Silicon Valley billionaires-in-waiting may face reckoning amid stock panic

Silicon Valley startups basking in billion-dollar valuations may face a long-overdue reckoning as a result of the global panic set off by roiling Chinese markets, investors and analysts have warned.

The number of technology companies with so-called “unicorn” designations of $1bn or more reached at least 131 on Monday, as healthcare websites, big-data firms and even Buzzfeed joined the kings of a new digital economy like Uber ($51bn) and Fitbit ($3.7bn).

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But Silicon Valley watchers examining the ripple effects of a selloff across sectors from Beijing to the Nasdaq, which continued in Asian trading on Tuesday although European markets bounced back , insist those valuations have been too generous for too long – and may have consequences for both the startup scene and the market at large.

Whether the recalibration represents a market adjustment or a bursting tech bubble, investors say this week’s global stock rollercoaster is a sign of weakening confidence in the startup sector’s bigger bets – especially in what one venture capitalist called the increasingly difficult prospects “for some very high-end stuff to go public”.

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Venture capitalists tend to lead the way in seed funding for glitzy startups, but they may be left without more risk-averse investors to bankroll the homestretch toward an IPO in a volatile environment.

“I could see mutual funds pulling out of the market, leaving traditional VCs – and the VCs are going to be more aggressive on valuation,” said Maarten Hooft, managing partner at Quest Venture Partners, which focuses on early-stage investment.

Such seed-stage investments and so-called “Series A” funding were likely to continue, VC backers and analysts agreed. But the ability of startups to rapidly snatch millions upon millions – particularly in the absence of profitability – could begin to fade away, with buyouts likely to rise.

Bill Gurley, general partner at Benchmark, wrote on Twitter that he thought tech investors had become too fond of growth and had failed to pay enough attention to “names” that had failed to turn enough profit. The decline of technology stocks, which he said had been “getting crushed” since mid-July, could represent “an inflection point”.

On Monday, the technology sector of the S&P 500 fared better than the index’s average, but prominent public tech stocks still suffered:

• In China, where inflation concerns led to the christening of “Black Monday” , the e-commerce behemoth Alibaba fell 3.4% to $65.86 – well below its IPO price of $68 per share. (It was still down before the NYSE opened on Tuesday.)
• In the US, Apple, Google and Microsoft were all down .
• The social network Twitter had a similar collapse last week but rallied; it was back down again on Monday, while Facebook stock plunged 3.45%.
• Among more recent IPOs, Box – the online storage provider that reaped huge rewards for risky VC backers earlier this year – was down more than 1%.

“I think this is probably a correction rather than the start of the end of the bull market,” said Hooft. “People are trying to take into account the news coming out of China and Europe and emerging markets, and then trying to figure out how that plays back into the US tech sector. For me, what I was thinking about doing this morning when I saw Facebook was down was buying more Facebook.”

Uncertainty in the startup world may mean good news for media giants large enough to weather a market correction – and perhaps even the smaller startups that could get swallowed up by them.

“We’re at a point where both kind of core supports of the media ecosystem are shaking – advertising and the subscription business,” said analyst Rich Greenfield of the research firm BTIG. “Every one of these companies has ‘missed’ mobile.”

Companies attracting upwards of $1bn in funding were “relatively small acquisitions” for giants like Disney, Greenfield noted.

“You’ve got massive companies like Snapchat sitting out there,” he said, referring to the social network reported to be raising some $650m in its latest round – ahead of a valuation that could be worth $16bn.

Hooft said for tech companies that have managed to acquire hundred-million-dollar stakes in the last year and a half, it is a buyer’s market and mergers-and-acquisition activity is very likely as soon as cash-rich techies “see an opportunity to do some talent acquisition or to buy cheaply into a space so they can give it a go”.

And the larger tech firms themselves might get in on the action: “A lot of the tech companies have a lot of cash and they have to do something with it,” said Hooft.

Regardless of who ends up acquired and who gets forced to IPO in an uncertain market, “valuations will probably be toned down a bit”, said the other venture capitalist, who asked not to be named.

“The focus is on how hard it is going to be for some very high-end stuff to go public,” he said. “How does Pinterest go public now? Dropbox? Square?”

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