Wednesday 11 December 2019

Silicon Valley may be headed for slump

Delegates wait near a digital image wall during the Dublin Web Summit in Dublin last year. Adrian Weckler says unions have shown no interest in the tech sector.
Delegates wait near a digital image wall during the Dublin Web Summit in Dublin last year. Adrian Weckler says unions have shown no interest in the tech sector.

Adam Satarlano

THE decline in publicly traded technology stocks is fuelling concern that Silicon Valley start-ups will follow with plummeting valuations.

In the past month, Amazon, Facebook, TripAdvisor and Netflix have plunged at least 13pc each.

The trading days of April 10 and 11 marked the Nasdaq Composite Index's biggest two-day drop since 2011, and the index is off more than 7pc since early March.

If the declines continue, young entrepreneurs may have to accept more realistic valuations for their companies, said George Zachary, a partner at Charles River Ventures in Menlo Park, California.

The slump is "restoring some rationalisation to the market," Zachary said. "It's rebuilding the wall of worry a little bit."

Any pause in start-up valuations would signal a sentiment shift after recent weeks of increasingly lavish funding rounds.

Eight venture-backed technology companies in the US raised rounds of at least $100m in the past 30 days. Airbnb is among a small group of start-ups being assigned 11-digit valuations as hedge funds, private equity firms, corporate investors and mutual funds pour money in.

Still, it's too early to see an immediate effect. Movements in the private markets trail public stocks, sometimes by months. "As you saw the public-market valuations go up, it pulled the private market valuations with them," said Byron Deeter, a partner at Bessemer Venture Partners in Menlo Park. "If public markets continue to pull back, I absolutely expect that private markets will adjust quickly."

For now, there is a public-private divide as piles of cash continue flooding into Silicon Valley start-ups at ever-rising valuations, while public technology company stocks drop. Russell Horowitz has watched shares of his mobile-advertising company Marchex plummet 17pc in the past month, even as start-ups vacuum up cash.

"Two different sets of rules are being applied," Horowitz, chief executive officer of Seattle-based Marchex, said in an interview. "There is absolutely a double standard."

Those different rules may fade if the current sell-off of public stocks ends up dampening the enthusiasm of the start-up market. Any spillover may be hastened should financial results from technology companies disappoint, while strong numbers could reverse the stock slide.

Intel and Yahoo! kicked off earnings season yesterday with profit that topped analysts' estimates, and Google reports today.

To venture capitalists who have been sounding the bubble alarm, the current sell-off is long overdue and should seep its way into the start-up ecosystem. Internet start-ups raised more money in 2013 than in any year since 2001, according to the National Venture Capital Association.

More realistic start-up valuations would benefit venture capitalists and other investors, who could buy into companies more cheaply.

"I'd rather have this than escape into total crazy bubble territory," Zachary said.

Twitter employees are paying close attention. The site's post-IPO lockup period ends next month, meaning insiders can start selling their shares. The stock is 39pc below its high of $74.73 reached in December. Co-founders Jack Dorsey and Evan Williams and CEO Dick Costolo, as well as some top investors, said this week that they're not planning to sell when the lockup expires. (Bloomberg)

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