4 signs indicate Silicon Valley's tech bubble bursting

By Money Times

Oct 12, 2015 10:09 PM EDT

What matters the most in investing is the time when you exit. Loss or profit depends upon when you exit. If you can identify the bubble bursting, you can safely walk out of the market well before it happens. The tricky question is how to identify the market before it's blowing up. Investors, who made and lost money in dotcom bubble, fear that history may be repeated for the current tech bubble though the damage wouldn't as much as it was in dotcom crash.

Market analysts and experts see four weak indicators which are likely to get amplified in the near future indicating possible crash in Silicon Valley's technology bubble. However, the damage may not be as worst as it was during dotcom bubble burst.

Experts cite four indicators for identifying the bubble burst. IPO market saturating, funds and institutional investors moving out of the segment, money-losing startups are overvalued and private companies are aggressively sweetening the pot to attract fresh capital.  

The initial public offering (IPO) market was disappointing so far as 60 percent of IPOs are trading below the issue price. The average return since IPO was just four percent. The number of IPOs was also down by 43 percent.

Mutual funds (MFs), private equity (PE) and corporate investors prefer technology startups rather than tapping IPOs. About $42.5bn invested in startups and $26.3bn raised through IPOs during the first three-quarters of 2015, according to CB Insights. 

Many startups, which are suffering from financial problems and started to lay off people, have been overvalued exorbitantly. This is third indicator. This means funds and institutional investors are losing money by investing in these startups and trying jack up valuations to recover their investments. 

Several Unicorns, which are over $1bn valuation, Pentacorns, which are over $5bn, and decacorns, which are over $10bn, are now suffering from several challenges. 

Private companies are sweetening the pot to attract fresh capital is the fourth indicator that signals possible bubble burst in Silicon Valley. This indicator emerges inside matters of the board room. The sudden change in valuations upwards is just one example of this indicator. Recently, a napkin stage startup in Silicon Valley got $10mn pre-money valuations. Valuations, terms and conditions suddenly changed just within a month.

However, some analysts put forth the new signs such as qualitative and quantitative factors. Market volatility and interest rate fears are considered to be alarming signals for the bubble burst. Expensive capital also hurts the technology companies.

Not only investors, funds and institutional investors but also senior executives from technology companies opine that they're in the tech bubble. Most of the successful startups are subsidized by easy venture capital money for long. Using VC money, they're expanding. But, the customer acquisition costs remain very high.

During a recent business meeting, an observer said that Bill Gurely who's a general partner at Benchmark, a Silicon Valley venture capital firm, also sounding the alarm about the tech bubble on stage. The current tech scenario in San Francisco has a number of startups, but they can't last long.

The majority of startups lack serious revenue growth and profitability model. Some startups despite their overvaluations are managing the show to raise money. The major reason is their sustainability and popularity in the market. For instance, biggest unicorn Uber is overvalued at $51bn and it continues to raise money.

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