Nick Bilton - Vanity Fair
One Thursday morning in early June, the ballroom of
the Rosewood Sand Hill hotel, in Menlo Park, was closed for a private
presentation. The grand banquet hall appeared worthy of the sprawling resort’s
five-star designation: ornate chandeliers hung from the ceiling; silk panels
with a silver stenciled design covered the walls. Behind a stage in the
2,800-square-foot room, a large sign bore the name of Andreessen Horowitz, one
of Silicon Valley’s most revered venture-capital firms.
As breakfast and coffee were offered, the company’s
partners mingled with the men and women who endow their $1.5 billion fund. The
investors were dressed invariably in business casual, with the top button of
their dress shirts noticeably undone. (A mere handful of men stood out in a
suit and tie.) Off in the distance, you could make out the faint purr of
Bentleys and Teslas ferrying along Sand Hill Road, depositing the Valley’s
other top V.C.’s at their respective offices—Greylock Partners, Draper Fisher
Jurvetson, and Sequoia Capital, to name just a few—for another day of meetings
with founders, reviewing the decks of new start-ups, and searching for the next
can’t-miss company.
After some chitchat (Mitt Romney had
addressed the group the previous night), Scott Kupor, a managing partner, took
the stage to tell the assembled investors what was going on with their money.
A16z, as the firm is commonly known in the Valley, had invested hundreds of
millions of dollars in some of the industry’s biggest companies—Instagram,
Facebook, Box, Twitter, and Oculus VR—along with a number of upstarts, such as
Instacart, a grocery-delivery business that had been recently valued at about
$2 billion. After the guests found their seats, Kupor began moving through a
series of slides depicting the past and present of the tech sector, using data
that would help inform the firm’s investments in the future. Each set of
numbers had been meticulously researched and culled from sources that included
Capital IQ, Bloomberg, and the National Venture Capital Association.
Yet the presentation, which adhered to a16z’s
gray-and-deep-orange palette, seemed to have an ulterior motive. Kupor, his
hair neatly parted, was eager to assuage any worry about the existence of a
tech bubble. While he conceded that there were some eerie similarities with the
infamous dot-com bubble of 1999—such as the preponderance of so-called
unicorns, or tech start-ups valued at $1 billion and upward—Kupor confidently
buoyed his audience with slides that read, “It’s different this time,” and charts
highlighting the decrease in tech I.P.O.’s, the metric that eventually pierced
the froth in March of 2000. Back then, a company went public almost every
single day; now it was down to about once per week. This time around, he noted,
the money was flowing backward. Rather than entering a company’s coffers in the
public markets, it was making its way to start-ups in late-stage investments.
There was little, he suggested, to worry about.
And then, toward the end of his reassuring soliloquy,
the ANDREESSEN HOROWITZ sign fell from the wall and landed on the floor with an
ominous thud. As the investors looked on, some partners in the Rosewood
ballroom laughed awkwardly. Others did not seem so amused.
Kim Jong Un vs. Hitler
While the rest of the country has spent the past year
debating gay marriage, policing tactics, Obamacare, and Deflate-gate, the
inescapable topic of discussion in Silicon Valley is whether we are in a
technology bubble. Marc Andreessen, the co-founder of his eponymous venture
firm, is perhaps the leading advocate against the bubble chatter. On his
Twitter feed, he has referenced the word “bubble” more than 300 times,
repeatedly mocking or refuting anyone on his radar who even hints at such a
possibility. One of his arguments, as the slides in the Rosewood ballroom
suggested, is the exponential growth of mobile phones, which have fundamentally
changed the way we buy and sell virtually everything, from groceries to
taxi-like services, and created unprecedented disruption. Also, in contrast to
the days of the dot-com boom, many tech companies are creating revenue—in some
instances, lots of it.
