Economy

Silicon Valley Braces Itself for a Fall: 'There'll Be a Lot of Blood'

Wannabe entrepreneurs are still piling in to San Francisco, but there’s a sense that time is running out on the exuberant startup world.

A sharply dressed French investor is leaning against a doorway, arms folded and his expression slightly bemused. Philippe Suchet is considering the latest raft of hopeful new technology entrepreneurs that have presented at 500 Startups – a major hothouse for up-and-coming Silicon Valley talent.

There’s no shortage of enthusiasm and ideas in the valley, but Suchet is sceptical.

“Things have been frothy, and you see a lot of dumb money. The music’s going to stop and not a lot of people will have a chair,” said 48-year-old Suchet, a 500 Startups mentor who says he’s been seeing companies now with $10m valuations and no product. “There will be a lot of dead bodies. A lot of dead bodies. There’ll be a lot of blood.”

One of the founders walks by handing out his newly venture-backed meal replacement called Ample, whose label says: “Formula version 1.3 better because science.”

Suchet raises his eyebrows and nods.

The last few months have been hard on Silicon Valley startups, as a series of “down rounds” across the tech world chop established companies in half and stock collapses move billionaires back to millionaires. There’s a sense that San Francisco’s excess is peaking; investors asking for their money back, house-flipping seminars popping up across Facebook, and gold-flaked pizza signal the end of times. 

But tonight was a party, an exuberant group of 125 founders presenting their brand new startups. Most had just moved to San Francisco, and each raised $125,000 in January 2015 as part of Dave McClure’s 500 Startups accelerator.

On the sixth floor of a nondescript modernish downtown office building on a rainy night, McClure’s latest 500 Startups batch presentations began.

“Being six in a two bedroom is uncomfortable, but it pays off in the end,” says a young woman whose new startup puts up Instagram ads for e-commerce sites. A panelist giving advice describes himself as having “lived a life of aggressive networking”.

This is McClure’s biggest single accelerator batch ever – 53 companies initiated at once for his four-month training program, each of which gives him a 5% stake. McClure is the closest to a startup mass production factory that there is – last year he invested about $60m in 600 companies, and this year he’s aiming to invest around $100m in even more.

“It’ll be smelly,” he says, looking around the crowded open-plan office.

The room has the sour, wet, warm smell of bodies and pizza. There’s a scruffy grey carpet with various stains. The ceiling’s exposed with fluorescent lights. It’s a minimalist decor, white walls, folding black plastic chairs. Behind the presenters is a large screen and two small posters that read: “Bullshit Free Zone” and “Complaining Is Not a Strategy”. 

One beam has a poster of McClure as a genie coming out of a bottle with a falcon on his shoulder. There’s a small camera on a stick hanging from the ceiling to record the presentations. As is normal, all the startup founders are in casual wear and the VCs by their uniform suit jackets and dark jeans.

McClure watches from the floor. He’s in a black shirt that reads: “500 Strong.” When he doesn’t like a pitch, he shouts: “Buzzword bullshit!”

The startups are a good cross section of what gets seed funding in Silicon Valley.

There’s a company selling ad-blocking software for live-streaming videos, another promising to put all the financial advice you need on a sticky note and somehow monetize this. One woman presents an Airbnb management company. There’s a digital sewing stencils company. A founder says he “designs, builds and sells electric bikes as a service”, echoing the meme “software as a service” to describe his bike shop, and another who’s created “a marketplace to invest in your favorite poker players”. There’s Yodder, an on-demand acne prescription service: “Upload a photo, download a prescription. Remember, life’s already bumpy so keep your skin smooth.”

There are a lot of somewhat shady and questionably legal financial tech startups: one guy presents a company that gives “instant credit through your smartphone in 180 seconds minus the credit check.”

And then another that works as a middleman with bail bondsmen, referring to them as an “underserved industry”. “They’ve been a little demonized because they’re viewed as predatory – the payday loans, bail bonds guys”, the founder Jordan Kelley says. “We make high risk much lower risk but introducing a familiar, friendly brand: Romit.”

And finally an earnest guy in a dress shirt gets up to pitch Halolife, an e-commerce site for burial services.

“It’s a $20bn industry,” he says. “Everyone dies.”

Bedy Yang, a partner at 500 Startups, says everyone’s waiting to see what happens after demo day, when the companies start looking for funding: “There’s a fear that right after demo day we’ll know whether they can raise money or not. It’s almost like a thermometer.”

At the end of the night, founders sit at long communal work stations laughing about their new high rents and what drew them to San Francisco.

Bradley Deyo, a 24-year-old sharing a one-bedroom with his brother and co-founder, just went to an event in Sunnyvale and found a parking space that said “Venture Capitalist parking only,” he says, showing me a picture on his phone.

“That just doesn’t happen in Maryland,” he says. “When I saw that sign I said, ‘I’m in the right place’.”

Nellie Bowles is a technology reporter for Guardian US in San Francisco.