Venture capitalists are reportedly urging startup companies to curb their spending and hold on to more capital as concerns about the volatility in the stock market and the growth of the global economy are starting to worry them.
According to a report in The Financial Times, it’s the first evidence that worries about the stock market and global economies are impacting the financing of private technology startups. Danny Rimer, a partner at Index Ventures, told The Financial Times that the firm is telling the entrepreneurs to have 18 to 24 months of cash so that they can weather any unforeseen situations. The report noted that a year ago the venture capitalist would have advised clients to have nine to twelve months of capital in the coffers and hold back from raising more if they could get a higher valuation down the road. Recently he has urged them to seek more cash now rather than later, even if it’s at less valuation.
The report noted that some tech investors are also telling the tech startups to prepare for the chance of a downturn in the economy that could prompt companies to scale back spending on tech and that they could face a much harder time raising capital in an environment like that. The Financial Times pointed to SoftBank’s move to cut its planned investment in WeWork as any example. SoftBank is now planning on investing $2 billion in the company that provides access to shared office space — instead of $16 billion. That is raising concerns that valuation of tech startups that are still private will start to come down. There are some investors that argue there is more capital available for tech companies than during the 2008 recession.
Ultimately there are a lot of investors that are beginning to view the technology startups as riskier than investing in publicly traded companies. After all, many have multi-billion dollar valuations that could take a big hit if economic conditions sour, reported The Financial Times.