Andreessen’s
points are all valid, but the bubble chatter is still impossible to quell, in
part, because the signs are increasingly ubiquitous. When I moved to the Bay
Area to cover the tech industry for The
New York Times, in the summer of 2011, the Valley was still
reeling from the bursting of the last bubble, which led to more than $6
trillion in losses, and sent the NASDAQ on a downward spiral similar to the
Dow’s amid the Wall Street crash of 1929. In 2000, some start-up C.E.O.’s lost
millions of dollars in a matter of hours. Others saw their entire net worth
fall to zero in months. People vanished; commuting times were sawed in half;
private investment ossified. At the time I arrived, LinkedIn was the only
publicly traded social-media company. A little-known upstart with a catchy
name, Uber, had just raised a seemingly staggering amount ($11 million) in
venture capital. Postmates, Tinder, Instacart, Lyft, and Slack didn’t exist.
Silicon Valley was an actual place, not an HBO show.
But within months I noticed that private money was
returning and a cavalcade of start-ups were reshaping the city in their image.
Engineers from companies I hadn’t yet heard of began showing up at open houses
with checks written out to cover rent for the first few months (a recruiting
perk, I later learned). I attended a jungle-themed Halloween extravaganza
featuring acrobats, a 600-pound tiger, and other wild animals in order to bolster
photo moments that people were posting on a hot new start-up, Instagram.
Meanwhile, I was pitched countless apps to find a parking space, or messaging
services to tell someone that you are running late. The founders told me their
companies were worth tens of millions of dollars. When I asked for their logic,
they looked at me as though I were the crazy one. Shortly after the Facebook
I.P.O., I learned about a secret group within the social-network company called
“T.N.R. 250”; it was an abbreviation of “The Nouveau Riche 250,” comprising
Facebook’s first 250 employees, many of whom had become multi-millionaires. The
members of T.N.R. 250 privately discussed things they wanted to buy with their
windfall, including boats, planes, Banksy portraits, and even tropical islands.
Whenever I even
suggested the word “bubble” in my reporting, I became a punching bag. After I
scrutinized the ethics (and preposterous valuation) of Path, an ill-fated
social network, Michael Arrington, once a nexus of power in Silicon Valley who
had invested in the start-up, called me a “pit bull” and said I wasn’t a very
noble person. But lately the worries have spread. There are now fast
approaching 100 unicorns based in the U.S. alone, and counting. The NASDAQ
recently closed at an all-time high, surpassing a record set right before the
dot-com crash in 2000. The Shiller P/E ratio, a measure of the ratio of price
to earnings, has a number of investors worrying, with The Wall Street Journal noting
that it shows stocks are “frothy.”
Lately, in fact,
even some of the most aggressive V.C.’s have cowered. Not long after the
Andreessen Horowitz presentation, Roger McNamee, co-founder of the
private-equity firm Elevation Partners, told CNBC, “We are going to have a
correction one of these days.” Bill Gurley, a partner at Benchmark Capital and
Andreessen’s nemesis (“my Newman,” as he recently put it, referring to
the Seinfeld character),
echoed this sentiment on Twitter, venture capitalists’ preferred platform of
communication. (Many are staked in it.) “Arguing we aren’t in a bubble because
it’s not as bad as 1999,” Gurley tweeted, “is like saying that Kim Jong-un is
fine because he’s not as bad as Hitler.” (Gurley declined to comment for this
story.)
But the best way to understand the current situation
in Silicon Valley is to recall the last bubble. Mark Cuban, who sold his
Broadcast.com for $5.7 billion several months before the dot-com bubble burst,
told me that there is no question whatsoever that we are in the midst of
another one. And as with the last one, there is no question that a lot of
people will be devastated when it pops. “The biggest of all losers will be
anyone who has borrowed money to invest in private companies,” he told me. “You
were stupid. You blew it. You lost. That simple.”
“This Is Hubris”
Perhaps the clearest way to observe the tech industry
is through its architecture. When the I-280 deposits you into San Francisco,
the view is like no other in America. To the left, waves of thick fog roll
slowly off Twin Peaks. To the right, dozens of massive container ships sit like
specks on the bay. If you drive farther into the city, toward gilded Nob Hill,
the area that once belonged to the robber barons—the city’s original
entrepreneurs—is now filled with upscale boutique hotels. But as you enter the
city itself, every corner of the sky appears the same: spikes of lanky cranes
protrude hundreds of feet into the air, their fishing lines plucking concrete
and steel from street level, stacking these beams atop one another.
