San Francisco: The post-election rally that’s lifting US public markets has left at least one group by the wayside: private technology start-ups.
Since last year’s peak in mid-December, startup deal-making has fallen 37%, according to the Bloomberg US Startups Barometer, which tracks fundraising, initial public offerings and acquisitions. The index is at its lowest point since April 2014.
Although far from the only factor, politics plays a role in investment decisions. Silicon Valley’s uncertainty toward the policies of President Donald Trump has sapped the confidence of some venture capitalists. “We’re in for a lot of volatility in the next four years, and it’s hard to invest in that,” said Dennis Phelps, a partner at VC firm IVP. “It’s also an opportunity as an investor.”
Meanwhile, the technology-laden Nasdaq Composite Index has jumped 13% since Election Day, and the Dow Jones Industrial Average cracked 20,000 for the first time. Investors are optimistic about potential corporate tax cuts, freeing overseas cash and reduced regulation. Start-ups should benefit from some of these same factors, with lower taxes and repatriation possibly resulting in more deals. But other anticipated moves by Trump could hit start-ups especially hard. For example, immigrants start American companies in disproportionately high numbers, and a crackdown could starve the startup ecosystem of talent.
Private-market deals typically settle into a lull at the beginning and end of the year, but the recent decline has been unusually sharp. The start-up market is returning to “a more normal period” before the rush that began in 2014, said Marcelo Ballvé, an analyst at research firm CB Insights. The effect is being felt globally. Start-ups raised $12.9 billion so far this year compared with $18.7 billion during the same period in 2016, according to CB Insights data.
At times last year, VCs grappled with the prospect that they had overpaid for many investments, particularly the coveted unicorn startups valued at $1 billion or more. Many mutual funds marked down the values of their stakes in private companies during the last couple of years and pulled back on investing. Several high-profile, bargain buyouts, including Hudson’s Bay Co.’s purchase of Gilt Groupe at a 75% discount to its earlier private valuation, didn’t help, either. Nor did IPOs that valued companies well below their peak private-market valuations, including Square Inc., which went public in late 2015 at less than half the value investors put on it the year before.
But VCs are sitting on a lot of cash, and it has to go somewhere eventually. Last year, US venture funds raised $41.6 billion, the most since the dot-com days of 2001, according to the National Venture Capital Association, a trade group. Investors hope that a successful offering for Snap Inc., which could come as soon as this week, could help convince other venture-backed companies to go public.
The biggest drop in the Startups Barometer came from a 35% decline in the 12-week trailing average of start-ups raising money from investors for the first time compared with the same period last year. Access to financing for the youngest businesses is essential for a healthy entrepreneurial ecosystem and indicates investor appetite for the riskiest bets.
VCs said there’s a healthy pipeline of deal flow, which isn’t yet reflected in the data because they haven’t been disclosed publicly. Scott Raney, a partner at Redpoint Ventures, said while his firm has been investing at a slightly slower pace so far this year, that has more to do with trying to find the right bet than the turbulent political climate. He said: “If you’re generating revenue and you’re starting to grow, you can definitely raise capital.”
Check back in every Monday for a new weekly reading of the Bloomberg US Startups Barometer. The index tracks the business conditions for venture capital-backed private technology companies based in the US.