As we can see from the volume of traffic on Route 101 , Silicon Valley is in boom mode again.
Tech and innovation is clearly disrupting some old school businesses in large markets, such as SaaS disrupting software , Big Data and Analytics , Cloud – Infrastructure as a Service (IaaS), Storage and Security.
In Big Data, we see waves of companies, with quite similar functionality – there will be a consolidation in three to four years time, depending on the patience of the VC community (not a characteristic they are renowned for !). With some of these analytic plays, the ROIs can be difficult to prove out quickly, so the adoption curve is slow in some areas . We see a differentiation between operational analytics that save money for the enterprise and those that help drive revenue, evolution of dashboards and reporting tools.
Security is also hot – the volume of attacks continues and are getting increasingly sophisticated, giving more opportunities for security vendors. In Storage, data growth is out of control. There is a lot of evolution and modernisation of storage infrastructure underway.
There is also a lot of liquidity in the market with some big acquisitions and lots of IPOs with decent market capitalisations. The Twitter IPO is a big event, because it creates liquidity for a ton of local employees/investors. House prices in Silicon Valley and San Francisco have already been pushed up dramatically by the prior wave of IPOs (Facebook, LinkedIn), the current ones will continue that trend. The San Jose Mercury newspaper has already reported 20% annual growth house prices in some locations. We’ve seen a wave of new companies, mostly software centric, move into San Francisco from Silicon Valley.
My predictions – liquidity will remain high but the IPO market will shrink.
There a lot of companies scaling to the $50- $100 millionwindow – and hoping to find liquidity in the public markets (seeing the recent flurry of IPO’s with quite high valuations), and this drives increased valuations from the VC community. But there are just too many companies looking to go public, and many won’t make it, with the VCs having overvalued their portfolio companies. So these companies will need to get acquired at high valuations in order for the VC’s to generate a return – which could prove challenging.
But this isn’t a bubble – it’s frothy sure – but there are true technology trends that have solid business cases behind them. These companies are creating and adding value so their valuations are sometimes justified. It’s not irrational but there are common themes, such as valuations getting out of control, difficulty of getting talent and compensation trending higher.
Also the financing rounds are getting higher, with fewer deals being funded but large rounds such as the MongoDB ($150 million) and KenAndy ($40M) . The PR value of these funding rounds is significant. Also it’s the VCs doubling down on their preferred companies rather than spreading their investments more thinly.
The market for executive talent is very competitive – compensation is trending higher but not going through the roof. We see some candidates getting multiple offers so our clients need to move quickly. But broadly in the startup community, we see responsible behaviours rather than “unnatural acts”. Clients are more flexible around change of control clauses triggering option vesting.