San Francisco, a city that zones about half of its
land for residential use, is on track to increase its office space by 15
percent, with a majority of it presumably allocated for tech start-ups. Travel
about 50 miles south to Cupertino and you will see the site of Apple’s new
gargantuan glass headquarters, “the Spaceship,” designed by Sir Norman Foster,
which will span 2.8 million square feet and house more than 12,000 employees.
And then there’s the new, recently occupied Facebook building, designed by
Frank Gehry, with its rooftop park and what it claims is the largest open floor
plan in the world. Google is currently planning its own updated campus—this one
designed by Bjarke Ingels and Thomas Heatherwick— that will include an army of
small crane robots, known as “crabots,” which can move office walls, floors,
and ceilings and transform the spaces in mere hours.
Yet there may be
no greater monument to what’s going on in the Valley than the 1,070-foot
edifice under construction at 415 Mission Street. The new, glassy Salesforce
Tower is slated to soon become the tallest building in San Francisco, rising
more than 200 feet above the Transamerica Pyramid. And that may be a big
problem. Vikram Mansharamani, a Yale lecturer and author of the book Boombustology, has
argued that virtually every great bubble bursting has been preceded by an
attempt to build the tallest buildings. Forty Wall Street, the Chrysler
Building, and the Empire State Building were under construction during the
onset of the Great Depression. The Petronas Towers, in Kuala Lumpur, were
completed in time to inaugurate the Asian economic crisis. The Taipei 101
tower, once the tallest building in the world, laid its foundation right at the
height of the dot-com boom.
Some of these
buildings, which were erected through money obtained partly from bubble-gotten
gains, rode on the assumption that the markets would continue to rise and there
would be enough tenants to fill their floors. This trend has historically been
true in other industries, too. An inflated art market, according to
Mansharamani, is another troubling indicator of overconfidence. (Last May,
Christie’s, Sotheby’s, and Phillips broke records by selling a total of $2.7
billion of art in a week and a half.) There’s also a precocious indicator some
economists refer to as the Prostitute Bubble, where the filles de joie flock
to increasingly frothy markets. (While it’s difficult to substantiate this
theory, several bars in the city are well known for this kind of deal-making.)
“I think we are absolutely in a condition that you would qualify as bubbly by
any stretch of the imagination,” Mansharamani told me. “This is hubris,
chest-bumping behavior: Bigger. Better. Wider. Me.”
In more quotidian ways, the mania that presided over
1999 is also back. During 2013, high-tech workers up and down the peninsula
were reportedly paid nearly $196,000 a year, on average, and some made several
million dollars in stock. Other programmers have their own agents, much like
Hollywood stars. Some interns have been paid more than $7,000 a month, which
adds up to about $84,000 a year. (The median household income in the United
States is around $53,000.) Snapchat has offered Stanford undergrads as much as
$500,000 a year to work for the company. Jana Rich, founder of Rich Talent
Group, a well-regarded tech recruiting firm, told me that she hasn’t seen such
bidding wars since the late 90s. “I’ve seen two of these life cycles, where
things are going fabulously well,” she said. “Then we have the bust. We are
now, in my opinion, at the height of the demand curve.”
Other tech recruiters noted that every little detail
of the hiring process is again up for negotiation, just as it was in 1999, with
an increased emphasis on extravagant stock-option packages that could
ultimately yield several million dollars. This era also brings the allure of
all manner of gourmet cafeterias, exercise rooms, open terraces, and unorthodox
cubicles. Sometimes the demands are prosaic: one recruiter told me that an
engineer requested closer proximity to the free-snack station. Other times,
less so: a Google executive was reportedly paid $100 million not to leave the
company for a competitor. Google, or its new parent company, Alphabet, seems to
have enough money to throw some of it away.
