The Death Of Hopium

As many readers know, I spent 13 years living and working in Silicon Valley before partnering up with Chris to start Peak Prosperity.

I got my MBA at Stanford in 1999 when the dot-com bubble was at its zenith, and worked for both a VC-funded start-up as well as one of the biggest Internet juggernauts (Yahoo!). I lived in Palo Alto, the central core of the tech scene.

As a result, I have a pretty good read on how Silicon Valley works. Many of the folks I worked and went to school with are now in leadership positions at the big operating companies, VC firms and hedge funds in that ecosystem -- so I have personal knowledge of who's making the decisions.

And it's no secret that I think things have degenerated into a steaming pile of hucksterism.

The "engine of our economy", the "cradle of innovation", the "land of tomorrow" -- whatever breathless hyperbole the fawning media is using this week -- is a sham. Silicon Valley has become a factory of hype, funneling gobs of early-stage capital into whatever half-credible concepts it can think of, and then pimping the artificially-inflated initial results of those tarted-up ventures to whichever "greater fool" is willing to acquire it or buy its IPO. Let that idiot figure out if it will ever turn a profit...

Like the too-cozy relationship between DC and Wall Street, I see a similar one between Wall Street and the Tech sector. They collude to pump out as many opportunities as they can -- private placements, acquisitions, IPOs, secondary offerings -- to cash out the insiders and foist the long-term financial risk onto the "dumb money" (pension funds, foreign capital, retail investors, corporations desperate to enter the "digital age"). The dreams of 'changing the world' or revolutionizing lives by making great products have taken a distant back seat to the drive to have as lucrative an "exit" as possible. If that exit requires selling junk to unassuming buyers, so be it.

As with Wall Street in general, the Tech story has been driven by ferocious and cheap liquidity. The Fed and the other major world central banks pumped trillions and trillions of freshly-printed money into the system starting in 2008, and it largely went into the hands of the major financial institutions and the top 1%. All that money has to go somewhere, and the high-potential rewards offered by tech ventures is a really attractive magnet for it. Coupling that with the administration's "Don't worry, technology will save us!" meme to calm market jitters, and the media's amplification of that message in desperate hopes it will come true, it should come as little surprise that money has been lining up to enter Silicon Valley over the past 6 years. There literally have not been enough ventures to invest in to soak up the supply of capital sloshing around Silicon Valley.

This, of course, has led to the stupidly fast pace at which we've entered Tech Bubble 3.0. Facebook, LinkedIn, Twitter, etc went public several years back to astronomical valuations given their (lack of) profits. Since then, a herd of "unicorns" -- start-up companies with no profits but $multi-billion valuations -- stampeded onto the scene. A new mythos of all-knowing visionaries (Musk, Kalanick, Dorsey, etc) emerged to replace the previous generation of "god like" sages (like Jobs, Schmidt, Bezos). A sense of hubris and entitlement returned to the rank-and-file employees working within the over-designed and over-perked corporate HQ-plexes that pepper the 101 corridor. Real estate prices in San Francisco and surrounding counties blew through the previous heights set in 2007, and housing affordability there is now at a record low. And a new dynamic this time, capital flooding in from Asia (mostly China and India), has provided the rocket fuel at the margin for prices of both homes and companies to soar.

How shockingly little we learn from history.

Not ancient history, mind you. We saw this same movie play out just 7 years ago in 2008. And that took place 7 short years after the initial dot-com bubble burst in 2001.

As they say, "Those who cannot remember the past are condemned to repeat it". The Ponzi-like party that the current crop of Technorati are enjoying cannot last forever. It can only continue as long as incoming capital flows exceed demand, and someone is willing to bid higher than the seller's basis.

Well, there's growing evidence that the end is nigh. (Finally! shout those of us living out here with a front row seat to the insanity).

As with all bubbles -- which are a product of mass psychology -- they resist all influence of logic and fundamentals until perception shifts. It's at that moment, when the veil of hopium is cleared from the public's eyes, that the fawning crowd can suddenly see that the emperor is actually naked.

And we are finally seeing the initial signs that sentiment is beginning to shift.

