The Party's Over: Public and Private Markets Deflate
“When the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rate [companies] will VAPORIZE.” – Marc Andreessen
“As they say in poker, if you’ve been in the game 30 minutes and don’t know who the patsy is, you’re the patsy.” – Warren Buffett
2015 was an insanely great year for venture-backed companies … until it wasn’t. Financing mega-rounds, deal activity and unicorn creation all peaked in the third quarter of 2015 and then fell off a cliff. Not just a regular-sized cliff either. A really steep one.
Instead of going out for their next round of funding, maybe Uber and Airbnb should have bought Powerball tickets.
A sneak peak at an upcoming report from KPMG and CB Insights reveals a dramatic shift in VC activity toward the end of last year. Indicators fell so sharply in the fourth quarter that they actually dropped below 2014 levels.
There were previous signs that the “gold rush” characteristic of the unicorn (venture-backed companies with $1 billion-plus valuations) era was wearing thin on investors, but this is the clearest indication yet that the private equity bubble that’s been growing for years is finally starting to deflate.
For the past year and a half or so, everyone from noted VCs Bill Gurley and Marc Andreessen to Mark Cuban and Snapchat CEO Evan Spiegel has sounded the alarm that startup valuations are out of control, burn rates are too high and profits are too rare. We started to see the fallout last November when institutional investors Fidelity and BlackRock cut their valuations of Snapchat, Zenefits and Dropbox.
That led Fred Wilson of Union Square Ventures to write about the blurring lines between public and private markets, “I don’t think we will see less of these public markdowns. I think we will see more of them.” He went on to say that his firm – whose portfolio companies include Twilio, Kik, Foursquare, Kickstarter and Meetup – may follow suit.
Indeed, the line between public and private markets is evaporating. And in many ways, we’re experiencing a sort of bubble economy that spans a wide range of markets, asset classes and investment vehicles.
To paraphrase Benchmark’s Gurley, a defining characteristic of this tech cycle is the way investors have forsaken their traditional areas of focus and crossed over into each other’s lanes. Hedge funds, mutual funds and investment banks have thrown caution to the wind and rushed into late stage mega-rounds as if they were IPOs. Never mind the lack of liquidity.
Clearly, last quarter’s private equity plunge and the New Year’s market selloff are connected. And even though stocks are staging a rally on Thursday, the biggest in 5 weeks, the major averages are still down sharply for the year. The Nasdaq has dropped nearly 8% over the past two weeks – falling 3.4% on Wednesday alone. Once high-flying cloud stocks like NetSuite, Workday, Splunk, Tableau Software and cybersecurity firm FireEye are all trading at or near 52-week lows. And the Dow and S&P 500 are along for the ride. That’s no coincidence.
We’re living in a connected world in more ways than one. What began with cables and 747s crossing oceans gave rise to the Web, ecommerce and the global economy. When Andreessen famously wrote, “Software is eating the world,” he meant that technology is biting off big chunks of age-old industries and disrupting them.
There’s Amazon and Alibaba in retail, Apple in music and TV, Google and Facebook in advertising, GrubHub in food, Netflix and Amazon in entertainment, Tesla and presumably Apple in cars, Uber and Lyft in transportation services, Airbnb in hospitality, BuzzFeed and a host of venture-backed media companies – it’s a long, long list.
A natural outcome of that growing phenomenon is that technology no longer exists as a self-contained industry. It’s everywhere and in everything. So like it or not, technology has brought its own unique brand of boom and bust cycles to the broader markets. And now the lines between different classes of assets, investors and markets are forever blurred, at least until they disappear entirely.
The takeaway is this. It’s been said that Silicon Valley is in a bubble. Well, guess what? Silicon Valley’s bubble is now everyone’s bubble. And when it bursts, it gets all over everything. Better get used to it.