The Great Tech Freakout: An Overview

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The Great Tech Freakout: An Overview

Well if you were looking for lousy news this week, you didn’t need to search long to find it. Days after some hair-raising price falls for publicly traded LinkedIn and Tableau Software (they tanked 43 percent and 49 percent, respectively, on February 5), a broader swath of public and private tech companies prepared to take their lumps. They came quickly, too.

Zenefits, the benefits software company, elbowed out cofounder and CEO Parker Conrad. We also learned the company is under investigation by the California Department of Insurance, as well as firing execs who may have encouraged employees to skirt the law.

Walgreens meanwhile threatened to end its agreement with the blood-testing company Theranos, with healthcare investor Stephen Kraus of Bessemer Venture Partners remarking to Politico, “Is Theranos going to be around two years from now? I would guess probably not.”

As for the high-flying daily fantasy sports site DraftKings, things didn’t go much better. In fact, Twenty-First Century Fox, which invested $160 million in the company last summer, just wrote down its investment by 60 percent, as revealed in a 10-Q filed earlier this week.

But wait, there’s more! What other terribleness befell the tech sector this week — and what’s coming next? Let us count the ways…


Non-Traditional Venture Investors May Grow Scarce

This week, at a popular San Francisco conference, we talked on stage with investor Tomasz Tunguz of Redpoint Ventures, and he offered that late-stage nontraditional venture investors are likely to end their years-long experiment with startup investing soon. Though they want exposure to privately held startups for a variety of reasons, Tunguz noted that public companies are simply a better value right now (not to mention more liquid).

Said Tunguz: “What [we’re seeing in the pubic market is] really a general rotation into more conservative stocks. And I think that’s basically foreshadowing a lot of these mutual funds and hedge funds starting to look at the public markets . . . It’s not inconceivable that that $10 billion [they invested in startups last year] just kind of goes away this year.”


Late-Stage Deal Terms Are Growing More Backbreaking

This past week, we shared some new research out of the law firm Fenwick & West. Among its findings? With “unicorn” financings of U.S.-based companies, 42 percent of the fourth-quarter rounds involved senior liquidation preferences, meaning preference over common stock and also other series of preferred stock. That’s way up over the third and second quarters of last year, when only 15 percent of rounds included senior liquidation preferences. (In 2014, 19 percent of deals included these terms.)

Blocking rights – which give investors the right to block an IPO if it isn’t priced as high as the unicorn round price – also became far more prevalent, with 33 percent of deals including them, versus 25 percent in the third quarter and 20 percent in the second quarter. (Investors can get these terms when entrepreneurs don’t have a whole lot of leverage.)


Valuations Are Expected to Fall (Further)

According to a recent survey of 150 venture firms by Upfront Ventures, 91 percent of respondents said they think valuations in the private market are going to fall, and 30 percent think they’ll fall sharply.

For his part, Upfront Ventures cofounder Mark Suster, who appeared on Bloomberg Television this week, agrees with Tunguz that the “fast money” that showed up in private-company financings in recent years will disappear. As a result, Suster also said he expects a “whole cohort [of privately held companies] will struggle to raise money because they raised at too high a valuation and it’s hard to raise a down round.”


Data Suggests Things Really are Slowing Down

According to a recent report by CB Insights and KPMG International, venture funding fell 30 percent between the third and fourth quarters of last year, while deal activity fell 13 percent.


Going Public Looks Further and Further Out of Reach

The U.S, IPO market had the slowest January since 2009, without a single, solitary company priced last month. (According to Renaissance Capital, that’s down from 14 IPOs in January 2015 and 17 in January 2014.)

Bigger picture, says Renaissance,  January ended a 51-month streak of IPO activity that had gone on since September 2011.

The immediate future isn’t much brighter. Four small biotech companies have priced in the last couple of weeks, but their shares have since fallen, and there are no IPOs expected this coming week.


Twitter is (Still) in Trouble

One of the biggest darlings of the tech world, Twitter, reported some lousy stats during an earning call this week, disappointing those who may have hoped that CEO Jack Dorsey had miraculously turned things around since being permanently re-installed at the company last October.

The long and short of it: Twitter met its revenue expectations, but its user growth is going nowhere fast. That Twitter has seen a whole lot of turnover of late has its fans worried, too.


Hot Areas Like Fintech Won't Be Spared Entirely Either

You might think some particularly hot areas of investment like fintech would remain unscathed by this shift in investor momentum, but you’d be wrong. Georg Ludviksson, CEO of Meniga, an eight-year-old, Iceland-based company that makes personal finance apps, summed it up to Business Insider this week. “Wherever there’s a lot of VC investment, there’ll be froth.”

Though Ludviksson is reportedly bullish on fintech, he notes that “there’s a lot of investment, but I don’t know how much of it will come to something.”


Even Marc Andreessen Is In the Dog House

You know when the world turns on Marc Andreessen, Mr. Silicon Valley, that tech is having a bad week.


Hard to Find a Silver Lining

As of this week, it seems like we’re in for a pretty horrible year, with a lot of companies likely to run out of capital, meaning plenty of employees are poised to lose their jobs. That’s depressing.


There is One, Though (a Silver Lining)

Of course, many would argue that we were due for a correction, and we wouldn’t disagree.

If hedge fund and mutual fund investors really do flock elsewhere, frothy valuations will fall, and that won’t necessarily be bad news.

Strong companies could start spending less to compete for talent and more on developing their products.

Startup employees trapped in companies that have been too richly valued to IPO or get acquired will likely see their management teams forced down one path or the other.

Those employees may not get quite what they’d hoped for, but some financial reward for their years of hard work would be better than nuffin’.

A dip would presumably be good for early-stage investors, too. As investor Mike Volpi of Index Ventures told us recently of falling valuations, they’re a “double-edged sword. For our portfolio, it’s not great, but when valuations go down, it also gives us an opportunity to invest and get better deals. It’s part of the natural course of the business we’re in. [I]t hurts us and it creates opportunities.”