Contact: Brenon Daly
For the most part, the venture capital industry seems like it hasn’t changed the calendar and still thinks it’s the ‘up and to the right’ year of 2015. Firms are still writing checks for amounts that, until a few years ago, only came from public market – rather than private market – investors. (Datadog raising almost $100m earlier this week, for instance.) And, even though there have been only a smattering of successful $1bn VC-backed exits in recent years, firms are still bidding up funding rounds for startups, and continuing to create ‘unicorns.’ (Anaplan crossed that threshold in a round announced earlier this week.)
That is unlikely to continue in 2016, at least according to a majority of tech investment bankers, many of whom have worked on private and public fundraising. In our survey last month, more than half of the tech investment bankers forecast that venture funding will get tighter in 2016 than it was last year. That stands as the most bearish outlook since the recession, coming in twice the level of bankers that said VC dollars will be less available in our previous survey.
If indeed venture firms start keeping their money in their own bank accounts – rather than investing it in entrepreneurs – that could well put startups under pressure, resulting in slower growth rates and lower valuations for those that survive tighter times as well as dramatic flameouts for those that don’t. Not to be too ominous, but recall how business contracted in 2008-2009 when debt – which, like equity, is oxygen for many companies – was no longer widely and easily available.
Of course, quite a few VCs recognized how the broad economic recession during the credit crisis could weigh on the tech industry. (Sequoia Capital posted its famous ‘RIP: Good Times’ slides in October 2008 as a cautionary forecast for its portfolio companies.) Similarly, a few VCs have recently sounded off that valuations have gotten ahead of themselves and that startups need to watch their spending more closely.
But for the most part, that message of fiscal responsibility has only started to get through to executives and their backers. Most money-burning startups continue to run their businesses as if there’s an inexhaustible supply of money. Triple headcount in a year? Sure, if a company can find enough warm bodies. Spend three times more on sales and marketing than the revenue that effort brings in? No reason not to as long as companies are valued on growth. But at some point this year, startups will almost certainly have to make different decisions than they’ve made up to now.
Projected change in availability of VC funding for startups
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Source: 451 Research Tech Investment Banker Survey
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