Soft Spots: Five Places Where Silicon Valley’s Bubble Could Pop

Xconomy National — 

The main premise of J.J. Abrams’ Fringe—unquestionably one of the three best sci-fi shows made for television in this century, alongside Battlestar Galactica and Doctor Who—is that there’s a second, nearly identical universe coterminous with ours. The wall between the parallel worlds remains impenetrable until a grief-stricken scientist, Walter Bishop, figures out how to cross over in order to save his dead son Peter’s doppelgänger; Walter ends up kidnapping the other Peter and bringing him back. This infraction against physics opens up “soft spots” between the two universes, and wherever the spots become too thin, a vortex or micro-black hole arises, leading to untold destruction in both universes.

The soft spots came back to me when I was searching for a way to sum up my picture of Silicon Valley’s perilous state.

Yes, we’re in a tech bubble. Of course we are. When Facebook can use $19 billion in funny money to buy a startup with revenues of $20 million (WhatsApp) or spend $2 billion to buy another startup that doesn’t even have a product on the market (Oculus), that’s a bubble.

When the median rent for a two-bedroom apartment in San Francisco is $3,350—enough to pay the mortgage on an $800,000 house in any other city—that’s a bubble.

When investors have so much cash floating around, and keep buying into risky startups at ever-higher valuations (like Uber’s ludicrous $18.2 billion) because they can’t get a decent return on their money doing anything else, that’s a bubble.

This bubble may not look the same as the last one. But I’m not going to waste space here documenting its existence, which is only challenged by people who enjoy living in it.

The more interesting question, to me, is how the bubble will eventually pop. What are Silicon Valley’s most important flaws and weaknesses? Where is the membrane being stretched so thin that it’s in danger of tearing open and letting the outer reality rush in?

Of course, there isn’t any single, physical place where the bubble’s collapse will begin. Since a bubble is primarily an economic and psychological phenomenon, it can only be burst by a broad shift in attitudes and expectations. But there are plenty of real places where the tensions, imbalances, or injustices that could escalate into a show-stopping crisis are in evidence.

So I invite you to play along with me below as I tour a few locations around the San Francisco Bay Area that could be considered our soft spots. They’re symbolic of larger problems. You don’t want to be standing in one of these places when the vortex opens up.

By the way, that’s not an event I’m looking forward to, or that I would want to hasten in any way. People riding the bubble have been generating all sorts of important new ideas and capabilities that might not have emerged otherwise. But it’s wise to plan ahead. If we can identify the fractures that threaten to destroy the innovation machine, we might be able to patch them up and keep the system going for a while longer—and maybe even point it in a smarter direction.

1. 555 California Street, San Francisco: The Former Bank of America Tower 

This 52-floor skyscraper has a lumpy black granite sculpture at its base. It’s the creation of Nagasaki-born sculptor Masayuki Nagare and its actual name is “Transcendence,” but locals know it as the “Banker’s Heart.”

Bank of America, still a major tenant in this Financial District landmark, repaid the entire $45 billion it received from the federal government through the Troubled Asset Relief Program in 2009, with interest. But it was still the focus of protesters’ ire during the Occupy San Francisco movement in 2011: they stormed a branch office on Market Street, a few blocks away. And even today, the bank is struggling with the consequences of its $4 billion purchase of Countrywide Financial in 2007, which led to $40 billion in settlements and legal costs.

I choose this location because Bank of America’s troubles show how quickly boom can turn to bust. They remind us that a bubble is first and foremost a financial phenomenon fueled by easy money, whether that’s in the form of excess capital or subprime loans.

The former Bank of America Tower in San Francisco. Source: Mike Linksvayer/Flickr.

The former Bank of America Tower in San Francisco. Source: Mike Linksvayer/Flickr.

Because interest rates have been so low for so long and the global economy isn’t expanding very fast, investors are willing to put lots of money into any business that shows signs that it might actually grow. That’s what tech startups do—a small percentage of them, anyway. So there’s still a lot of money being allocated to high-risk venture and private equity funds. But as soon as another plausible investment opportunity comes along—when the Fed finally raises benchmark interest rates again, for example—the capital could flee.

The tech giants still have a lot of cash on hand, so the big acquisitions could continue for a while even after an economic shock. Apple has $160 billion and Google has $57 billion. Facebook has only $12 billion in cash, but has much greater purchasing power thanks to its sky-high $154 billion valuation. But if things really go south, there’s no net large enough to catch all of the late-stage tech companies that have been cashing huge venture checks lately, not because they need the money, but simply because it’s available ($500 million for Airbnb; $250 million for Lyft; $80 million for Quora; $60 million for Nextdoor).

