Silicon Valley’s Tech Bubble 2.0 appears on the verge of bursting as valuations plunge, even though venture capitalists are still raising record amounts of cash.
Breitbart News has been warning that despite venture capitalists raising $13 billion in the first three months of 2016 — their best quarter since 2000 — their inability to launch a single tech initial public offering (IPO) was a warning that the tech bubble was about to pop.
The 531 venture capital-backed tech companies currently in the “IPO Pipeline” have raised a total of $89.03 billion since 2000, according to the 2016 Tech IPO Report. In a classic sign that the tech market is in bubble territory again, $36.1 billion, or 40.6 percent, of the funding took place in 2015.
Due to the heavy bidding-up of private market valuations, 39 more tech companies joined the existing universe of 23 so called private “unicorns,” with private market valuations of over $1 billion.
The reason for the accelerating valuation bubble in private tech companies was new competition in the “deal market” from mutual funds, hedge funds and corporations. These non-traditional investors were dived into the venture capital markets in an effort to chase red hot historic returns.
As of the end of 2014, Cambridge Associates’ U.S. Venture Capital Index reported venture-capital investment annual returns of 21.49 percent for 1 year; 18.04 percent for 3 years; 16.05 percent for 5 years; and 10.28 percent for 10 years.
The 2015 flood of cash that careened into the tech venture capital market drove the average funding level for companies in CB Insights‘ “Tech IPO Pipeline” to an all-time high of $182 million, up 64 percent from 2014.
But the huge amounts of cash that sloshed into private tech deals in 2015 has not translated into quick IPO profits. Despite 77 venture capital IPOs in 2015, none of the 22 technology companies that filed SEC registration papers for initial public offerings were able to “go public” in the first quarter of 2016, according to a Dealogic report from the Wall Street Journal.
According to the 100-plus leading venture capital companies that met at the annual “Upfront Summit” in February 2016, their biggest concerns was that despite making about $77 billion in venture investments, portfolio companies only raised $6 billion in 2015 IPOs.
Upfront attendees were wildly optimistic in February 2015 about the prospects for higher valuations for tech venture capital-backed companies. But in February 2016, “[m]ore than 90% of the Upfront attendees expected valuations to go down in 2016 with a full 1/3rd of investors expecting significant price corrections.”
The peak of the market may have come during the week of May 18, 2015, when legendary investor Carl Icahn published a public letter to Apple CEO Tim Cook, claiming that Apple stock trading at about $132 a share was worth $240 a share.
As reported by Breitbart News, Icahn asked Cook to support his demands that Apple Board of Directors agree to up their repurchase of Apple stock by tens of billions of dollars, since analysts at Icahn’s firm estimated Apple would generate over $60 billion in free cash flow.
But after cajoling Apple to spend $87 billion on stock buy backs, Icahn announced last week that he had dumped all his Apple stock after booking a $2 billion profit.
Unfortunately for Apple shareholders, the shares have fallen since Icahn’s letter by about 37 percent. That decline is similar to the early stages of the Dot-Com Bust, when the Nasdaq Composite Index fell 37% in the 10 weeks following March 10, 2000 peak.
Just like venture capitalists that invested another $25 billion in Silicon Valley startups in the second quarter of 2000 — down just 5 percent from the first-quarter’s price peak — venture capitalists in 2015 initially ignored the deteriorating business fundamentals and highly inflated valuations in the tech industry.
In the Dot-Com Bust that would that last from 2000 through 2002, the tech-heavy Nasdaq Composite Index would eventually lose 78 percent of its value, falling from 5,046.86 to 1,114.11. Total stock market losses exceeded $5 trillion and only 48 percent of Dot-Coms companies survived through 2004.
The last time tech valuations collapsed, California’s economy was hammered, as Silicon Valley employment plummeted. The San Francisco Chronicle ran lists of restaurant closings and full-page liquidation ads as office furniture flooded the secondhand market.
People held “pink slip parties” and net out-migration from the San Francisco Bay Area was so heavy that there was a U-Haul shortage as people rented them for one-way moves to Las Vegas or Dallas, TX — or wherever the economy was healthier — to get a regular job.