Is a Bloodbath coming to Silicon Beach?

That question has been whispered for months, if not years. But now it’s being asked openly.

There’s no doubt tech companies, at least some of them, have gotten wildly overvalued, especially considering that some of them have little or nothing to sell. Snapchat of Venice was valued at $1.6 billion in May, even though it is still unable to demonstrate how it could be a big moneymaker.

But tech company valuations started to come down late last year. In November, Snapchat’s value got knocked down to $1.2 billion when a big investor wrote down the worth of its stake by 25 percent.

And matters have gotten worse in this new year. The reason: stock markets worldwide have taken a serious dive. (Thursday’s headline on the Drudge Report: “Gold Rush as Stocks, Bonds Plunge.”) That means there’s diminished appetite in the stock markets now for tech companies, or any companies, that want to go public or sell to a big public company. What might Snapchat’s value be today if it tried to sell its stock in a public offering? Below $1 billion? Below $900 million?

Mark Suster, a Silicon Beach investor, wrote in his influential blog earlier this month: “Frankly, it’s really hard to write checks (to tech companies) at later-stage valuations when you know you’ll have to exit into the public markets or sell to a public-market company, and the stocks are declining precipitously.”

As mentioned, long before the stock markets dropped, there was a growing sense that tech company valuations had gotten overhyped and out of balance. Part of the reason is that in the last two or three years, more investors wanted to jump into the gold rush, and they pushed up valuations. The advent of crowdfunding made raising money easier still.

There for a while, a couple of kids with an interesting idea and a nice PowerPoint presentation could get $1 million in seed money; a few months later they could find that several million would be pushed at them in a funding round. Meanwhile, half a mile inland, traditional companies with established customers that sold tangible products or services had trouble getting $100,000 from a bank.

Suster, in the same blog post, wrote that in the past two years or so, he noticed “new participants pushing their chips onto the table with relatively less experience at doing so.

“The result? Median pre-money valuations skyrocketed – shooting up 3x in just three years as investors competed to christen imaginary animals with imaginary valuations. And then, seemingly all at once, the market felt constipated.”

Indeed, as with all things that get out of whack, eventually the teeter has to totter.

Now, Suster wrote, the anecdotal sentiment he gets from early-stage investors is that they’re no longer telling young companies to scale up as fast as they can but instead telling them to lower their burn rate and “make sure you have 18-24 months of cash.” Winter is coming.

This is important, of course, because the tech community that’s clustered in the Santa Monica and Playa Vista area arguably has been L.A.’s most dynamic sector for several years. If tech is diminished, the Los Angeles economy will be hurt.

There’s little doubt that tech is sustaining a downturn. The big and important question: how severely so? If the downturn is just a correction – a reasonable retreat that gives pause before a more orderly ascent – then that’s fine. But if it’s more like the dot-com implosion of 2000 or the market meltdown of 2008, then that’s not fine. That will truly hurt.

And that’s why the question – is a bloodbath coming to Silicon Beach? – is being asked openly and urgently.

Charles Crumpley is editor of the Business Journal. He can be reached at [email protected].