This euphoria has created a debauched culture that
also hearkens back to the last bubble. In 1999, thousands of instantly rich
young people would line the city streets and cram into bars and event halls to
gorge themselves on the endless flow of multicolored booze and hors d’oeuvres.
Every night, it seemed, a blowout was being thrown by companies like Kozmo—a
precursor to Postmates or any of the current errand-running sites—that later
lost more than $250 million. Some parties had acrobats and fire-breathers.
Others gave away gadgets and clothing.
Now a recent “Product Hunt” Happy Hour, where
entrepreneurs network with investors, attracted more than 4,000 people,
according to the Facebook invite page. At another event, hosts handed out free
Apple TV set-top boxes as thank-you gifts. A prominent Facebook employee’s
birthday party was orchestrated like an elaborate wedding, with ice sculptures,
chocolatiers, and half a dozen women who walked around with card tables hanging
off their waists so that guests could play blackjack while staring at their
chests. A Google executive’s “40th-and-a-half” birthday party had elaborate
acrobatics. In recent years, Burning Man, the annual art-and-music festival in
the Nevada desert, has started to swell with venture capitalists and employees
from Google, Twitter, Uber, Facebook, Dropbox, and Airbnb. (In 2012, Mark
Zuckerberg flew in for a day on a helicopter.) These newly minted rich have
eschewed the paltry sleeping conditions for private camps on what has become
known as “Billionaires’ Row,” where some spend the night in custom-built yurts
with their own power generators and air-conditioning. The most luxurious camps
can come with teams of “Sherpas,” waiting on tech elite at a three-to-one
ratio.
On any given night a dozen venture firms will host
V.I.P. dinners at the city’s five-star restaurants, or on its own Billionaires’
Row, for designers, chief technology officers, or young entrepreneurs to meet
and mingle. Some of these dinners even have the promise that a second-tier
celebrity, who is now involved in a start-up, might show up. More elaborate
affairs involve weekend trips to Richard Branson’s Necker Island or the Four
Seasons in Punta Mita, Mexico, or even a pub crawl through Dublin with Bono.
All of this exuberance is magnetizing the same diaspora of Wall Street bankers,
models, college dropouts, and anyone else with a start-up idea who came to
Silicon Valley in the mid-90s. “You know there’s a bubble,” the saying goes,
“when the pretty people show up.”
The Domino’s Economy
Engineers and
venture capitalists insist that things are different now. In the past, they’ve
suggested, people were just trying to get filthy rich. Now they are trying to
“make the world a better place.” They are quite emphatic about it, too. Last
year, Fortune reported
that one of Airbnb’s executives said that he would love to see the company win
the Nobel Peace Prize.
Indeed, there are
many technologies that are genuinely changing the world—companies that aim to
take people into space, or eradicate senseless traffic fatalities, or help
people in developing countries by connecting them to the Internet. That shiny
rectangle in your hand—the one that you are probably reading this story on—has
unequivocally changed our lives in remarkable ways. Hashtags about racism,
rape, police brutality, and inequality have offered a potent voice to those who
were previously ignored. But the farcical line in the fictional Silicon Valley that
people are “making the world a better place through minimal message-oriented
transport layers” couldn’t be more true in the real one. All across the Valley,
the majority of big start-ups are actually glorified distribution companies
that are trying, in some sense, to copy what Domino’s Pizza mastered in the
1980s when it delivered a hot pie to your door in 30 minutes or less. Uber,
Lyft, Sidecar, Luxe, Amazon Fresh, Google Express, TaskRabbit, Postmates,
Instacart, SpoonRocket, Caviar, DoorDash, Munchery, Sprig, Washio, and Shyp, among
others, are really just using algorithms to deliver things, or services, to
places as quickly as possible. Or maybe it’s simpler than that. As one
technologist overheard and posted on Twitter, “SF tech culture is focused on
solving one problem: What is my mother no longer doing for me?”