First, there's the obvious: several companies that were Tech's proudest 'darlings' just a year ago are now looking a lot uglier. For instance, last month, Twitter's stock price was down nearly 65% percent from its year-ago high, and had dropped below its IPO price -- a shameful milestone for the former high-flier. It's CEO, Dick Costello, was ignominiously dumped; and after a much-criticized search for a replacement, the new CEO, Jack Dorsey, announced today that the company will be laying off 8% of it workforce, many of them engineers. Those who work in Silicon Valley will confirm that an engineering job has had about the same job security as academic tenure up to now. The fact that any company in the Bay Area, but especially a tech-bellwether like Twitter, is firing engineers en masse is a big discordant departure from the status quo here in Tech-land. If the engineers are getting cut, it's a sign that the senior executives are very, very worried.

But perception and sentiment aren't just about the numbers; they're about the vibe, the "feel" of things. What's being talked about in the hallways, at the trendy coffee bar, or voiced behind conference room doors. And the tenor of that vibe has suddenly become a lot more off-key.

During a recent gauntlet of industry conferences held in the Bay Area by the likes of Fortune, Re/code and Vanity Fair, the speakers gave voice to a nervousness that's been absent during the past half-decade of bulletproof optimism:

We talked to a lot of these execs, as well as the quieter folks behind the scenes, at the events and the parties afterward, and a common theme shone through: Everybody agrees we're in a tech bubble.

At the Code/Mobile conference in Half Moon Bay, there was a lot of chatter about "on-demand" companies such as Uber, Postmates, and Instacart. These companies sprung up over the last few years to provide conveniences at the touch of a smartphone button to busy professionals with disposable income.

But investors are worried that these companies have been subsidized by easy VC money for too long.  In many cases, their customer and usage numbers are going up because they're using VC money to expand into new cities, but customer-acquisition costs remain high and many of them are bleeding money. Worse, mature markets like San Francisco and New York are starting to see some scary, weak customer-adoption numbers, which bodes poorly for these companies as they expand into other regions.

Basically the theory is that you can only sell a dollar for $0.75 for so long until you run out of money. That's going to happen at some point, and some investors believe a lot of these companies will vaporize.


The invading gloom has been noticed by journalist Dan Primack, who has covered the venture capital beat for years:

The party isn’t entirely over, but you can hear someone shouting “last call.”

Every couple of months I leave my small Massachusetts town — where most people still shop for their own groceries and drive their own cars — and head for the Bay Area. Suddenly, all of my cynicism and bubble worries are drowned out by the kind of unfettered optimism that only $1 billion valuations (on $0.00 earnings) can buy.

But not today. Not this time.

Since landing in San Francisco on Wednesday, I’ve met with an assortment of senior venture capitalists, bankers, entrepreneurs and crossover investors. All of them have, in one way or another, been involved with so-called ‘unicorn’ companies. As in the past, they are nearly unanimous in sentiment. The difference now is that their sentiment is fear.

The past several years of raising too much, too high, too soon has run smack into a much more conservative investor ethos. Later-stage tech startups can still raise growth equity — and still lots of it — but not necessarily at the terms they were receiving just two months ago.

“This shift is only five or six weeks old, so most companies haven’t felt it yet,” a senior tech banker explains. “But I know of many companies who raised money at $1 billion valuations last year that are now being told that, to raise money now, they need to take around $700 million or $800 million. Probably with some serious structure that protects investors, like ratchets, on top of it.”

The reality is that record-high private market valuations have been driven by two things: Wall Street’s lust for growth at all costs, and relatively high tech multiples in the public markets (and, more specifically, applying the former to the latter). But a variety of macro economics factors (China, the inscrutable Fed, etc.) have cut public equity prices and moved the spotlight to unit economics, which means some pretty large biz model disruption for the disruptors.

Moreover, many of the crossover investors fueling these big deals were playing primarily for IPO optionality, and the successful VC-backed tech IPO has become few and far between. No longer are they willing to have terms dictated to them when the endgame seems so much less certain, and particularly not based on ambitious internal growth projections that would never be provided to the public in filings or on earnings calls.


Nick Bilton, technology and business columnist for The New York Times takes it even further, decrying current valuations as "out of whack" and advising it's time for tech investors to "put your money in your mattress" to protect it from the coming carnage:

So sentiment is shifting, but it's early on in the process. Like a ball tossed in the air that reaches its apex, it reverses direction slowly at first, but then speeds up with rapid acceleration.

We are likely to see one of the great confidence-supporting memes of the past 7 years -- the unstoppable virility of our Tech sector as a jobs and capital gains engine -- unravel over the next year and a half. This in-turn will remove one more of the dwindling number of pillars supporting the 'master plan' our central planners have been claiming is necessary for stabilizing the global economy. 

