Fintech Investments

As Tech Investments Chill, What's Next For Unicorns?

It is not just the East Coast grappling with winter chill; even the West Coast has tech investments that are continuing to cool down with a slide in public and private valuations.

The cooldown comes as the Chinese market continues to lose its force and angel investors grow weary of lofty startup valuations, which seem to be less driven by actual growth and more by market momentum.

“Are angels more cautious? Most likely, yes,” said AngelList Cofounder Naval Ravikant.

The chill seems to be catching up with unicorns and companies marching ahead to go public. In 2015, only 31 tech companies filed for an IPO on the NYSE and Nasdaq — a 46 percent drop from the year before, according to The Wall Street Journal. Additionally, investment activity took a hit, with the average funding round falling down by more than half to $400 million.

“We had the slowest quarter in a decade for tech IPOs in the fourth quarter of 2015,” said NYSE President Thomas Farley, hinting at the possibility of an even worse market in early 2016. “Private and public funding is slowing.”

According to a recent report by the Angel Resource Institute at Willamette University in Salem, Oregon, the median valuation of companies getting funded by angel investors last year grew to $4 million between January and September, which was about 33 percent higher than valuations in 2014 and the highest in the last five years.

Unlike early 2015, when startups seemed to be riding the high horse, with VC firms flooding the market with their open coffers, investors are now growing cautious of investing in overvalued startups with inappropriate valuations.

So, now, instead of betting big on the next Uber of Silicon Valley, investors are taking a safer approach towards investing in the market, with more and more of them choosing to invest further in their previous investments.

“VCs are taking a vicious approach to capital deployment,” Jeff Schumacher, founder and CEO of venture firm BCG Digital Ventures, told WSJ. “Preserving cash is the priority because the funding faucet has turned off.”

With angel investors and VCs growing more cautious, startups seem to be feeling the heat. Angel investors are “negotiating a little harder,” investor Bill Payne from Whitefish, Montana, told WSJ. “Wise entrepreneurs who want to raise money are listening.” Payne told WSJ of two investment deals in which he is involved that would value the startups at about $1 million each, way below the $5 million the two companies initially pursued.

Chicago-based Opternative Inc., an at-home eye exam provider, is reportedly yet another startup experiencing a reversal in attitude of angel investors in its third round of fundraising in about three years.

“When I started raising money for this series, it was pretty clear things had changed,” said Aaron Dallek, CEO and cofounder. “You can tell their mentality is to be a little more patient.”

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