Mark Zuckerberg issued a chilling warning to Meta employees: “If I had to bet, I’d say that this might be one of the worst downturns that we’ve seen in recent history.”
Such sentiment echoes our trip to the Bay Area last month. The discourse there deviated into the macro realm; this wasn’t our prior experience, when everyone extolled their startups and glorified their high-flying stocks.
The evolution of venture capitalists into macro experts fascinates us. Comments like “there is no end in sight,” however, and “we are already in a recession” leave us frazzled. Are VCs projecting their own experiences—the maximum pain in their portfolios—onto the rest of America? Everyone must be suffering because they are, right?
That is simply untrue. We believe Silicon Valley is experiencing a confined downturn, similar to the shale bust of 2015—16.
Hunting for oil
Let’s go back in time.
The innovations of horizontal drilling and hydraulic fracturing made it possible to extract oil from shale formations around the US. Although neither technology was entirely new, they were both improved upon and combined to increase the commercial viability of shale gas.
The Bakken formation in North Dakota was a shining star of the shale revolution. Oil companies and the businesses that support them were desperate for workers, and more than eighty thousand people flocked to the state from all over the country to meet that need. For seven straight years, North Dakota boasted the lowest unemployment rate in the country.
The fast-rising output of the Permian Basin and Eagle Ford saw Texas produce more oil than heavyweights like Brazil, Venezuela, Nigeria, Mexico and Kuwait. Between 2010 and 2015, US oil production increased from 5.4 million barrels per day to 9.4 million, closing on the all-time peak of just over 10 million set in 1970.
Flourishing innovation in the Bakken and Permian transformed these basins into the Silicon Valley of the energy sector: hubs of creative activity...