Silicon Valley is in a bubble and it is about to burst, one of the technology industry’s shrewdest investors has warned.
A considerable number of “unicorns” — young, private technology companies worth $US1 billion or more — are doomed to fail in the coming months, Sir Michael Moritz, the chairman of Sequoia Capital, has predicted.
“Several years ago the atmosphere wasn’t as euphoric as it is today. Even the zaniest ideas can attract money,” Sir Michael said.
Sir Michael Moritz, the chairman of Sequoia Capital. Picture: Noah Berger
“The valuations are very sporty for absolutely everything. There are some companies that don’t deserve the valuations they have.
“There are a whole bunch of crazy little companies that will disappear. There are a considerable number of unicorns that will become extinct. There are also a good number that will flourish.”
However, he predicted that while there “undoubtedly will be some sort of setback” in Silicon Valley, it would not be as pronounced as in 2000.
“Back then you had companies with fly-by-night business models or fly-by-night pretensions,” he said. “There are some of those today, but when you scratch and peer beneath the surface, most companies are secure and have sustainable business models.”
Sir Michael was an early investor in Google, PayPal and Yahoo, which helped him to amass an estimated fortune of $US2.7 billion ($3.4bn).
His latest comments come after Bill Gurley, a prominent Silicon Valley investor, said last week: “I do think you’ll see some dead unicorns this year.”
Mark Cuban, another respected technology dealmaker, claimed this month that the bubble was “far worse” than the one that popped in 2000.
Billions of dollars have been pumped into Silicon Valley start-ups in the past 12 months, giving rise to extraordinarily high valuations for companies that are years away from turning a profit, if they even get that far.
In recent weeks investors have poured nearly $US3bn into Uber, the taxi-hailing app, Pinterest, the online scrapbook, and Snapchat, the photo-sharing app.
Last week Pinterest said that it had raised $US367 million to bring its valuation to about $US11 billion. Although the company has a large number of users across the world, it is still experimenting with ways to make money from them.
At $US19 billion, Snapchat is the third most highly valued technology start-up. Uber, the second, is worth $US41.2 billion, behind Xiaomi, the Chinese smartphone manufacturer, which is worth $46 billion.
Sir Michael said that “everybody in the West is in denial” about China’s increasing power in the technology industry. “The balance of power is shifting,” he said. “The reality is, probably the most vibrant setting for start-ups in the world is China. Seven of the 20 most valuable internet companies in the world are Chinese. That should shake the fillings out of the teeth of everyone in the west.”
Mr Gurley, who has investments in Uber and Snapchat, said at the SXSW technology conference last week: “There is no fear in Silicon Valley right now. A complete absence of fear.”
In a blog post this month, Mr Cuban wrote: “If we thought it was stupid to invest in public internet websites that had no chance of succeeding back then, it’s worse today.”