SAN FRANCISCO: Investors who once poured money into the nation’s start-ups with abandon began to tighten their belts this year.
The amount of money that flowed into US start-ups fell in 2016 for the first time in four years as the number of deals struck tumbled to their lowest levels since 2011.
But the technology world has high hopes that 2017 will prove to be brighter, as the parent company of Snapchat and other high-fliers prepare to go public and venture capitalists amass huge new war chests.
About $67.8 billion was invested in start-ups in 2016, according to data from PitchBook, down 15 per cent from last year. And just 7,841 deals were struck, down 25 per cent from the period a year ago.
Much of 2016 proved to be a less ebullient time for the once red-hot start-up market.
In years past, investors and the industry press alike delighted in anointing new “unicorns,” the once-ballyhooed term for a start-up valued at more than $1 billion.
This year instead brought a healthy scepticism — while the apocalypse hasn’t arrived, leaner times are ahead. Start-ups have tightened their belts, laying off staff and focusing more on reaching profitability rather than skyrocketing user growth.
Just 12 companies joined the unicorn club, according to the data provider CB Insights, a 70 per cent drop from 2015.
And initial public offerings — one of the primary ways that investors in start-ups can harvest their gains — tumbled sharply during 2016 amid uncertainty and tumult in the stock market. Just 105 offerings priced during the year, according to data from Renaissance Capital, down 38 per cent from 2015. Those deals raised $18.8 billion, also a 38 per cent drop from the year-ago period.
Both hedge funds and big mutual funds, which have been among the most enthusiastic new backers of new private companies, continued to largely show reluctance in venture investing, according to CB Insights.
Moreover, a few of Silicon Valley’s most prominent start-ups suffered significant blows in the past year. Theranos, the once highly lauded blood-testing company, laid off about 40 per cent of its workers and closed its laboratory operations amid heightened scepticism about its technology.
Zenefits, a business software start-up, replaced its chief executive after BuzzFeed News reported on its use of unlicensed health insurance brokers. Zenefits has since settled investigations with a number of states, and the company has sought to turn itself around.
Of course, heavyweight start-ups had little trouble raising money. Uber alone raised $3.5 billion from the Kingdom of Saudi Arabia, putting its cash hoard from outside investors at more than $11 billion. Lyft, Palantir and Snap Inc, the parent of Snapchat, all raised enormous sums as well, as did big non-American start-ups like Chinese ride-hailing service Didi Chuxing.
And some start-ups sold out to bigger companies for multibillion-dollar valuations. Jet.com, an e-commerce company that began selling goods only within the last two years, sold itself to Wal-Mart for $3.3 billion.
Investors are betting 2017 will be better. Renaissance Capital pointed out that the average total return of IPOs in 2016 reached 23 per cent, a sharp reversal from the negative 2.1 per cent return of 2015 offerings and surpassing the 21 per cent return of two years ago.
And some boldface names are preparing to begin trading in the public markets next year, potentially providing ballast for a bigger wave of debutantes. Leading the way could be Snap, whose shares are expected to begin trading as soon as March with a valuation that could exceed $30 billion.
Other big names, like Spotify, the music-streaming darling, are also poised to hold IPOs as soon as 2017.
“This momentum, when matched with the stable, postelection markets, should lead to strong performance for IPOs in 2017,” Jackie Kelley, the Americas IPO leader for EY, said in a recent report.
And there is still a healthy amount of money waiting to be deployed. Venture capitalists raised about $40.6 billion in 2016, according to PitchBook, the biggest amount in at least a decade. That includes new funds raised by venture capital giants like Andreessen Horowitz and Founders Fund.
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Perhaps the biggest of all is a new $100 billion investment fund being raised by SoftBank, a Japanese technology conglomerate (it owns most of Sprint, for one) that is partnering with the likes of Saudi Arabia and Abu Dhabi.
More money pouring in will not necessarily save the most troubled start-ups, however. In April, investor Bill Gurley of Benchmark Capital warned that the sheer amount of money sloshing around Silicon Valley and other tech hubs was propping up weaker players and potentially harming returns.
“More money will not solve any of these problems,” he wrote in a blog post. “It will only contribute to them.”
