Is the ‘Tech Bubble’ in Silicon Valley Avoidable?

It looks like history might be repeating itself once again in the tech world. When the Dot-com bubble occurred back in the 90s, thousands of companies ran out of capital and lost a large portion of their shares. After 2001, the market crash cost investors $5 trillion. Today, in 2015, there’s a chance that we might see another collapse happen in the Valley.

Unicorn startups – the ones that have gotten more than $1 billion investments -aren’t that scarce anymore. There’s a new word called Hectacorns. Startups that have gotten more than 10 billion investments. According to CBinsight right now there are 142 unicorns out there with a total valuation of $506 billion. Slack, the team collaboration app is estimated $2.8 billion dollars. Uber raised its valuation from $18 billion to $40 Billion in 6 months, and is now worth $50 Billion. But are these startups really worth this much or it’s just a “tech-bubble”? Could the market crash like it did back in the late 90s and investors get hurt?

“The argument in favor of concern is cyclical. The counterargument is that stuff works now”, says Marc Andreessen, the co-founder of Andreessen Horowitz Venture Capital.

According to Bill Gurley, the well-known investor behind Uber and Snapchat, there’s no doubt about the existence of a bubble in the Valley. “We may not be in a tech bubble, but we’re in a risk bubble,” says Gurley. “There is no fear in Silicon Valley right now. More people are employed by money-losing companies in Silicon Valley than ever before.”

Predictions are somewhat ambiguous. Investors are being more cautious in this situation and they’re holding on their excitement for now. But while everyone is debating whether if there’s a bubble or not, let’s see how the crisis could be avoided if there was actually a bubble.

Hold On! If the Money Isn’t Pouring into the Valley, Where Is It Going Then?

For investors, a good reaction to what’s going on in the valley could be investing on emerging market’s startups. A smart move right now could be putting your eggs in different baskets, until the storm is passed. 500 startups, the early-stage venture firm and accelerator headquartered in Mountain View, Califonia, has raised funds in Southeast Asia and emerging markets like Turkey. They recently announced the launch of 500 Istanbul, a micro-fund focused on Turkish startups.

 

Why the Emerging Markets?

Emerging markets could mean a lot of things. Countries such as China, Russia and up-and-coming markets like Turkey and Iran. There are some pretty good startups coming out of these markets. Indian startup Zipdial, is an example for a startup in an emerging market, bought by Twitter.
The growth rate in emerging countries is two to three times the amount in the US and Europe. Also the return is higher. Digikala, the biggest e-commerce website in Iran, got $10 million early stage fund and it’s now valued at $300 million dollars.
Emerging markets are resource rich. Iran’s population is around 80 million with 67% being under the age of 35. The country has the highest number of educated individuals in the the MENA region.
Investing in an emerging market like Iran could be a good diversifier. The economic declines could be balanced by growth in an emerging country.
Many startups in emerging markets fail fast. Reason? not enough early stage fund! A great deal of these startups are really desperate for an early stage fund. And for investors, due to higher risks in these markets, the valuations are much lower.
Could Iran Be the Answer?

Right now most tech-hubs in the world aren’t self-sufficient. If something happens in the valley every other hub might go down with it.
Investors in the Valley have their eyes on Iran’s market. Iranian diaspora are slowly entering the country. There are already startups that rival with the best. Such as Taskulu, a task management application that’s competing with Trello. Taskulu is one of the graduates at Avatech startup accelerator in Tehran that’s getting fund from foreign investors.

Due to the sanctions imposed on Iran in the past couple of years, Iran’s market has been immune to any sort of incidents that affected the Valley. Incidents which could have a domino effect all around the world.
In Iran, almost all of the investments are coming from inside the country. But now that the sanctions are getting lifted, Iran could join forces with the players in the valley. Rocket Internet has already entered Iran. Snap, Zoodfood, Bodofood, Mozando are some of the startups owned by Rocket Internet in Iran.
Iran might be left behind, but it’s moving at a fast pace.

Picture from Pardis Technology Park in Tehran. The sign says "Iran Silicon Valley".
Picture from Pardis Technology Park in Tehran. The sign says “Iran Silicon Valley”.

Trade-Offs?

If the investments pour in an emerging market like Iran, wouldn’t that create a bubble? The first generation of startups in the country have just paved the way for the new generation to come. Short investments could help this new generation but in the long run, it could dry the buds. Short-investments could hurt any economy, especially a young one like Iran.
What do you think would happen if the so-called bubble in the valley bursts? Or if some of the money from the valley moves to the post-sanction Iran? Leave a comment below.

Originally published on techrasa.com on Oct 31, 2015