to create a market inhospitable to newcomers. This can be seen in other industries, such as banking, where greater regulatory scrutiny has led to a massive industry consolidation.

It may be hard to think of relatively young companies like Google or Facebook in the same light as AT&T, the electrical utilities or broadcast stations, but this may well be where they find themselves in the future. The public and both political parties, with some exceptions, are far less enamored now with the breaking things mantra so popular with Silicon Valley entrepreneurs.

The new tech world will instead by more obsequious with both the public and the political class. Their excesses will be less forgiven, and they will have lost their protection against antitrust and other regulations. They will become, over time, like other large companies, bureaucracies more interested in preserving their market share than in creating entirely new markets.

Look forward then to a boring new tech world dominated by largely the same big players. Firms like Google, Apple, Microsoft, Amazon, and Facebook may take a stock hit from the depression of IPO frenzy, but they will survive; larger more established tech firms over time survived the tech wreck and came back stronger than ever. Some over-hyped companies, like We, may go out of existence, but other, more established firms, with better balance sheets and less disruptive hype will survive.

This, of course, means the end of our ideal vision of Silicon Valley but its one that many of the established firms can live, and even thrive with. As firms in broadcast and energy distribution become essentially regulated utilities, some, including Facebook and Google, seem ready to make the old bargain, exchanging some constraints on issues like privacy and transparency. Mark Zuckerberg has openly endorsed the notion of a more active role by government and regulators.

This is not as self-defeating for these firms in the long run as some may think. Already hugely rich and established, the oligarchal giants could become sinecures for their founders for generations. With control of their markets, a decline of start-ups and a weaker IPO market suggests less danger of new, disruptive competitors. Rather than frighten children with their break things bravado, they will simply settle into the kind of political correct behavior one already sees in most utilities.

Ultimately, the existing oligarchs could even become more powerful under a hyper-regulatory regime which insulates them both from grassroots opposition as well as new competition. Although the immediate future may cause some headaches, and big paper loss for them , the current tech oligarchy, in the new order, could still exercise increasing control over our economy, society and politics. They simply wont be as interesting, or annoying, just another set of companies you can color grey.

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