The balance of power has shifted from suppliers of capital towards entrepreneurs
A subject guaranteed to get them talking is the flood of capital into Silicon Valley. In the popular metaphor, thebusiness used to consist of a flotilla of small boats fishing in a well-stocked lake. It was all very collegial. Now the lake is an ocean. Trawlers are out there—big institutions, such as sovereign-wealth funds and pension-fund managers, that increasingly invest directly in technology firms before they reach public markets.
Perhaps a more important shift than the fall in demand for capital has been a steady rise in its supply. The secular slump in long-term interest rates, caused in part by abundant savings, was given an extra shove after the financial crisis by central banks’ easy-money policies. Yields on listed stocks have fallen, too. The venturesome, noting the boom in the share prices of tech stocks, moved into pre-financing in search of higher returns.
One consequence has been a fall in the number of listed companies. By the time a tech startup goes public, its days of supercharged revenue growth may be over. This fear only fuels desperation to get in on the act sooner. There is much shaking ofheads about the participation of institutions based back East in even the early funding rounds for new tech firms.s pride themselves on pastoral care: the support, expertise and contacts they provide to fledgling firms.
As more and more money crams into Silicon Valley, valuations inevitably become inflated. Last month WeWork, an office-sharing firm, was forced to pull itswhen public investors balked at the price tag. A bail-out by SoftBank, WeWork’s main backer and a writer of big cheques more generally, valued the firm at $8bn. Yet a funding round in January put the firm’s value at $47bn. “The damage done by SoftBank is incalculable,” says one Silicon Valley bigwig.
Nevertheless a general view is that it will take something dramatic—a meltdown in tech stocks or a sharp rise in interest rates—to scare the money from Silicon Valley. Big dreams are part of venture capitalism. Everyone fishing in these crowded waters still hopes to land a whale. Look at it another way, says a. In 2012 Facebook paid $1bn for Instagram, a firm that had 13 employees and was not yet two years old. That seemed profligate, he says.
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