Summary List Placement
“The main problem with Silicon Valley is its wealth creation engine,” he said. “That model is broken.”
He contends that “unicorns,” or billion-dollar companies, come to fruition through venture capitalists placing bets on certain founders, then bidding up valuations of their companies with successive rounds of funding. Those funds then end up subsidizing money-losing operations solely to buy market dominance.
“Sidecar is a great example of everything that’s wrong with Silicon Valley,” O’Reilly said. “It pioneered the ridesharing business, but couldn’t compete with the hundreds of millions of dollars being poured into Uber and Lyft, despite neither company ever making a dime.” He instead believes founders should focus on building businesses with the goal of making money from customers, not the kind of financial engineering, as he sees it, that the venture world engages in.
O’Reilly is the owner of O’Reilly Media, a leading publisher of technical education, and, especially through his company’s conferences (which permanently went to a virtual format in 2020), he’s become known as a tech thought leader.
“O’Reilly Media has operated profitably for 40 years with hundreds of million of dollars in revenue and employees all over the world — and never needed a financing,” he said. When the pandemic hit, O’Reilly Media had to make a hard pivot to become an online learning platform, shutting down in-person events and laying off 75 staffers.
In his latest essay, “The End Of Silicon Valley As We Know It,” O’Reilly explained why he feels Silicon Valley is at risk of losing its status as the center of innovation once cooler heads prevail in the stock market and talent is needed elsewhere.
The betting economy is not sustainable
Most tech startups become public companies while still in the red. According to a report by the University of Florida, only 19% of tech IPOs in 2020 were profitable.
While profits in business are pretty much always a good thing, newly public companies being unprofitable is very much by design. As long as they can show investors that their products or services are capable of being profitable, investors want to see them spend every penny toward growth.
That said, O’Reilly feels there’s a level of irrational exuberance right now similar to that which existed in the run-up to the dot-com crash of 2000 and global financial crisis of 2008.
For instance, cloud software company Snowflake closed its first day of trading in September 2020 with a valuation 110 times its sales, as reported by Barron’s.
“These are speculative investments,” he said. “When the market loses interest in companies whose only business model is to exit through IPO, Silicon Valley will stop funding them and founders will go elsewhere.”
But money is pouring like a waterfall at US venture-backed companies — they broke records by raising nearly $130 billion in 2020 despite the pandemic — and Silicon Valley venture capital firms top the list of most active investors, according to a recent report by PwC and CB Insights. So it’s hard to see the region’s hegemony ending any time soon.
In fact, O’Reilly’s fund, Indie.VC, which he launched with his O’Reilly AlphaTech Ventures investment partner Bryce Roberts six years ago to back businesses focused on sustainable growth, announced last week that it would not be investing in new startups.
It said that its investors (known as limited partners in the VC world) were less interested in its mission of building solidly growing companies and would rather invest in the kind of conventional Silicon Valley venture funds that values growth above all else. O’Reilly told Insider it will continue to iterate on new models of funding.
Yet as powerful as the funding engine is that’s keeping many close to Silicon Valley, the pull of solving the most pressing problems of the day, like COVID-19 and climate change, is causing founders to flock to innovation hubs across the world, O’Reilly said.
O’Reilly pointed to venture capitalist Chris Sacca’s new climate action fund, Lowercarbon Capital, as a good example of this, highlighting the breadth of job openings listed on its website, including those at Maine-based Running Tide, which makes kelp-farming robots to rejuvenate aquaculture, Massachusetts-based Commonwealth Fusion, which builds ultra-hot superconducting magnets for clean energy, and Sweden-based Heart Aerospace, which is electrifying air travel.
In other regions around the world, O’Reilly is excited about agritech communities sprouting up in The Netherlands and an inventive billionaire’s community setting up shop in Singapore and attracting the likes of Google cofounder Sergey Brin and Facebook cofounder Eduardo Saverin.
Quoting tech visionary Alan Kay, O’Reilly explained it’s better to invent the future than to predict it.
“A lot will depend upon what we do in this moment,” he said, urging founders to work on projects that make a difference in people’s lives and shunning business models of companies like DoorDash, which closed its first day of trading in December with a $72 billion market cap after reporting $149 million in losses for the first nine months of the year.
But he’s not a believer in the death of Silicon Valley — he’s just predicting it won’t remain at the center of the conversation in years to come.
“Anyone with a sense of history understands that Silicon Valley is a thing of a particular moment, and no moment lasts forever,” he said.