The past few years have been incredibly fortuitous for Silicon Valley. It seems like every few days a new “Unicorn” is coronated. Everybody is making money (with a few exceptions) and nobody wants the party to end. Unfortunately, the bars close at 2 and a hangover is coming.

    In the time since the Great Recession, economic growth has been slow with one glaring exception, the tech industry. Investors are flocking to the Silicon Valley and other tech hubs, “chasing the yield” as they would say. Nobody wants to miss out on the money and successful startups are incredibly difficult to identify. The solution according to some VCs? Spray-and-Pray. From an individual VCs perspective, spray-and-pray isn’t necessarily a bad idea when the market is hot. Sure, there may make a lot of duds but one Über more than makes up for them.

    But what happens when too many VCs takes a spray-and-pray approach? Bad companies get investments too. At their Series A round they get a valuation of 10M dollars just because some investors happened to pick them. In their Series B they’re worth 100M because they happened to hit a lucky streak in investment roulette. Suddenly, everyone is talking about this company that is exploding in valuation. Sure they are nowhere close to making a profit but “we’re investing in future value”. This drives more investment interest because nobody wants to miss out on the rocketship. Next thing you know that company is “worth” 28 Billion dollars yet is somehow bleeding half a unicorn a year.

    The hangover is coming. The Federal Reserve is raising interest rates which means that capital in Silicon Valley is going to be harder to find. Companies relying on future funding rounds are suddenly SOL. It will start slow but eventually people will see the emperor’s new clothes for what they really are. Investors will stop investing because they don’t want to be left holding the bag. This leads to more start-ups going under because they can’t raise the capital and the vicious cycle repeats.

    If we’re lucky, the bubble will deflate rather than burst. The good companies won’t be swept out with the waste. VCs will start doing their jobs; identifying companies with actual potential. The schemers and scammers will be flushed out of the system. Given that I work in the software startup world, I hope that is how it turns out. Maybe I just don’t want to face up to the reality.