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TOO REAL

HBO’s Silicon Valley is hilarious—but the tech bubble it depicts is terrifying

HBO
They see it coming.
  • Mike Murphy
By Mike Murphy

Technology editor

This article is more than 2 years old.

In its first two seasons, HBO’s Silicon Valley did a pretty excellent job of lambasting the tech and business culture of the Bay Area. But after the first two episodes of its its third season, the show is quickly moving away from comedic social commentary and into something far more real.

Last night’s episode put into motion a series of events for Pied Piper, the fictional company at the heart of the show, that mirror the problems of many real-life startup valuations, and illustrate how we may be on a precipice of a crash just like the Dot-com bubble of the early 2000s.

Popular Science explained in an article today how Silicon Valley is teaching its audience about the tech industry, by inserting references to real-world corporate rivalries, pitch decks that look strikingly like what you’d expect to see in a meeting with a venture-capital firm, and jokes that only engineers are likely to get. That’s all very true, and part of what makes creator Mike Judge’s show so great, but the same could’ve been said about earlier seasons. But this season seems be setting itself up to teach us a bigger point about the way startups are funded and run—and what that could mean for the global economy.

In the first episode of the current season, Pied Piper’s board of directors, comprising almost entirely employees of the VC firm that invested in it, voted to remove the company’s founder, Richard Hendricks, as CEO, demote him to technical lead, and install a CEO with experience running startups. This is a common practice in the tech world—it even happened to Apple in the 1980s—but Pied Piper’s new chief executive, Jack Barker, has a goal that seems entirely unaligned with Hendricks’ vision for the company. In the second episode of the season, Barker moves the company from the small home-based office it had been occupying to a flashy new office with pool tables, in-house chefs, and a boardroom table made from a bowling lane. Barker also hires a corps of salespeople without consulting Hendricks. Barker’s belief is that to get the company from where it is now to an IPO, it needs to start selling its core product—a super-fast file compression software—as soon as possible. Hendricks is skeptical of the moves, but Barker reassures him, saying: ”I’ll never compromise the product.”

But soon after, Hendricks finds the new salespeople talking about selling their software to businesses (rather than to consumers, as he intended), and scrapping all of the grand plans he had for the company. They even talk about building a piece of hardware just for corporations, which Hendricks hates. But next time he meets with them, they’ve created an ad for just such a thing, chock-full of corny slogans suited for your stereotypical middling, faceless corporation, including, “Business at the speed of light.”

In arguably the funniest and bleakest scene in the episode, when Hendricks confronts Barker at a stable where Barker has a prize-winning horse that he’s watching breed with a steed, Hendricks learns that Barker really never was going to compromise Pied Piper’s product, but that didn’t mean what Hendricks thought. Turning away from the horse-mating, Hendricks says, ”You said you’d never compromise my product, but my product feels pretty fucking compromised.” Barker explains that the product isn’t what Pied Piper produces—it’s the company’s stock. ”Whatever raises the value of that stock is what we’ll sell,” Barker says.

This is the big issue undercutting the episode and exactly what’s happening at startups in the Valley, and around the world. Startups have an idea, acquire funds to build out that idea, and then they try to generate as much revenue growth as they possibly can, because that’s what investors look at as the sign of a “healthy” startup. When a startup prepares itself for a public stock offering, its growth over the last few quarters—and the growth it projects for the future—are what’s scrutinized by underwriters and investors. But in many cases, those figures don’t actually mean the business is solid.

In his recent book Disrupted, former Newsweek editor Dan Lyons explains how he left the world of journalism to work at a startup called HubSpot, which sells marketing software. He explained—which the company has refuted, to some degree—that the goal of the company was to grow its revenue figures, regardless of whether it cost more money to sell more products, in the run-up to an IPO. He compared the company to Twitter, which has had sliding revenue growth and barely a profitable quarter since it went public in 2013. Lyons was brought on to Silicon Valley as a producer this season, so it’s unsurprising that the show’s story arc would take a realistic turn.

But Lyons isn’t the only harbinger of a bubble built on companies with unstable foundations. Today, the Wall Street Journal’s Christopher Mims wrote (paywall) that the “tech bubble is bursting,” as valuations for startups are starting to diminish. As Mims noted, the last internet bubble wiped 37% off the Nasdaq Composite Index, and this one, with hundreds of companies valued at over $1 billion, could be just as dire for the economy.

“One of the reasons people are raising all these funds isn’t because they want the money, but because they believe their own metrics are inflated at the moment, and they want to get that money before companies in their portfolios start crashing and burning,” Keith Rabois, a partner at the venture-capital firm Khosla Ventures, told Mims. And last week, Bill Gurley a partner at VC firm Benchmark, wrote a 5,500-word essay on why the current fantasy of Silicon Valley is collapsing on itself. He wrote:

New potential investors might also be surprised how few Unicorn executives truly understand their core unit economics. One easy way to spot these pretenders is that they obsessively focus on high level “gross merchandise value” or “multi-year forward bookings” and try to talk past things like true net revenue, gross margin, or operating profitability. They will even claim to be “unit profitable” when all they have really done is stopped being gross margin negative. These companies will one day need real earnings and real profits, and if the company does not proactively address this, you should not be giving them millions of dollars in late stage financings. 

And this is the goal for those investors, founders, and “professional CEOs” with lots of stock options: to get a lot of money back when the company goes public rather than set the company up for more sustainable growth over the long-run. Startups engage in all sorts of accounting gymnastics to cover the true cost of their revenue growth, because for those with the most to gain, it doesn’t matter how feasible the business plan is after the IPO.

While venture capitalists and business publications may have been decrying the ridiculously high valuations startups have been receiving for a while, their warnings are not likely to reach the same wide slice of the US or international public as an HBO sitcom. And while it’s uncertain how Silicon Valley will eventually play out—whether Barker’s goal of generating as much short-term revenue will win out over Hendricks’ desire to create the next Facebook or Google—it’s already started to show that much of what the world sees of Silicon Valley is just as fictitious as Silicon Valley.

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