There has been an uproar in the tech world recently about what people perceive to be the “doom of the Silicon Valley economy.” Several high-profile companies have taken extremely public hits in the stock market (think Twitter, LinkedIn, Tableau), and the venture funding that used to flow so incredibly loosely a couple of years ago has become much more reserved. But a 20-30 percent decline in stock prices isn’t the apocalypse: it’s a market correction, and ultimately, it’s a good thing for the industry.
There have been 22 market corrections in U.S. since 1950, and each has lasted 135 days on average. It’s a natural part of every industry’s economic development. A correction like this one was always going to happen. It was only a matter of time before a few of the bloated, over-funded “unicorns” that we’ve been reading about came back down to earth, and that’s okay — in fact, maybe even good. It isn’t the end of the world for the rest of the tech sphere. The leading companies in the space are still worth billions of dollars and thriving. They will continue to grow and build new business, just a little more slowly and with valuations more in line with future revenue.
You can’t discount the correction completely — the tech world will indisputably still feel an effect in one form or other. Specifically, there will be a psychological effect. We see this already in the daily news of startups “cutting the fat” and laying off employees. Everyone becomes less bullish during a correction — investors are less eager to bet on new businesses, hiring slows, and financing in general becomes more complicated. But those changes are natural and actually end up opening a suite of new opportunities for companies that have been more judicious with their resources.
The costs of running a business declines during a downturn. Top-tier talent becomes available at a more affordable price, office space gets cheaper, and partners and vendors are more willing to negotiate. According to the National Wage Index, the average wage paid to American workers jumps every year, but during economic downturn years (like 2002-2003) the jump is much smaller: $812 versus economic boom years (like 2005-2006), where the average wage goes up $1,699. Similarly, office subleasing, an early indicator of past downturns, is at the highest level since 2010. The amount of available space from subleases in San Francisco jumped to 1.9 million square feet (176,500 square meters) just last month, a 46 percent increase from the end of the third quarter, according to a report from Cushman & Wakefield Inc.
When all of these elements come together during a downturn, businesses are presented with a much more manageable landscape for steady, sustainable growth. Something much different than what we’ve seen over the past few years. Instead of racing to secure funding, companies can focus on plotting out and pursuing new value in a much more productive and enduring way.
It can be easy for young companies to psyche themselves out by watching the plunging stock prices of massive corporations that might have seemed previously untouchable, but those drops were predictable and are by no means indications of an unavoidable destiny for other tech companies.
Here’s what happened to the LinkedIns and Tableaus of the world: They posted slower growth than expected. Their revenue and earnings projections were lowered and their trading multiples came down. What most newly public companies don’t realize is that the combination of the two leads to a significant correction in stock price. It’s unfortunate and painful, but not lethal. Those struggles pave the way for more careful development and better practices in the future.
It’s true that the Silicon Valley of next year will most likely not look like the Silicon Valley of two years ago, but that isn’t a bad thing. It doesn’t mean that a bubble has burst. It just means that the industry is like a train, and instead of blowing through coal and firing all engines, it’s adjusting to a more sustainable pace to be far more successful for the long haul.
Sheeroy Desai is CEO of Gild.