Are Soaring Startup Valuations Scaring Off Investors?

Albert Einstein once quipped that compound interest was the most powerful force in the universe. If he lived to see the volatile ecosystem surrounding tech startups and angel investors, Einstein might have changed his answer to return on investment.

As the annual TechCrunch Disrupt conference kicks off in San Francisco, Forbes magazine is reporting that a number of venture capitalists attending the startup crucible have expressed open misgivings about the number of exorbitantly high valuations on the market. In fact, the single largest investment group in Silicon Valley, SV Angel, is planning to significantly rein in their next funding offer — from about $75 million to $40 million.

“We want to go back to basics,” Topher Conway, son of SV Angel’s founder Ron Conway, told Forbes. “The market has gotten a little more crazy.”

Citing billion-dollar valuations of so-called unicorn startups, Conway explained how the sheer dollar amounts many investment groups have had to pony up in recent years have fundamentally changed their business goals. Instead of floating a startup with a small amount of seed funding, venture capitalists were instead committing finances that required them to monitor startups closely so their sizable investments were protected.

There is a chance that skittish investors are just a reaction to a venture capital market that has reached a tipping point. According to Quandl, the total value of deals between investment firms and startups in 2005 sat at $18.1 billion. In 2010, that figure rose slightly to $19.2 billion. However, 2015 saw the total investment amount spike to $24.8 billion, which may have been cause for alarm among VCs that have already been burned by unwise investments.

It might be a painful process for startups to see a once-torrid stream of funding slow to a trickle, but it’s better than investors losing everything they have on and the river running dry.

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