With stock markets around the world going bonkers this past week, analysis has inevitably turned to how this will affect Silicon Valley.
This is natural, because many of us are conditioned to use things like IPOs and stock options as barometers to measure the ups and downs of Silicon Valley. A good example, but not the only one, is this column in the New York Times that attempts to explain and rationalize how plunging stock markets could be good news for entrepreneurs and venture capitalists.
There may be things for Silicon Valley to worry about these days (like the Chinese economy), but the gyrations of the stock markets are almost completely irrelevant to the state of Silicon Valley’s well-being. This story from the International Business Times (“In Silicon Valley, Where Optimism Reigns, Tech Pros Shrug Off NASDAQ Woes, China Worries”) is much closer to the mark.
Reporter Salvador Rodriguez (a former colleague of mine) talked to folks in the Valley who are like, “Whatever.” This what-me-worry attitude underscores a radical shift that has happened over the past 15 years since the dot-com bubble.
To understand how Silicon Valley has changed its attitude and dependence on stock markets, let’s explore a couple of conventional views of the Valley.
First is the popular notion that the Valley is a place of startups. That is still true, of course. But over the past decade, the Valley (and in fact, the U.S. tech industry in general) has become increasingly dominated by a handful of tech giants: Apple, Google, Microsoft, Amazon, Facebook.
Collectively, these companies are far larger and far more powerful than the tech giants of decades past. Each one on its own, in fact, almost completely dwarfs the importance of all the startups in its neighborhood.
Consider just Apple. In the last four quarters, Apple has generated more than $80 billion in net operating cash flow. By comparison, over that time, there has been about $57 billion of venture capital invested in U.S. startups. And Apple, of course, is just one of the tech titans that throw off a ton of cash.
The thing about companies like Apple, Google, Facebook, and Amazon is that they don’t really manage their businesses around their stock price. When their stock tanks, or when it soars, they just keep doing what they’re doing – hiring gobs of people, building outlandish new campuses, and developing new products. Yes, Google is turning itself into Alphabet to give investors a bit more transparency (maybe).
But these companies are not like Hewlett-Packard, which seems to have exclusively managed its business to please stock markets (with corresponding acquisitions and layoffs), only to run itself into the ground.
The events of this past week are something less than even a distraction to these companies. They’re almost entirely irrelevant.
But what about those startups? Well, increasingly, over the past decade, these companies are waiting as long as humanly possible to go public. Or they are pursuing the more popular exit strategy, which is to angle for a sale to one of these giants.
People speculating about whether the stock markets’ wild ride will affect the IPO market are missing the bigger point. The IPO is pretty much dead as far as Silicon Valley is concerned.
Through the first eight months of 2015, when the stock markets were running with the bulls, the number of IPOs in the U.S. were down to 131 from 189 during the same period of 2014. And the overwhelming number of IPOs are biotech or health care related, 58 so far this year compared to just 15 tech IPOs, according to Renaissance’s IPO tracker.
Wall Street bankers have adapted to this new reality, and shifted increasingly to helping companies get bought and sold. Or they are creating new modes of investment to help companies like Uber raise shocking amounts of money from non-traditional sources.
Along the way, this allows founders and employees to cash out without having to wait years for a sale or IPO. Someday, Uber will have to go public to pay back these investors. But not now. And not for the foreseeable future.
Still, in the popular imagination, the link between Silicon Valley and stocks remains firmly in place. For many people, connecting the two makes for a simple, quick analysis about the health of Silicon Valley.
And sometimes, the simple-minded analysis is too tempting to resist, no matter how wrong it is.