Longing For The Good Old (Bubble) Days?

Down rounds. Rising rates. Lower valuations. Skittish stocks. Pulled IPOs.

Markets sure ain’t what they used to be.

Headed into the end of the first quarter of a year that many investors – both private and public – may already want to delegate to the rearview mirror, all these pressures are setting up tech companies across payments, eCommerce, mobile and just about everything else, for some major headaches.

First, the 50,000 view.  Global stock markets have been nothing if not erratic thus far this year.  The NASDAQ is down 6.6 percent to date.  Even the layperson without much skin in the game knows that the Chinese economy is slowing, even as the government there has stepped in repeatedly to put a floor under growth (and under the stock market, too).  There’s a new rumble in Europe as the U.K. is considering a “Brexit” – not to be confused with Greece and its Grexit (that was soooo last year).

With that type of macro pressure we are seeing a few things happen, with none of them boding well for the near term.

Microscope the view a little bit and there’s not much to be happy about in techland.  Valuations are coming down – and most recently a once-stalwart group is feeling the pinch.  A number of investment banks and funds have taken down their estimates of what their holdings in cybersecurity and eCommerce companies are worth.  Of particular note, Fidelity took down its estimates of CloudFlare by a little more than 30 percent, and also ratcheted down its estimates of Dropbox – hardly alone here, as Morgan Stanley slashed its own valuation on the name by 25 percent.  The valuation pessimism is not confined to U.S. firms, as investors have chopped the Indian eCommerce firm’s estimated worth by 23 percent.

As valuations come down, companies that are planning to go to the public equity markets get skittish.  After all, no one (especially company founders and others with sizable stakes) wants to put in years of effort into building sweat equity only to see the value of that equity dissolve amid a pool of, well, flop sweat.  In only the latest salvo of reticence, CloudFlare is reported to be pushing out its timeframe to come public by quite a while, from 2017 to as late as 2019.

As for down rounds, where funding is raised at valuations that are lower than had been seen previously, some names stick out, like Jawbone, and Foursquare, and, of course, Square.  When the people who do not have to bear the scrutiny that comes with public listings — and who presumably have longer memories, greater patience and broader investment horizons — start slashing sentiment along with numbers, look out.

So begins a ripple effect.  Funds write down what they hold.  Companies get scared of fickle stock markets.  Companies do not come to market.  Private investors get ever more demanding of business models and perhaps stingy with capital – based on the fact that writedowns are occurring elsewhere, and public markets suddenly are not a great exit strategy.  Capital deployments trickle rather than pour into certain companies and/or sectors.

It’s not too far-fetched to think that in this much tougher landscape, innovation gets choked off, simply by lack of what once was easier to come by funding.  That may winnow down, say, the number of online food delivery services, an arguably overcrowded space, but it also has a real knockdown effect on companies that could truly make some headway into, say, data security, or faster payments, or any number of functions yet undreamed.

And lest you think that this is improbable, and that the improbable really can’t become reality, here are two words to chew: President Trump.