I’ve been visiting companies in Silicon Valley for more than a quarter century. In that time, I’ve met with hundreds of entrepreneurs, executives and management teams there. To a person, they’ve all been bright and ambitious. The Valley has earned its reputation as a hotbed of creativity, innovation, and economic vitality. But let’s be frank, it’s also earned its reputation for building just as many manias and pipe dreams as viable products and services–and I think the time has come to rain on the region’s latest parade of groupthink, self-congratulation and irrational exuberance.
Last week, I took another trip to interview management teams in their corporate headquarters. All told for my career, I’ve met with more than 1500 executives across the US now. This particular trip took me to a number of companies in Dallas and its outlying areas. It was a fast-paced and tiring, but the most exhausting part of it came after I landed back here in the Bay Area.
I only live 22 miles from San Francisco International Airport but it took me an hour and a half to drive home. As I crawled through traffic over the Golden Gate Bridge, I couldn’t help but wonder why anyone would bother moving here. Sure, it’s beautiful, but it’s hard to enjoy the scenery when you’re sitting in gridlock–especially when you’re paying some of the highest real estate prices in the country, if not the world to do so.
As I write about in the book I’m finishing up (it’s due out late this year or early next year–stay tuned for more details!), I’ve lived through a number of asset bubbles, or manias, in my career. By far, the most maniacal of these manias–and the biggest one in the history of capitalism–was the dotcom craziness of the late-1990s. It was absolute bedlam, and its epicenter was down the road from me in Silicon Valley, so I had a front row seat.
The normal metrics for valuing companies went haywire during those days. Revenues didn’t matter. Earnings mattered even less (because they were usually nonexistent). When it came to pricing a dotcom stock, it was all about “eyeballs”–the number of people visiting a given website.
If that sounds familiar, it should. It’s the exact same way people are valuing the darlings of the latest online mania–social media.
With apologies to Yogi Berra, it’s deja vu all over again in Silicon Valley these days. The rest of the country might be mired in never-ending slow growth and high unemployment, but the Valley is partying like its 1999. Just like back in the go-go 90’s, you can’t go two blocks on El Camino Real without somebody trying to get you to invest in their startup.
In my thirty years as a fund manager, I’ve never put a nickel of my clients’ cash into private companies, let alone startups, and I never will. There’s one main reason for this: they are notoriously crappy investments. I should know. I’ve paid with my own personal money to learn this lesson repeatedly.