Once the public's faith in Tech is shaken, how far behind will its faith in the Fed follow? How quickly will tolerance of further taxpayer-funded welfare programs for our big banks evaporate? Or of the cronyist revolving door between DC and Wall Street? Or of more policies that expand farther the wealth gap between the 0.1% and everyone else?

Change happens quickly once beliefs shift. As we continually advise here, make your preparations now, in advance, while supplies are still abundant and affordable.

Oh, and develop a taste now for unicorn meat. There's going to be a heck of a sale on it over the next few years.


This is a companion discussion topic for the original entry at

to my list of reasons I'm happy to be vegetarian.
It must be at least slightly amusing for you to see it happening from the other side of the bubble.
Insightful article Adam.

Thank you,

Couldn't have happened to a nicer unicorn. crying
I'm calling dibs on a case of that unicorn meat…that would go well next to the cases of Spam and Velveeta…

Does it also have an infinite shelf life? And why does it look so much like Elk droppings?

The NSA doesn't help their cause. I get Google begging me to install their latest .exe but I won't. Can't trust their ethics. 

Hopium is still $16 dollars on ebay! AND it's got 100% of your daily happiness…


I just sat through a fascinating talk at the Chicago Theater with Ben Bernanke.  I actually got to ask him a question at the end.  I mentioned that society does not require growth, but that it seemed like the financial system does.  His response was predictable and unsatisfying, suggesting that economic growth doesn't have to involve "more stuff".  After the talk many people approached me and thanked me for asking.  The ideas presented in this forum are out there and adopted, but they are in hiding it seems.  The event was live streamed online. Check it out!

Macro - great job on asking a Q to the Bernanke!  Of course, you knew even before asking that it would be an unsatisfying answer, but it was good for other people to hear you ask it.  Well played.
In other news, scanning across the technopium landscape, there's still plenty of starry eyed dreamers out there, especially those buying stocks with a long track record, yet still are sporting p/e multiple of over 200.

Netflix (NFLX) is one I am tracking as a bell weather for "loss of faith in the dream."

It's got a p/e of 246 (ugh!) and is a full double this year alone.

Yes, NFLX is down since August, but it's got a very loooong way to fall if it ever decides to get around to getting back to a fair value p/e or 10 or 15.

On the other side of the hope ledger, we find that Twitter has been a real destroyer of capital and dreams.

That's a roughly 50% loser from the peak…and probably will go a lot further.  Of course it doesn't even have a p/e to report because it's lacking a full year of positive 'e' to put in the equation.

But it does have a market capitalization of $19 billion.  As soon as TWTR earns $10 million over the course of an entire year, finally, then it will sport a p/e of  1,900.  But if it could earn $100M, then the p/e would shrink to "just" 190.  To justify this company in a long-term portfolio you'd want to see a p/e in the vicinity of 15-20…and that would require earnings of ~$1 - $1.2 billion.

This is why tech company investors hate earnings.  As soon as you get them you can value a company.  Best to not have them so you can continue to evaluate the company on "growth" and "eyeballs" and "market share."



economic growth doesn't have to involve "more stuff".  
I assume the growth will have to be in "non-stuff". Paper, computer digits etc. To be more precise,  there is no limit to his left brain creating non-stuff ex nihilo. 

Ben and I are of a mind. Who knows what the past will bring tomorrow?

Microsoft and the largest Russian internet company Yandex have announced a partnership that appears to be a hammer blow for Google. Yandex will become the default homepage and search engine on Windows 10 devices in Russia, other CIS countries and Turkey.


I think there's a pony somewhere inside silicon valley.  Amongst all the silly startups, there really is some worthwhile stuff happening.  It just gets lost in all the me-too race for billion dollar valuations of zero earnings companies.
I've used the Internet for a very long time, long before it was popular.  The first time my friends and I heard the word "internet" used in public was at a bar called the Tide House in 1991.  We were all surprised.  We'd all been on the net for years, but we didn't realize it had made it into the mainstream.  Of course, it was a silicon valley bar, which meant it wasn't really a traditional bar per se but rather than a medium-high end yuppie beer drinking place in a valley full of tech people, so … how mainstream is that, really?