2. Valencia Street and 24th Street, San Francisco: The Google Bus Stop 

This is one of at least 20 places around the city—many of them Muni bus stops—where Google shuttle buses pick up employees early every morning for the ride to the Googleplex in Mountain View. In December, protesters blockaded a Google bus here in a demonstration against what they saw as misuse of public resources by a commercial entity.

The feelings at work behind the Google bus protests are complex. But a key element is the perception that the big Silicon Valley tech companies are subsidizing their employees’ desire to live in San Francisco, one of the nation’s tightest housing markets. Because these well-paid software engineers are able to fork over $4,750 per month for a junior 2-bedroom in Noe Valley, and be chauffeured to work on a cushy Wi-Fi-equipped bus, rents in the city are becoming unaffordable for everyone else, or so the story goes. It doesn’t help matters that more and more San Francisco landlords are taking advantage of a California law, the Ellis Act, that allows owners of rent-controlled buildings to “go out of business,” evict their tenants, and sell their properties to developers, who replace them with more expensive units or condos.

Protesters blockade a Google bus near the corner of 24th and Valencia in San Francisco. Source: Chris Martin/Flickr

Protesters blockade a Google bus near the corner of 24th and Valencia in San Francisco. Source: Chris Martin/Flickr

To my mind, Google employees are driving up rents, but no more than anyone else. At bottom, it’s a problem of supply and demand. The housing supply in San Francisco is extremely limited and unlikely to grow much in the near future, for reasons explained in an in an epic, masterful piece last month by TechCrunch writer Kim-Mai Cutler. Prominent angel investor Ron Conway is leading an effort to repeal the Ellis Act, but even if it works, it wouldn’t solve the problem. The truth is that as long as more people have their heart set on moving to San Francisco to seek their fortunes in the technology industry, rents will keep going up.

But there could come a time—possibly soon—when the entry-level or service workers every company needs are completely priced out of the region; or employers stop being so happy to subsidize their senior employees’ high rents through high salaries and bonuses; or young workers in San Francisco realize that there are perfectly pleasant cities, like Sacramento, where they could live for a fraction of the rent. Then the housing crunch will become a drag on the labor supply, and companies won’t be able to keep growing.

3. 3000 Hanover Street, Palo Alto: Hewlett-Packard Headquarters

The average age of employees at Hewlett-Packard is 39, according to PayScale, the salary database provider. At IBM and Oracle, it’s 38. The average employee at Google, Facebook, or Zynga, by contrast, is about 10 years younger.

It isn’t possible to explain this difference using factors like geography or training: all of these companies draw on the same population of highly educated Bay Area software engineers. The truth is that Silicon Valley has an ageism problem. The hot young companies are afraid that if they hire people older than 30 or 35, it’ll slow down the pace of innovation—the “move fast and break things” ethic espoused by Facebook’s Mark Zuckerberg, who also famously remarked in 2007 that “young people are just smarter.”

As several excellent journalistic reports have documented lately, interviewers at younger companies systematically weed out mid-career professionals, despite their years of experience, using excuses like … Next Page »

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6 responses to “Soft Spots: Five Places Where Silicon Valley’s Bubble Could Pop”

  1. patrickrafter says:

    Wade: Thanks for this fascinating and thought-provoking article. As a native of San Francisco who’s lived in Boston for the last 20+ years, very interesting to see the state and cost of living in my hometown. I liked your editorial approach of using physical locations as harbingers of likely bubble trouble to come.

    • Wade Roush says:

      Thank you, Patrick. Boston has its own set of challenges. But the contrasts here are so stark…I’ve been gathering thread for this piece for a while, and could have added another five locations to the list. But people don’t have all day to read blog posts, and I had to stop somewhere.

  2. Sridhar Vembu says:

    Great post, Wade. You have highlighted the collateral damage caused by the bubble well.

    The role of the Federal Reserve in blowing these repeated bubbles is also worth highlighting. As an institution, the Fed has failed us.

  3. natalia says:

    Оченъ красивые фотографии) wade

  4. Frank Hofmeister says:

    Wade – Your thoughts and visions are very well timed and placed. Let’s hope some of the ‘grown-ups’ are paying attention? Thanks