Sun, Mar 19, 2017 - Page 15 News List

Signs that the start-up
boom might be fizzling

Start-ups are beginning to run out of money and investors are becoming more discerning. How does this compare to the time leading up to the dotcom crash?

By Olivia Solon  /  The Guardian, SAN FRANCISCO

A cyclist rides past a Snapchat Spectacles by Snap Inc vending machine pop-up store in Venice, Los Angeles, on Tuesday. The Los Angeles-based firm on March 2 became the first start-up in the past few years to have a successful initial public offering.

Photo: Bloomberg

If you were looking for an apartment in the San Francisco Bay Area 18 months ago, realtors recommended you took your checkbook to viewings and were prepared to fork out for the deposit and first month’s rent — that is US$8,000 to US$10,000 for a two-bedroom place in San Francisco — on the spot.

“There was no negotiation because there were 10 people behind you saying: ‘We’ll take it,’” said Ron Stern, chief executive officer of housing relocation service Bay Rentals.

Today, rents are still expensive, but the market has plateaued after years of painful increases.

It is part of a broader trend in the Bay Area: Silicon Valley’s technology bubble has had some of its wind knocked out — not bursting, but fizzling — with venture capitalists (VCs) making fewer investments, start-up valuations falling, and recruitment slowing.

“We’re starting to get a lot of resumes from [software engineers at] companies where the business model isn’t working and they can’t get funding, so they are closing down or cutting back,” said Mark Dinan, a software recruiter based in the Bay Area, who keeps track of companies’ hirings and firings.

“The number of investments [in the private market] has fallen by about a third, but the amount of capital is around the same,” said Tomasz Tunguz, a venture capitalist at Redpoint, adding that some of the “fast money” from hedge funds and mutual funds had shifted away from the sector.

“It’s been happening for a couple of years. It’s not as easy to raise capital and VCs are demanding better terms,” said Aswath Damodaran, a professor of finance at the Stern School of Business.

This is partly because of a slowdown in companies going public.

Last year was the slowest for US initial public offerings (IPOs) since the recession, with the amount raised by technology companies falling 60 percent from 2015, according to Bloomberg News.

“Silicon Valley has not had a major success in terms of IPO before Snap [Inc] for years — and Snap is in LA,” Dinan said.

A stream of “down rounds” — when a company raises funds by selling shares that are valued lower than the last time they raised funds, leading its overall valuation to fall — has led investors to be more discerning.

CB Insights has tracked more than 100 of these down rounds and exits since 2015, including software company Zenefits, mobile app Foursquare and online music streaming service Rdio.

“It used to be that 95 percent of [investment] rounds were up, now 20 percent are down,” Tunguz said.

Then there are the so-called “decacorns” — unicorn start-ups valued at tens of billions of US dollars — such as Airbnb, Uber and Palantir, which some believe are overvalued, but it is hard to tell until they go public and are forced to reveal details of their underlying finances.

For example, ride-sharing app Uber has raised more than US$16 billion and is valued at more than US$69 billion. That is more than automotive giants like General Motors Co and Ford Motor Co, despite the company losing US$2.2 billion last year.

How does this moment compare to the time leading up to the dotcom crash?

“I got here in 1997 and it was like it is now — incredibly packed, impossible to commute, high apartment costs,” Dinan said.

“We’re seeing over-valued companies, funded based on hopes and dreams and aspirations and not good business models. Companies counting users and eyeballs rather than profits. There are a lot of similarities,” he said.

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