Liquidity Public Startups

Holiday Cheer Brings Tech Fears

Morning Markets: Morning Markets won’t come out every day this week, but today we have something to talk about.

And just like that, everyone is afraid.

It took a lot to shake confidence, but the combination of trade worries, global economic deceleration, troubles with Chinese debt, Facebook’s rolling catastrophe of a year, Snap’s deflation, Japanese growth issues, a slowdown in the United States, rising interest rates, and the air coming out of the growth-oriented technology companies that had long lived in the sun nearly did it.

Then the US stock market fell further into correction territory as some of the above issues became more acute, the United States government partially shut down, and the Federal government’s pace of debt accumulation shot north. And then there was the most recent self-inflicted wound when, after the worst December for stocks since 1931, the current administration decided to tell the markets that one signal that no one was watching was just fine. That scared people into wondering they should have been worrying about bank liquidity all along.

Finally, for good measure, stocks fell this morning right before Christmas. Welcome back to the bad times, everyone.

Grinch Stole My Damn Christmas

They may not last, of course. We could be in for an early 2019 rally, bringing calm to jittery public investors.

That would go a long way to helping private companies, many of whom raised tectonic sums in 2018 and are going to be spending as if another round was coming. But perhaps not. The media, at least, is running stories like this:

  • As Markets Tumble, Tech Stocks Hit a Rare and Ominous Milestone (NYT)
  • Startups Hustle to Raise Cash Before Recession Strikes (Bloomberg)
  • Why the Worst May Not Be Over for Tech Stocks (Barron’s)
  • Here comes the downturn (TechCrunch)
  • A decade-long rally on Wall Street looks like it’s ending (ABC)

Those are from the last four days. They correctly mirror how sentiment has changed.

So what is next for the startups caught in the crossfire? Probably what normally happens in times like these. As lending requirements tighten in harder economic times, so will investing standards for private companies. Every venture capitalist will tell you that good companies can always raise, regardless of the macro picture, but it will get harder for middle-tier startups. God help the weak.

Sheer growth may lose some of its luster in favor of efficiency (revenue growth per dollar raised, a startup-centric but useful metric), and companies that burn less will appear more attractive than they did before. 1 As far as the well-funded versus lean startup argument, after a long run of companies raising extra capital just because they can, the ability to extend runway and thus protect valuations is about to see its own value rise.

The Crying Wolf

The Crunchbase News fourth-quarter report will land starting the second week of January, so we’ll have a host of trailing notes on the state of startups. But there’s lag in private market reporting, so it may not be until the middle of the first quarter that we fully get our grip around the state of things. Expect some sort of slowdown.

At the same time, the contra-argument isn’t too hard to make: there are lots of great companies at various stages of maturity at the moment, that the venture market is flush with cash, that the Saudi-powered Vision Fund will continue to splash cash around the world, that the global economy is still growing, that smartphone and Internet penetration will continue to expand, and so forth. But none of those things, I think, are enough to halt a medium-term correction if the market deems such a contraction needed.

So, fear! Just like in 2014 and 2016, the bad times are supposedly back, perhaps for real this time.


  1. There is, of course, a perverse view taken on a lack of burn in boom times. The thinking goes something like this: If you can grow faster, why aren’t you? There’s plenty of money around. And if you aren’t burning much is that because you can’t grow any faster? And then down goes the value of your startup.

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