This, perhaps, is the greatest
similarity to what took place during the dot-com bubble, when a generation of
companies were created to do more or less the same things. Webvan, the
grocery-delivery business, raised $375 million at its I.P.O., in 1999—and
reached a market value of as much as $7.9 billion— before eventually going
bust. Kozmo, which initially offered free one-hour delivery, ended so abruptly
that some employees arrived at work only to discover they had five minutes to
retrieve their belongings and vacate the premises. And then there was the
parabolic Pets.com, which sold kitty litter and dog food over the Web and
raised $110 million from investors before descending from I.P.O. to out of
business in fewer than 300 days.
Even if this generation of distribution companies is
able to ride the shift from the desktop to mobile—64 percent of American adults
now own smartphones—errand running has not proved an infallible business model.
Kozmo and UrbanFetch lost so much money on orders and infrastructure that they
ended up going kaput. Some more recent start-ups have subsidized their
deliveries in a race to gain new users and grow their audience. Even Uber,
which is now valued at around $51 billion, is reportedly operating at a loss of
almost half a billion. As one prominent author who has written about Wall
Street and Silicon Valley said to me, “How long can these companies continue to
sell a dollar for 70 cents before you run out of dollars?”
For now, they may have a little while longer. The
Federal Reserve’s decision to carry out multiple rounds of quantitative easing,
in which the central bank stimulates the economy by buying securities, has
flooded the system with cash. (“The whole world is awash with money,” says Christopher
Thornberg, an economist who is best known for predicting the 2007 housing
collapse.) Private-equity firms, not to mention China and Russia, now have the
ability to help venture capitalists fund massive rounds of financing to prop up
billion-dollar start-ups that have little in the way of revenue. Last year the
Government of Singapore Investment Corporation led a $150 million round of
funding for Square, the mobile-payments company. Tiger Global Management, a New
York–based investment firm, took part in a $1.5 billion round for Airbnb.
Collectively these start-ups have helped promote a culture of FOMO—or “fear of
missing out,” in Valley parlance—in which few V.C.’s, who have their own
investors to answer to, can afford to ignore the next big thing.
And this is where it gets particularly murky. These
are private companies, with private balance sheets, and the valuations they
ascribe to themselves aren’t vetted in the same way by the S.E.C. or public
markets. These start-ups, in other words, can command much higher, and at times
fabricated, valuations. One successful venture capitalist told me that he
recently met with a unicorn that was seeking a new round of funding. When he
asked the C.E.O. why he had valued his company at $1 billion, he was told, “We
need to be worth a billion dollars to be able to recruit new engineers. So we
decided that was our valuation.”
Another well-known venture capitalist told me a
related story. When Instacart raised $220 million, this past winter, V.C.’s who
had wanted to get in on the round were allowed to look at the company’s
prospectus only inside a secure office. Investors were asked to refrain from
using their cell phones at the meeting and banned from taking any pictures. The
company claimed that these measures were taken to prevent anything from leaking
to the press or competitors, but this venture capitalist said it felt
suspiciously like the company was trying to control how much time investors
could spend mulling over the company’s revenues and margins.
Indeed, contrary to Kupor’s argument at the Rosewood,
it is this later-stage investing—with its shortage of regulation, tremendous
envy, and Schadenfreude—that worries many bubble-watchers. “We basically
doubled the number of unicorns in the past year and a half,” says Aileen Lee,
the founder of Cowboy Ventures, who has herself become a mythic creature in the
Valley after coining the term. “But a lot of these are paper unicorns, so their
valuations may not be real for a while.” Others, Lee acknowledged, may never
see their balance sheets add enough zeros to justify the title. They will be
given a new sobriquet: “unicorpse.”
The problem with being a unicorn, indeed, is that
there aren’t many exit strategies. Either you can go public, which is
inadvisable without a lot of revenue, or you can sell, which is difficult given
the paucity of companies that can afford to make such an offer. So, for many,
the choice becomes fairly simple. You continue to raise more and more money, or
you die.
Kaboom!
