Investments

August Investment Activity Gets a Bit Cooler

After a tough start to the week, the second day story on the U.S. stock market initially seemed to be one about improvement. While the Chinese market remains something closely resembling turmoil, the U.S. market at one point in the day jumped about 400 points as of the time of this piece, though by the end of the day – most of those gains had been reversed and the Dow was back in the read.

“It’s not the fall that kills you. It’s the sudden stop at the end.” — Douglas Adams

After a tough start to the week, the second day story on the U.S. stock market initially seemed to be one about improvement. While the Chinese market remains something closely resembling turmoil, the U.S. market at one point in the day jumped about 400 points as of the time of this piece, though by the end of the day – most of those gains had been reversed and the Dow was back in the read.

But the futures did seem to look better  – and while commentators across the dial were sounding somewhat apocalyptic after the thousand-point drop that accompanied the Monday market’s open – the phrase “turnaround Tuesday” started trending at about the halfway mark in the market’s day yesterday.

However, not everyone is quite sold on the “turnaround” narrative just yet.

The Guardian noted that much of yesterday’s gains only look good in a 24-hour context. As the graph below indicates, looking at yesterday’s results graphed against the last 90 days is unlikely to cause a case of the warm and fuzzies.

IT1And, as The New York Times reported while the Monday meltdown was still in full force, the troubles in the public markets could spell tough times ahead for the emerging class of high value startups that have spent the last four years proliferating.

There are, according to CB Insights, 131 firms with valuations of $1 billion or more – an over tenfold increase from 2010 when there were less than a dozen.

“Lots of founders today weren’t around in 1999, and they don’t know a thing about financial markets beyond what’s happened in the last 24 months,Venture Capitalist Bill Gurley said in an interview with The Times. “To them that’s how this game is played, money is cheap and everything goes up.”

[bctt tweet=”“Lots of founders today weren’t around in 1999, and they don’t know a thing about financial markets beyond what’s happened in the last 24 months,”]

And yesterday, the tech world really was partying like it was 1999.

Gurley started questioning the future for tech startups in the face of a downturn on Twitter last week, wondering if new entrepreneurs are prepared for what could be coming next.

“Investors are likely to refocus on business model viability and path to profitability. This will seem like an abrupt sea change to many.”

[bctt tweet=”“Investors are likely to refocus on… profitability. This will seem like an abrupt sea change to many.””]

[You mean that investors didn’t focus on business viability and path to profitability before?]

So what about that sea change? Do the slumping fortunes of the market in the last few weeks of summer portend a “long and bumpy fall?”

There are certainly reasons for concern, especially with so many “billion dollar companies” being birthed at every turn.

Which begs the question …

Is Winter Coming For Silicon Valley?

Not unless they need money, says Matthew Rubin, Director of Investment Strategy for Neuberger Berman. And if one subscribes to that theory, that means we won’t really know if winter is coming until, say, winter, when startups do go out to raise money again – or for the first time.

The trend for the last few years has seen valuations rising each time these young companies go out for new funding, leading to what some have called a bidding war among VCs that has helped to superheat the values of startup investments. However, with a stock market performing more weakly than it has been for the last half decade, a possibility that U.S. interest rates are going up and a Chinese middle class that may no longer be growing at quite the astonishing rate it has for the last decade – some are wondering if investors will be less generous than they have been in recent years, and more interested in firms that prize a clear path to profit, as opposed to profit at some point, sometime, whenever.

Then there’s the moral hazard associated with an impending downturn. Venky Ganesan, a managing director at Menlo Ventures, told The New York Times that the proliferation of high-valuation tech startups and a market awash in easy money encourages companies to spend at breakneck speeds.

“There is already a chill in the late-stage funding market. If you see down rounds and mutual funds report losses on private companies, then things will spiral downward very fast,” Ganesan said. “Like in ‘Game of Thrones,’ winter is coming.”

Seriously? The Game Of Thrones?

“Maybe I am the only one who thinks this way,” BlueSnap CEO Ralph Dangelmaier told PYMNTS in an interview on Turnaround Tuesday, “but I don’t think what looks like a market correction the public markets is going to have this seismic effect on business in general, or the startup market.”