Anyhow, in the next 10 years, silicon valley made our quaint little Internet into a monster.  In so doing, it blew through hundreds of billions of dollars of investor money leaving wreckage in its wake., eyeballs, AOL buying Time Warner (ha!), the silliness and the losses were legion.

What did we get?  Well, Internet was rolled out worldwide, and it has enabled almost everything tech since then.  Smartphones/online cameras & 24/7 portable connectivity: Iphone and Android.  Amazon (dotcom survivor, still not profitable) + UPS.  Google: search, maps, translate.  Open source software: including complete operating systems!  And everyone is connected, everywhere.

But boy was there sure a messy, expensive process in sorting out the good ideas from the crappy ones.

What is silicon valley enabling now using this vast wall of money that is in its infancy, but will change the world 10 years from now?

Situational AI: drones, self-driving cars.  3-D printing - biological, physical.  Quantum computing.  I hate to say "the cloud" because its so overhyped - but servers-on-demand (i.e. the cloud) which itself is an enabling technology for new services.  Integration of microfluidics, other sensor technology with smartphones - linking the real world to the internet.   There's other stuff that I don't see too, I'm sure of that.  Some of the hype will turn into real stuff that we'll then use every day.

Buried in all the stupidity of twitter, facebook, and other silliness, real stuff is being created.  Its a messy, gold-rush-like process.  Why do we have to fund such utter stupidity along the way?  I don't know.

All that said, do we want to kill off the goose that has laid a very large number of golden eggs down through the decades?  I don't think so!  I do think we need the crash periods to bring a reality check back to the process.   But we can't lose the silly part.  Somehow, it seems to help.  I'm not sure how, maybe it just gives permission (and money) for people to think outside the box.  In our current society, outside-the-box thinking is not rewarded very often; not in school or industry.

There is also group-think in the funding process.  If you can cloak your new idea as the hot new thing (social media, the cloud, etc), you can get your crazy dream funded.  $4 million dollars on an 8 million dollar valuation - enough money to do "something" and probably blow up, but who knows for sure?  I think that's cool.  And the culture it enables, that of everyone thinking that, if they get a cool new idea, they can start their own company in their garage and eventually become Apple, is awesome.

Am I a tech investor?  Ha.  That'll be the day.  Time, effort, energy - sure.  But money?  No way.  I save my investment money for a boring business that makes a profit every quarter.  :slight_smile:

Anyhow, just some perspective on hopium.  I think it may be a required part of the process, though I'm not sure.  Just my two cents.

I agree Dave. The productivity gains of the internet are very real, and our markets are struggling to quantify that.  The way social media, big data, and cell phones are changing society is incredibly significant; both wonderful and horrible at the same time.  
We are getting  extremely efficient at producing the stuff we need/want.  Previous frictions in the machine, like logistics, manufacturing, marketing, and even development are being automated.  

There was a time when 95% of society worked on farms to produce food.  Next came a period where energy and engineering allowed most of those farmers to pursue other jobs in manufacturing and services.  Tech and automation are reshuffling the deck yet again… Just 2% of the population is enough to make all of our food, and eventually just 5% of the population will be enough to make all of our "stuff". 

The labor force participation rate is in a perpetual decline that will persist until a new global purpose emerges. I'm hopeful that things like climate change and space exploration play a major role in our society's next phase, but I'm worried that it is our government that will be doing most of the changing in the next iteration of society.

I found it interesting in engineering school that the maximum possible efficiency of a thermodynamic process (coal plant, steam engine, etc) is a function of just two factors: the temperature on the way in, and the temperature on the way out).  I think a lot about what the Carnot (maximum) efficiency of humanity might look like.  Sometimes I think that our distribution of wealth is analogous to the temperature difference driving a thermodynamic process.  

What is the smallest percentage of our population that can successfully produce all goods and services for the remaining bunch?  What economic and political system would thrive in an environment where the labor force participation rate is sub 20%?  Do we all become artists?  How will we be paid?  How will resources be distributed?

I think capitalism (as we know it) might break down as this process continues.  I suppose we are seeing that now.



When was Tech Bubble 2.0?   Are you including Biotech?  Not just Internet?

Years ago my friend, an optical engineer, wanted me to move out there.  He was pumping the local economy saying great for engineer/science/math types.  I said didn't want the earthquake risk.  I thought that bubble would have burst for good by now.  How we learn the hopium of central bankers!

