Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Investor Chill Hits Technology Sector

Posted by hkarner - 27. Januar 2016

Date: 26-01-2016

Source: The Wall Street Journal

As investors and entrepreneurs gathered at the World Economic Forum, many are now wondering if the tech boom is finally cooling off

DAVOS, Switzerland—The chill in the air here last week wasn’t just from the altitude.

A sharp slide in public and private valuations for prominent technology firms hung like a snow cloud over the World Economic Forum’s annual event this year. As investors and entrepreneurs crammed into meetings and parties in this mountain town, many wondered if the tech boom was finally cooling off.

“Obviously there are a lot of unicorns,” said Nathan Blecharczyk, co-founder and chief technology officer of Airbnb Inc., referring to venture capital-backed startups with a valuation of more than $1 billion. “Some of those unicorns won’t survive.”

For years, the tech sector was going nowhere but up. Fast-spreading connectivity promised a massive potential market for large Internet firms. Artificial intelligence and new data-analytics tools would help companies and governments gain orders of magnitude in efficiency.

Davos organizers themed this year’s meeting around harnessing the massive transformation that technology can offer, dubbing it the fourth industrial revolution.

The chill blew in over the summer. Investors had long been suspicious of valuations that were pushed as much by public appearance as by fundamentals. Then the late August shock over surprisingly slow growth in China tanked the public markets—and spooked private ones, executives say.

“It was after the August correction that we started to get a dose of reality,” says Devin Wenig, chief executive of Silicon Valley stalwart eBay Inc. “The private equity environment has changed entirely in the last six months.”

Now investors are circling the wagons. Giants can still raise money at eye-popping valuations, as Uber Technologies Inc. did in December. But others such as location-sharing mobile app Foursquare are being forced to sell shares at sometimes half what they asked two years ago.

Large investors are writing down the value of stakes they own, such as when Fidelity marked down the value of its Snapchat stake by 25%. In the fourth quarter, the median valuation before the latest round of cash infusion or pre-money valuation for tech firms raising venture capital was $28.75 million, less than a third than that for the previous quarter—and the lowest level since the beginning of 2014, according to Dow Jones VentureSource.

“VC’s are taking a vicious approach to capital deployment,” said Jeff Schumacher, founder and chief executive of venture firm BCG Digital Ventures. “Preserving cash is the priority because the funding faucet has turned off.”

Public markets are no less forgiving. Last year, just 31 tech companies went public on the NYSE and Nasdaq exchanges, down 46% from a year earlier. The amount raised per firm fell by more than half to just $400 million.

“We had the slowest quarter in a decade for tech IPOs in the fourth quarter of 2015,” said Thomas Farley, president of NYSE. He said that early 2016 could be worse: “Private and public funding is slowing.”

Many investors and entrepreneurs argue that the tech business is still far from facing the kind of crisis it saw in the dot-com bust. Unlike a decade-and-a-half ago, many of the most-prominent firms are generating revenue and growing—even if they are overvalued. Some say that what is happening is simply a realignment with reality after a period of stratospheric valuations that had no basis in reality.

The bigger impact could be on employees and the race for talent. Unlike later-stage investors who increasingly negotiate themselves protections if a firm raises money at a lower valuation, or an IPO plunges, many tech employees are wooed by stock options that may now be far underwater.

Taavet Hinrikus, chief executive officer of TransferWise, a startup that focuses on sending cash overseas, acknowledges a shift in the climate but said he isn’t personally that concerned. “It will weed out some of the businesses that shouldn’t have been funded,” Mr. Hinrikus said. “I think that the best companies always have access to capital.”

Alphabet CFO Ruth Porat tells WSJ’s Dennis Berman that the biggest surprise she had on joining the company was the realization that Google is still an early-stage company.

But in Davos, as in Silicon Valley, some executives did express private concern about how far the realignment would reach—and what that will mean for themselves. “Clearly, there is some sort of bubble that could be popping,” said an executive at a large venture capital-backed tech firm. “The question is how big it is.”

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