Tech Was Supposed to Crash in 2016. It Got Real Instead

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  • Author: Davey Alba. Davey Alba Business
  • Date of Publication: 11.26.16. 11.26.16
  • Time of Publication: 7:00 am. 7:00 am

Tech Was Supposed to Crash in 2016. It Got Real Instead

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Remember, remember, late 2015 November? You may recall it was getting chilly. That’s certainly how the weather started feeling for startups seeking to bathe in the warm glow of venture capital. Silicon Valley could sense the crash coming. The unicorn reckoning was nigh. But a year later, it still hasn’t really arrived.

Certainly, money isn’t as easy to get as it used to be. After a record third quarter in 2015, overall VC funding has contracted by nearly 40 percent a year later. Since last year, according to industry researcher CB Insights, there have been 93 down rounds—occasions where startups have raised more money, but accepted lower valuations to do so. Stock prices of hardware startups GoPro and Fitbit have plummeted—by 60 and 80 percent, respectively—in 2016. One Kings Lane, a home furnishings online retailer that at its peak was worth nearly $1 billion, sold itself to the conventional giant it promised to upend, Bed Bath and Beyond, for a mere $12 million.

So yes, gone are the good ol’ days when entrepreneurs could pitch ideas as far-fetched as a grilled cheese restaurant chain or a “Dropbox for physical storage” and still walk away with millions of dollars in seed money.

And none of this is a real surprise. With high-profile venture capitalists like Bill Gurley warning as far back as 2014, that too much money has been pouring into the tech industry, the script for what happens next was supposed to have already been written. 2016 was supposed to be the year that the tech bubble burst. And yet it hasn’t. Turns out the whole metaphor was wrong.

Bigger Checks, Fewer Deals

So, what’s going on? It’s not that the big VC “thought leaders” got the concept wrong, says Ben Narasin, a general partner at the seed-stage venture capital firm Canvas. It may just be that the bubble trope constrained people’s thinking about what was really going on. “It wasn’t a bubble that burst but a balloon that deflates,” he says.

In reality, any one metaphor is too simplistic to account for the whole story. Adding to the complexity this past year is that, even as venture capitalists back fewer startups, the firms themselves are raising more money than ever. So far, US venture funds have raised $32.4 billion in 2016 according to the National Venture Capital Association, an industry trade group. That surpasses the total raised for the entirety of 2015—$28.2 billion, putting 2016 on track to become a record-breaking year. At the same time, however, VC firms aren’t spreading their dollars as far and wide as they have in the past, a signal of a new and more cautious investment strategy.

“I think a lot of this is VCs wanting to be prepared,” says Narasin. “They’re raising money they didn’t have an immediate need for to prepare for future problems.”

Yet venture capitalists aren’t exactly pessimistic. In 2016, firms invested $56 billion across 6,000 companies—a volume second only to the massive investment boom of one year ago. But a decline is still a decline: researchers note that following a lively check-writing period from early to mid-2015, deal volume has stayed at a moderate level, signifying that investors are writing bigger checks for fewer deals.

That’s certainly consistent with pervasive anecdotes of smaller startups becoming much more realistic about their business models while the bigger fish—er, unicorns—in the pond are still able to raise sky-high rounds. “The very best companies were able to raise money,” Narasin says. “Everyone else fell into one of two camps: ones that battened down the hatches and survived, or ones that weren’t going to make it.” In that second camp are high upfront subsidy businesses like the exercise class reseller Classpass, which raised prices in 2016 in spite of a big outcry from customers to make ends meet—then still had to get rid of its eponymous unlimited classes option entirely.

‘It’s not like people felt there wasn’t going to be value created in Silicon Valley.’

On the other side, meanwhile, are the big, obvious winners, the startups that seem too big to fail. Chinese ride-hailing giant Didi (current valuation: $33 billion) raised more than $7 billion in funding in June, not long after Apple invested $1 billion in the company. (By August, Uber had conceded the entire Chinese ride-hailing market to Didi, agreeing to a merger of the two companies.) Slack is still killing it, solidifying a $3.8 billion valuation after closing a new round of financing in April. Uber is currently valued at $69 billion and Airbnb at up to $30 billion. At the seeming top of the pile, Snap Inc., owner of Snapchat, has confidentially filed paperwork for an initial public offering that could value the ephemeral messaging platform between $25 and $35 billion—potentially making it the third-most valuable market debut of all time for a tech company behind Facebook and Alibaba. If a Snap IPO succeeds, look for more tech companies going public next year.

Good to Great

In one formulation, this contraction could work out well not just for the industry but for customers. This year, a difference between the haves and have-nots became much more distinct, says Scott Raney, a partner at Redpoint Ventures. It was “good versus bad” in the past, says Raney, where the difference between good and bad depended on whether or not startups could raise money.

“Now, it’s ‘great versus good,’” says Raney. “If you’re a great company, raking in money is not difficult at all.” But good companies still exist, he says. They’re the ones with “the ability to not require lots of capital for the growth phase, but can build compelling business models efficiently.”

The long, cold season of tech investing may have ended up looking less like Siberia and more like a mild winter. Raney says that’s all the more reason to stay optimistic about tech. “It’s not like people felt there wasn’t going to be value created in Silicon Valley,” he says. Ultimately, people still do believe in the value of innovation, Raney says. It may just be that this is the dawn of a newly realistic approach—which doesn’t seem like half-bad way of looking at the future.

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