With new apps and web-based companies popping up every day, it can often feel like there is no slowing down in the technology market. But the prosperous times of the tech startup market cannot last forever. According to various news outlets, brands such as Jet, Snapchat, and Airbnb have all reported a slowed rate in valuations over the past six months. This has many wondering if the bubble will burst in the tech startup market.
According to Patrick Bosworth, co-founder and CEO of Duetto, it is still a good time start a new company. “The capital markets have been as good as they have ever been in history. Only the 2000 dot-com surge was more favorable, but otherwise, over the last 30 years of venture capital investing, these last few years of raising money have been the best,” he said.
However, it does appear that the lucrativeness of the market may be starting to change. This should not cause too much worry, since the market has been booming over the past several years. Now, it has simply entered a cooling-off period. This period will be the end of some companies, as their business models have been based on a time of key capital. This has caused startups to make essential changes in order to continue growth and further raise capital.
Additionally, valuations are rising at a slower rate than they were six months ago. Mutual funds have begun marking down their holdings in unlisted tech firms in the last quarter, and although there have been no official comments from mutual funds on why these markdowns are occurring, some speculate that it is due to certain startups not meeting growth targets. Another possibility for these markdowns is the volatility of the stock market.
Meanwhile, some backers of startups have become more cautions with their investments. Fewer specialist investors are taking part in new financing rounds, while general investors are filling in the gaps of the market.
Several early-stage companies have gotten into a bad habit of spending all their cash in an attempt to buy market share. Another unwise but common practice among startups is embellishing their valuations and giving outsiders a misleading number as to what they are “worth.” In order to try and make their valuation go up each time they raise funds—to suggest they are making progress—many firms are agreeing to investors’ demands to attach special privileges to the shares being sold.
The fundamentals of the tech industry are still quite stable. Gone are the companies that have no business model for raising money, which was the problem with the dot-com bust. Instead, these are real companies with real customers—and real revenue.
“I don’t think it’s going to be like 2000 where a thousand of these companies are going to go bankrupt,” Bosworth said. “I think 50 to 100 might since we are unlucky and prudent, but then there are still going to be hundreds more that will be really good businesses.”
Additional reporting by Sean Downey.