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Tech rout putting Silicon Valley on edge

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Outside the San Francisco headquarters of Twitter Inc. Most tech stocks have been plunging for months now. Globally, tech companies have lost US$1.1 trillion in value in the past 21/2 months.

New York

STEVE Hoffman grabs the mic and, at once, beams Silicon Valley optimism. In his high-pitched voice, he touts his start-up incubator's track record and rattles off the names he has helped propel: Instagram, Etsy, Change.org, Foursquare.

Oohs ripple through the crowd of 20-somethings. They have packed themselves tightly into this San Francisco conference room for a shot at meeting venture capitalists (VCs) willing to take a chance on their dreams. When Mr Hoffman delivers his punch line - "you may be the next unicorn" - the place erupts in cheers.

Moments earlier, though, the man who likes to be called Captain Hoff sounded decidedly more pessimistic as he chatted candidly while waiting for his guests to arrive. The truth was, he said, that when it came to his own money, he was plunking down very little.

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After a decade of soaring tech valuations, the recent 13 per cent wipeout in the Nasdaq was to be expected. He fears the sell-off in public stock markets will only get a lot worse and, in turn, start driving down the stubbornly high valuations of privately-owned start-ups.

"I'm actually quite worried," he said. He created his incubator, Founders Space, in 2011 and says he has pulled 80 per cent of the money he had in public markets and 60 per cent of what he had in private markets. It is all parked in cash now. "There's nothing safer than cash."

His trepidation may be a bit extreme by Silicon Valley standards - some here do not share the sentiment at all - and yet it underscores an unmistakable new reality: The hand-wringing over the tech stock rout is no longer the exclusive domain of Wall Street traders, that notoriously more jittery and anxious lot on the other side of the continent.

No, even here, in the heart of the industry where gung-ho optimism and bullishness are built into the DNA, doubts are starting to seep in.

It is not that folks are bracing for another dot-com or 2008-type bust. Only a few, like Mr Hoffman, are quite that gloomy. Typically, it is more subtle than that. Maybe a VC firm spends more time scrutinising deal terms, or a young programmer puts a million-dollar home buy on hold.

Austin Degenhardt, the 29-year-old founder of Paul Hardt, an early-stage company that makes luxury shoes and markets them online, described the growing sense of angst this way: "It's more just in the back of my mind. I just feel the rush."

For him, the rush is to lock in funding from venture capitalists while valuations remain near-record highs. He's seeking US$600,000.

For entrepreneurs further along in the development stage, the rush is often to tap public markets with an IPO. So far, that market hasn't shown any signs of cooling.

There have been 46 tech IPOs this year; they raised US$16 billion, topping 2017's total of US$13 billion. And some marquee names - Uber, Slack and Airbnb among them - are lining up to come to market soon.

Alex Wellins, co-founder of the Blueshirt Group, a technology investor relations firm and IPO adviser that has helped take SurveyMonkey, among others, to market, said: "We're seeing no slowdown in IPO preparation, readiness, planning for 2019."

He predicts another big year next year, though he acknowledges that if the market sell-off deepens, those projections could fall apart. "There's definitely been a correction, there's been a lot of volatility, but the markets are still relatively strong and it makes sense to be ready."

Most tech stocks have been plunging for several months now. Some of the moves are eye-popping: Netflix is down 35 per cent from a record high in July; Amazon.com is off 24 per cent since early September; Tencent, the Chinese technology behemoth, is down 40 per cent from a January record.

Semiconductors have been hammered too, dropping 20 per cent since early June. So too have tech hardware companies, which have fallen 16 per cent from an October peak. Globally, tech companies have lost US$1.1 trillion in value in the past 21/2 months.

The causes are many, from the nagging privacy issues at Facebook and Google to slumping demand for semiconductors and smartphones to the US-China trade war. And all of them point to a seemingly inescapable truth - that the days of never-ending profit growth are coming to an end.

So after an incredible decade-long run in which the Nasdaq soared more than 500 per cent, many Wall Street investors have decided the sector is just too pricey.

Curiously, that new-found cap on exuberance is hitting the Bay Area real-estate market faster than it is private tech valuations. The go-go days, where every new listing sold as soon as it hit the market, are gone.

Tracy McLaughlin, a real-estate agent in Marin county, says she is seeing price cuts of up to 10 per cent and is bracing herself for a 20 per cent decline in her business next year.

Ditto for Natalie Kitchen, a realtor in San Francisco, who, like Ms McLaughlin, sells only million-dollar homes.

Both of them cite the rout in tech stocks as a key reason for the recent declines. "I think it's more about that feeling of generally being poorer than you thought you were," Ms Kitchen said. When clients began asking for discounts on listings, she was taken by surprise.

Back at Founders Space, Captain Hoff is ready for whatever may come. At 53, he has witnessed first-hand the dot-com bust and the 2008 collapse. Those experiences give him a perspective many of his younger colleagues lack. And they keep telling him that a major tumble is not far off.

When exactly? He is not sure. Perhaps within a year. "I'm not an oracle." But he said he would rather be safe than sorry, and give up some potential gains for the sake of peace of mind. BLOOMBERG