The mathematical realities of tech startup funding are a bit alarming.
An FKD Feature exclusive

The amount of money flowing into the tech sector has remained a steady tsunami, which is causing some people to declare the existence of a Silicon Valley startup bubble. Shira Ovide from Bloomberg article titled “Silicon Valley Needs Startup Drano” describes the problem that tech companies face in today’s environment.

The clogged pipe

Basically, a bunch of money is flowing into the sector from venture capital funds. They’re buying up shares in these “young companies” at breakneck speed, but the money isn’t similarly flowing out of tech companies because of slow activity in Initial Public Offerings (IPOs) and startup acquisitions.

Essentially, IPOs and acquisitions are how investors get their money back. Without that, their money remains parked in tech companies whose worth is merely speculative.

With a weak environment for cashing out their investments, if things don’t speed up in acquisitions and IPOs, startups attempting to cross-over and become a traditional company could find themselves in sticky situations.

Get it together

Startups can’t remain startups forever, and must get bought by a permanent investor or become a publicly traded company through an IPO. They can’t remain in limbo, even if they’re massive household names, and they eventually need to formalize their existence through some sort of sale.

This is because investors, while they can be patient for sometime, will eventually demand their money back. After all, they’re chasing returns on their money, not permanent ownership in a company.

Cash BBQ

It doesn’t help that many of these startups are burning through cash just to stay afloat. In Silicon Valley, there’s a mainstream philosophy that ignores the long-term viability of a business. Essentially, investors aren’t concerned about making money or monetization in the short-term, but are hyper-focused on rapidly scaling a company’s user base.

In short, get users now, figure out the money later. Like all things, they must eventually wise up to the fact that they at some point will have to turn a buck like everyone else to keep their doors open.

Is it a bubble?

Throwing around the word “bubble” isn’t a term that people use lightly. Nevertheless, what’s going on right now in Silicon Valley, at least to some extent, seems to fit the bill. According to Investopedia, one of the symptoms of speculative bubbles is many more buyers than sellers.

That is precisely what’s occurring in this case: People continue to buy companies based on lofty expectations sometime in the future, while they can’t easily unload what they’ve already bought.

If you around during the real estate mania of 2004-2008, this phenomenon should sound familiar.

Takeaway

In reality, there’s no way to know whether there’s a bubble in tech right now. IPOs and acquisitions could pick up significantly, and investors could cash out their dough with little effort.

On the other hand, with this much money sloshing around in the tech sector, someone is bound to get burned. Considering the insane valuations of many companies that have yet to turn a nickel, it would be hard to imagine that all Silicon Valley investors will emerge scot-free with all of the cash they’ve already invested.

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Posted 01.17.2017 - 05:10 pm EDT