Long Text Reductions: Silicon Valley’s Impossible 2020 and What Happens Next
The following is based on two articles from The Information: "How Silicon Valley Turned a Doomsday Scenario Into the Hottest Year for Deals" and "What Comes After the New Tech Boom."
Sandy Miller, a general partner at IVP, called it “the golden age of venture capital exits.” 2020 saw the Nasdaq Composite gain more than 40%. SpaceX and Stripe could each be valued at up to $100B with new funding on the horizon. Yet by the end of April, more than 20,000 startup workers had lost their jobs, and top companies like Airbnb were looking for debt lifelines. How did a year that saw a collapse of tech stock prices rebound so quickly?
Helped by the Federal Reserve’s decision to drop interest rates to 0%, VC investment in U.S. startups reached $139.6B, and IPO valuations rose above their previous high mark, which was set in 2000 at the end of the dot-com bust. The awareness that tech companies such as Zoom were benefiting from lockdown orders moved investors to unfreeze their funding pipelines and double down on their top portfolio companies. After backing out of deals with untested companies, VCs began looking for quality and pushed for companies to cut costs, boosting confidence that sky-high private valuations were somewhat reasonable.
The PPP program saved some companies, despite issues with startups being ineligible based on their investors making them appear too large. The first round of fresh IPOs, led by ZoomInfo, showed public markets’ surprisingly high appetite for risk. The following barrage was helped by a long-term trend of companies staying private longer — the median age of companies at their public debut had increased from five years in 1999 to 12 in 2017. Many were ripe for the transition. While traditional IPOs remained dominant, the interest in SPACs and direct listings, which Palantir brought back into vogue, opened new avenues to companies unwilling to spend gobs on underwriting fees.
VCs adapted quickly to doing deals remotely, while the Black Lives Matter protests over the summer pushed big firms to do more to include Black, POC, and female founders in their rosters. Meanwhile, the new remote world opened up second-tier U.S. cities to startups, which perceived their lower operating costs as a good deal, now that they no longer benefitted from San Francisco’s and New York’s network effects.
One of the remaining problems is the massive disparity between the golden year for VC and how the rest of the country is doing. Nearly one-third of low-income workers are facing trouble paying rent or mortgages, and there was a 41% drop in the number of Black-owned small businesses, among other issues. This is all providing fodder for the fire of tech backlash. Several scenarios, driven by the new administration, include a substantial tax increase at a national level and cities pressuring top companies to pay up for things such as homelessness reduction efforts. Funds from the wealthy could be commandeered to pay for universal basic income, while antitrust lawsuits could seek to break up the most dominant tech behemoths such as Google and Amazon. While some CEOs and founders might be resistant to these ideas, it is clear that they also offer an opportunity for them to show their gratitude to the country, which is still in the throes of a pandemic and which made their wealth and success possible.
Did you enjoy this feature? Typically such pieces are reserved for premium subscribers. (Recent features included PwC's The State of Climate Tech 2020 Report, CB Insights reports, a Pitchbook report on LP cash flow, and more.) To gain access to them all, upgrade to Inside VC Premium for either $10/month or $100 billed annually. For a limited time, we are offering a 14-day free trial of premium. Click here to sign up!