Alternative Finances

Tech Startups Face An Uncertain Future With A Weakened Market

With the ongoing rollercoaster ride that is stock exchanges around the world for the last few days, attention has started to turn toward the startup market and the high cost of shares in private firms. Of particular concern — according to The New York Times — are the fates of the 131 (at last count) unicorns, i.e. startups carrying around valuations in excess of $1 billion. The money in the market has also been expanding at an almost exponential rate. As of 2010, there was around $23 billion in the market; as of 2014, that figure was up to $50 billion. In Q2 alone, startups raked in more than $17 billion in VC funds.

The question now is will venture capitalists be quite so excited to toss money at emerging startups when not backed by a stock market that seems pointed ever-northward — as the U.S. exchanges have been for the last six or so years.

The good news — insofar as it can be considered such — is that the private startup market won’t see the type of rapid onset deflation that has accrued in the public markets with the effects of a slowdown expected to ripple more slowly across the landscape. The reason being how those private shares are priced.

In the public market, that is more or less a daily process. Publicly traded companies get their value “report card” day in and day out with traders choosing to buy, hold or sell their stock. Private firms, on the other hand, only really have their share price calculated when they are in the process of raising funds — the point where, as NYT notes, “the rubber may hit the road.”

For the last few years — buttressed by a powerful U.S. stock market and a growing Chinese middle class — VCs have tended to up the value of startup share prices during each new funding round. With those buttresses no longer flying quite so high, the theory is that investors may not be willing to spend quite so freely.

The expectation among many going forward is that the startup space going forward might be less saturated with firms trying to prove they are the most innovative idea going and instead will see an increased focus on firms that can get to independent profitability and hit target milestones set by the people who write the checks.

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