If this year’s first-quarter numbers are any indication of things to come, the tech industry is looking at a major slowing of VC (venture capital) investing in new startups. This trend started near the end of 2015, after investors began discovering that many of those tech startups were being overvalued.
In an article published in the September 2015 issue of Inc. magazine, Yes, It’s a Tech Bubble. Here’s What You Need to Know, Jeff Bercovici describes the contributing factors that demonstrate why the tech industry is in a precarious position. According to Bercovici:
Tech companies are being overvalued.
Uber was valued at $50 million in 2015; Airbnb was valued at $25 million. This may seem like a good thing, but as CNN writes, “sky-high valuations also make selling the company tough to count on.” Airbnb lost $150 million in 2014 and was “on track to lose $200 million in 2015,” at the time of the writing, in June 2015. In November, Fortune Magazine suggested Airbnb was mostly able to recover prior to the year’s end – thanks to an additional $100 million in funding raised in the third-quarter. The article does not mention the company’s actual losses. However, it was projected that the company may reach profitability in 2016.
At least some startups seem to understand where the market may be heading. Slack founder, Stewart Butterfield, for example, explained that his company raised $160 million at a valuation of $2.8 billion not because it needed to, but rather because the opportunity presented itself. Strike while the iron is hot, so to speak.
Since 2014, both Airbnb and Uber have encountered regulatory problems across the globe. In March 2016, residents of New Orleans protested Airbnb, deriding it as illegal. During the same month in a special session the State of Louisiana passed HB 59, which legally requires taxation of short-term rentals. A few months prior, in November 2015, Airbnb narrowly defeated a ballot measure in San Francisco. If it had passed, the law would have imposed additional regulations on the short-term rental industry in the city.
In May 2016, Uber was fighting a different battle in the state of New York, in connection with expanding its reach in more rural areas like Buffalo and Albany. Taxicab services have had a monopoly on this market for a long time, and they are not willing to give it up so easily. “They’re not creating jobs, they’re destroying an industry,” said David Beier, president of the Committee for Taxi Safety. Uber also recently settled lawsuits in Massachusetts and California for failing to provide employee benefits for drivers working for the company.
Peter Thiel, co-founder of PayPal, says it is not only technology startups that are being given unsustainable valuations. In April, at a Lendit USA conference in San Francisco, Thiel was quoted saying, “Startup tech stocks may be overvalued, but so are public equities, so are houses, so are government bonds.” He asserts that the tech bubble is not an issue in the United States compared with other countries, because the concept “is a psychosocial phenomenon,” which typically involves the public. Since the public has not been involved this time around, Thiel claims the tech bubble is non-existent and unrelated.
In May 2016, The Felder Report, a website managed by Felder Investment Research, published an article titled, Tech Bubble 2.0 Is Bursting. Author Jesse Felder indicates many venture capitalists are now finding themselves raising funds in a mad dash to financially insulate themselves when the Tech 2.0 bubble bursts. Thiel’s remarks aside, to them the inevitable is already in the works. With that comes layoffs, reduced benefits, and decreased worker morale – which also affects the success of a budding startup.
A burst in the bubble may also lead to unforeseen consequences in the form of higher charges for tech service products traditionally available for free or a relatively inexpensive price, like Slack or Facebook. For traditional venture capitalists, the fall of Tech 2.0 may just be another day at the office. However, with the introduction of new rules permitting non-accredited investors to back ventures, there is likely to be some collateral damage to be suffered by those who aren’t prepared.
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