This is a key question with respect to how our economy - especially the part denominated in paper currencies - will go forward.  While I agree with Macro (big props!!!) that Bernanke's answer seems lackluster, when one learns that people have made real fortunes selling virtual real estate in Second Life or building up World of Warcraft characters to level 90 and then selling them for real money, there is something to the idea that more and more of our economy will grow virtually.  Here's an extreme example of that in the form of a Black Mirror episode - well worth watching.

I'm of the belief that while some of our economy will grow into this virtual space, and possibly alleviate the inflationary trend of money creation by occupying people's leisure time and funds in our modern Matrix, i.e. Facebook, Netflix, networked video games, and yes, even in some ways this website, that resource limits will still bite us, with the key resource limit being oil, our universal problem-solver, and that will lead to most or all of the consequences charted on the Limits to Growth curve.

Perhaps little archologies mimicking our high-energy consumer society will remain, but if they are like the one depicted in 15 Million Merits, then maybe it would be better to just slide right off of Seneca's Cliff.

One of my favorites:


The labor force participation rate is in a perpetual decline that will persist until a new global purpose emerges.
That's a good way to put it. The social media/Silicon valley growth model is still based on selling stuff. The ad revenue still comes from car companies, consumer products and so forth. Ultimately that is the source of growth. Now that the consumer is failing, there is a growing realization that eyeballs doesn't translate to people buying products from advertisers when many of those eyeballs are ISIS. 

Having just seen the movie, The Martian, I'm again more hopeful that something good could happen to give us a new global purpose. Although a false flag invasion from another planet might be more successful considering the global's current state of war mongering. 

by the way. Really articulates a lot I've noticed in my visits to the area recently. 

Dave -
Love the pony analogy. My opinion is that you have to dig through too much excrement to find it these days.

I'm glad you're giving me the opportunity to clarify that I am painting with a broad brush here. Yes, value is still being created/unlocked in the midst of all the glop I'm ranting about. I do loves me my smartphone. Am I saying the entire industry is unneeded? No.

But perhaps we differ on our tolerance level for "silliness/stupidity". Should tech ventures have a higher potential payoff (and, correspondingly, flame-out rate) because zany entrepreneurs want to try running things in a way no one has tried before? Sure. I agree that enabling folks with the courage and vision to reach for the stars is our best path for actually arriving at them someday.

But does that give the Tech industry a hall-pass on the abuses of capital, trust, and privilege now rampant there? No, in my opinion.

I see it as analogous to Finance (though not quite as egregious). Do I think we need a banking system and financial markets? Absolutely. Do I think that justifies the stranglehold the TBTF banks have on the world, the vast amount of wealth hoovered up by the Wall Street elite, the systemic fraud, and the deeply unfair playing field facing investors? Absolutely not.

Macro, you describe the topic of my next book to a T. As goods, services and finance are automated, and labor costs keep rising (for a lot of reasons), there won't be much work that is profitable for humans to do. I agree with you that the state is itself dependent on profitable companies and their employees for taxes, and the decimation of that model means the state will also have to change the way it functions as well.
Clearly, the emergence of mobile technology fueled Tech Bubble 3.0. there was an entire infrastructure to build out, and that has pretty much been accomplished. The evidence for this is the derivative nature of so many Unicorns–"we're the Uber of parking spaces," etc.

Nice work, Adam–this is a topic that is still well below the MSM radar.

This idea of crazy amounts of money chasing crazy dreams and doing stupid things is not confined to the tech industry…Exhibit A from the shale industry came out yesterday with the announcement of the first wave of resets to the lines of credit (LOC) for a raft of major and minor shale oil players.
While the table is really poorly formatted (thx Reuters!) I've taken the liberty of marking it up a bit.

 Here's the punch line:  Out of the tens of billions of open lines of credit, the banks only made $1,150 million in LOC reductions were made (in pink/red) while some $775 million in expansions were made (green) with the remaining balance not changed at all (blue).


This net reduction of $425 million is chump change in the larger story of lending to the shale players.  In the total table above, it represents a decline of just 2% in total net lending.

This against a slump in oil prices of ~50%, declines in operating profits that in many cases are now losses (not profits), and the supposed write-downs of underlying assets by 50% or more.

The reason for this gigantic mismatch?  The banks know that if they cut lending to these companies the banks will end up owning assets they'd rather not have.

Owe the bank a million dollars and you have a problem.  Owe the banks a billion dollars and the bank has a problem.

Solution:  Extend and pretend.  That's what the above table represents.