So long, tech bubble of 2011. Stock speculators and doom-mongers alike had such
great hopes for the new tech bubble. Privately held shares of the hottest web
companies commanded valuations in the tens of billions of dollars, ratcheting up
with each SecondMarket auction. Social media brands that ventured into the
public market surged. LinkedIn (NYSE: LNKD ) left many, including me , wondering
if the mania of the dot-com days had returned. But so much has changed since
LinkedIn went public starting with LinkedIns stock price: Its down 38% from its
high point of $122.70, reached a few hours after it went public. And now a major
investor is slashing its stake in the social network. But more importantly,
money is not flowing around so readily as it was this spring. The Feds
quantitative easing has ended, and unending financial turmoil in Europe is
making investors risk-averse. In the first half of 2011, 78 IPOs priced on U.S.
markets, up from 64 in 2010, according to Renaissance Capital. But the third
quarter saw only 18 pricings, down from 33 in the third quarter of last year.
Meanwhile, 20 companies withdrew their IPOs in the third quarter, compared with
11 for the same period a year earlier. For much of 2011, however, the public and
private markets have seen an unusual disconnect. The public markets grew so
volatile at times that rivate equity seemed like a safe haven by comparison.
While companies went public only to watch their stocks sink like a rock , the
private trading on secondary markets saw valuations of names like Facebook and
Twitter steadily rise. Others had no problem raising money from venture capital
firms, with late-stage rounds supplemented by even later-stage rounds that
raised several hundreds of millions of dollars for web companies like Twitter
and LivingSocial. If there was a tech bubble to be found, it seemed to be in the
private markets. But that may be changing, too. Venture firms have been raising
less money than they are investing. A few years ago, many VC firms were turning
money away from institutional investors, but no more. According to Dow Jones
VentureSource, VCs invested $14.3 billion in startups in the first half of 2011,
but raised only $8.1 billion. That gap has been growing since 2008. Venture
funds raise money to be invested over the course of several years, so the impact
of that investment gap wont be felt right away. But one venture capitalist, John
Steuart of Claremont Creek Ventures, had this advice for entrepreneurs: "If
you're in the process of looking for funding, seed money or an early round,
hurry up and get your term sheets signed." That prompted a discussion on
Hacker News about whether and when VC financing will dry up. "The sky is
falling," one commenter declared outright. "The reality is that with the
current financing environment, there will be a ton of orphaned startups,
remarked another. Needless to say, this will impact entrepreneurs, because it
isn't sustainable. This is a reversal of recent years, when there was more
money coming into VC funds than they knew what to do with. But fears of a
renewed recession is causing institutional investors to be more tight-fisted
with their money. Many tech companies have been avoiding the volatile public
markets because venture investments have been so ample, but while its not drying
up completely, it may well be harder to raise. The best names, like Twitter and
Facebook, will never have a problem raising private money, but others might.
That may prompt some to try for an IPO, but as weve seen the IPO market hasnt
been terribly accommodating. So for the first time in a while, web startups may
find it hard to finance their future – just like the rest of the economy.
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