There is, however, one crucial difference between
what’s going on now and what happened 15 years ago. On the eve of the dot-com
crash, as 1999 rolled into 2000, few wanted the party to end. Tech I.P.O.’s had
become a daily amusement, often doubling, and sometimes growing exponentially
on their first day of trading. (One even popped up 978 percent before settling
down at an unreasonable 606 percent before close.) As a result, gas-station
attendants, college students, bankers, teachers, and retirees were all cashing
in on these gargantuan returns. People who picked the right horse, which seemed
like pretty much any horse, were able to sextuple their net worth in a single
day—at least on paper.
Now countless people from all over want this to be a
bubble and they want it to burst. There are the taxi drivers who have lost
their jobs to Uber; hotel owners who have seen their rooms sit vacant as people
sleep in Airbnbs; newspapers that are at the mercy of Facebook’s algorithms;
booksellers and retailers who have been in an unrelenting war with Amazon; the
elderly, who can’t keep up; the music industry; television producers; and,
perhaps most of all, San Franciscans, who would rejoice in the streets if their
rents fell from totally insane to merely overpriced, or if they could get into
a decent restaurant on a Monday night. The bloggers who cover the technology
industry would write a thousand jubilant think pieces saying “I told you so” to
the venture capitalists who sneer and scoff when anyone comes close to
mentioning the word “bubble.” As one prominent tech reporter told me, “Frankly,
wiping that smug look off Marc Andreessen’s face—I can’t wait for that.”
Andreessen declined to speak to me for this piece, but
his argument against the bubble is well documented. It is based, in part, on
the fact that it hasn’t popped yet. (“Where’s the kaboom?” notes his Twitter
bio. “There was supposed to be an earth-shattering kaboom!”) But timing these
things isn’t easy. As the British economist John Maynard Keynes is said to have
observed, the market can stay irrational longer than you can stay solvent. And
calling these things early is a part of the process. Patrick Carlisle, chief
market analyst at Paragon Real Estate Group, in San Francisco, has studied the
great financial collapses over the past 30 years and said nothing ever happens
when you think it will. “People started to talk about bubbles in 1998 and ’99,
and said it can’t go on,” he said. “But it went on for another two years.”
The real difference may be that the
biggest tech companies—Apple, Amazon, Facebook, and Google, among them—are
indisputably now part of our social fabric. So perhaps this bursting won’t be
as big and sudden and cataclysmic as the last one. Instead, things could simply
slow down like a large tractor with a small hole in its tire. Maybe the
“kaboom” will be a number of smaller, quieter pops—more like a correction—set
off by something seemingly unrelated, whether it’s the collapse of Greece’s
financial system, the fall of the Chinese stock market, or, God forbid, the
election of Donald Trump. Meanwhile, according to CB Insights, start-ups have
died at an average of one per week in 2015. Many wondered if we were getting
the first intimation of the kaboom in August, when the Dow fell 1,000 points in
the initial moments of trading hours.
But in whatever form this pop happens, some worry it
could be worse than the last time. When the dot-com bubble burst, the Web was
still in its infancy. Now, according to a McKinsey & Co. report, by 2011
Internet-related consumption and expenditure exceeded that of agriculture or
energy. As Noah Smith, the noted financial writer, explained in July, the
danger is not that we’re in a tech bubble but rather that we’re in an
“everything bubble,” in which any one of these events could be the domino that
makes it all fall down.
Ironically, whenever the kaboom happens, and in
whatever form it takes, the people who are most protected will be the V.C.’s
themselves. Most of them learned their lesson from the last bubble, and this
time around have set up deals to ensure that if a company goes under, or has to
sell itself for parts, any leftover money will go directly into their
coffers—to “make them whole,” as the saying goes in the Valley, ensuring the
investors get back what they put in. This doesn’t protect the hundreds of
thousands of people who now rely on a paycheck from the errand-running
start-ups or taxi disrupters. Nor does it help the mom-and-pop businesses that
have bought into the hype of Zynga, Yelp, or Twitter, and invested their
savings, which continue to plummet.
But don’t worry. This time is different.