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This Bubble Finally Burst. Which One’s Next?

by Simon Black, Sovereign Man:

Like so many other high-flying Silicon Valley startups, Clinkle was supposed to ‘make the world a better place’.

Founded in 2011 by a guy barely out of his teens, the company picked up early buzz after proclaiming they would disrupt mobile payments. Or something.

Silicon Valley venture capital firms were apparently so impressed with the idea that they showered the company with an unprecedented level of cash.

(Given that investing in an early stage company is high-risk, investors might provide a few hundred thousand dollars in funding, at most. Clinkle raised $25 million.)

The company went on to burn through just about every penny of its investors’ capital.

There were even photos that surfaced of the 21-year old CEO literally setting bricks of cash on fire.

At the end of the farce, Clinkle never actually managed to build its supposedly ‘world-changing’ product, and the website is now all but defunct.

This is rapidly becoming a familiar story in Silicon Valley.

For the last 6-7 years, Silicon Valley startups have been able to raise unbelievable amounts of cash.

Yet so many of those companies haven’t managed to turn a profit. Ever.

There’s some of the big names like Uber and AirBnb which are supposedly worth tens of billions of dollars despite having racked up enormous losses.

(Last year ride-sharing company Lyft promised investors that it would cap its losses at ‘only’ $600 million per year. . .)

But there are countless other examples of startups being anointed with absurd valuations and continually replenished with fresh capital even though they keep losing money… and have no plan to ever make money.

Snapchat’s investment prospective summed it up best:

“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.

It’s as if the more money these startups lost, the more popular they became with investors.

Clearly that was unsustainable.

In business, profit (or even more specifically, “levered free cash flow”) is the most important metric.

No company is born profitable; it takes time for entrepreneurs to create and build a financially sustainable business.

In the meantime, startups sometimes need outside investment capital to keep going.

Early stage investors take a risk that the company’s founders and management will be able to execute on a plan that turns a big idea into profit.

But there’s supposed to be a plan. There’s supposed to be an objective to reach profitability as quickly as possible.

Silicon Valley investment firms ignored this basic principle for years, dumping their investors’ savings down the toilet into loser companies with no hope of profitability.

It was a bubble, plain and simple… and now that bubble seems to have burst.

According to Dow Jones Venture Source, venture capital firms in Silicon Valley pared down their investments in tech startups by 30% in the last several months after reaching peak insanity in late 2015.

Read More @ SovereignMan.com

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