BlueSnap offers a global payments platform that powers the checkout process for merchants wanting to do business cross-border. The platform supports 180 countries, 60 currencies and 110 payment types. Dangelmaier noted that in the 10 years BlueSnap has been in operation, and particularly recently, what he’s observed is a marketplace with increasing demand for commerce and financial tech – and investors who have been responding to that demand.

“When I see what the trajectory has been, I just don’t see VCs making changes to their long-term plans,” he said.

[bctt tweet=”“When I see what the trajectory has been, I just don’t see VCs making changes to their long-term plans.”]”

There’s proof. Even with the weakening market as a backdrop, young firms are still shoring up funding. Kevin Mak, the Director of Stanford’s Real-Time Analysis and Investment Lab, told The New York Times the story of how Massdrop, a firm he was advising, closed a $40 million investment two weeks ago.

“We started the fund-raising process two and a half months ago when the market was falling, and it didn’t have a major effect,” Mak said. “When and if we see the market fall 20 percent or more, it will filter through more. But it will primarily be the frothiness of the market coming down.”

Dangelmaier agreed that some valuations may come down — particularly if the market stays somewhat depressed — but noted the idea that VCs are about to undergo some sort of major personality change where they suddenly starting valuing things like “profitability” is a bit of a misunderstanding about how VCs operate currently.

“I think the idea that VCs have suddenly started caring about a clear path to profits or clearing pre-set milestones for funding is wrong. I’ve been working with private equity for a very long time – these are things these people always care about regardless of what the market is doing. Their goal is always to make money and they are always looking very hard at what they think will make it back for them.”

And, Dangelmaier noted, this is still unfolding.

As of today, stocks seem to be rallying back — though the persistent weakness in China isn’t making anyone comfortable.

But as of yet it likely remains too early to make much in the way of predictions – since the what’s next for the startup in the tech economy will probably rely on what happens past the annual Twilight Zone period in August and September and business as usual resumes.

Only the number will tell if that business will be as lucrative as it usually was before this market hiccup.

August Investment Activity Gets a Bit Cooler

August cooled down, at least in terms of investment activity. Where last week, big finance deals grabbed the headlines and the bulk of the funds flow, this time around, there were only two “billion dollar plus” transactions. But the overall trend continues, namely, that financial technology has seen the bulk of investment dollars and investor interest. In fact, business to business subsectors garnered hardly any funding at all. See below for aggregate totals by segment:

Moving down to individual transactions, National Penn Bancshares said last week that it would bought by North Carolina based BB&T Corp. for $1.8 billion in cash and stock. At the time of the announcement, National Penn Bancshares said it had $9.6 billion in assets, with $6.7 billion in deposits and a geographic concentration in Pennsylvania, Maryland and New Jersey, beefing up BB&T’s presence in those states.

Moving a bit away from the “bricks and mortar” concentration of the banking deal just mentioned, Social Finance, an online lender, grabbed $1 billion in investments from an investment led by SoftBank. In this latest funding round, Social Finance, at all of four years old, is valued at $4 billion. That would place the company among the top 30 banking institutions in the United States. The deal is also testimony to the rise of alternative lending platforms beyond traditional branches.

Dianrong.com managed to grab $207 million in funding last week, in a series C round that showed interest in the Chinese peer to peer market (perhaps under the wire) despite stock market, and investment jitters.
Finally rounding out the triple digit activity for the week, Denmark’s Saxo Bank gave up a roughly 10 percent stake to an Indonesian firm, Sinar Mas. That speaks to interest in cross-border business (Saxo runs a trading platform), and gives Saxo a new stakeholder.

Thus far for the year we can see that the rolling tally for the financial technology sector has been on an upswing, with smoothed data coming in at more than $500 million (not including large deals).

One key trend for the year to date has been the continued dominance of banking and trade finance, with a sharp drop off in the latter month to date, which may just be a temporary lull.  The banking sector has rebounded sharply since a relatively paltry July of only a couple of hundred million dollars’ worth of activity.  The security and fraud reals also seemed to lose a little luster in the past week, with a couple of headlines from earlier in the month fading into more muted territory in the most recent period.

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