At the annual tech jamboree known as the Dublin Web Summit last week, budding entrepreneurs typically swapped tips on building the next Internet superstar and celebrated ever-rising valuations for start-ups. This year, at least some of the pints of Guinness being hoisted have an aftertaste of anxiety.
Disappointing earnings from tech giants including Google Inc. and Facebook Inc., a drought of successful initial public offerings, and warnings from prominent investors that startups are overvalued portend a risky period for the industry, venture capitalists say. They fret that too much money is chasing young businesses with uncertain prospects, raising the specter of a bust as valuations and growth projections fall back to earth.
“The talk of a bubble is becoming generalised, and that indicates the mood is about to shift,” said Fred Destin, a partner in London at Accel Partners, which has invested in Spotify, Dropbox and Facebook. “The industry is abuzz with talk of funding rounds happening too fast, rounds that are too large, valuations that are a little crazy.”
The past few weeks have been difficult by the standards of Silicon Valley and its overseas imitators. Twitter last week shuffled its management after reporting third-quarter user growth that disappointed investors - even as revenue more than doubled to about $361 million. Facebook saw its shares fall by 6 per cent on Oct. 29 when it projected rising costs for developing new products and fourth-quarter sales that fell short of analysts’ most aggressive predictions.
In Europe last month, shares in eCommerce group Rocket Internet ended their first day of trading down by 13 per cent, and still haven’t recovered to the price of the Oct. 2 offering.
Dot-Com Implosion
In response to volatile markets, tech companies such as cloud-storage provider Box Inc. and Good Technology Corp., which produces mobile-security software, have postponed IPO plans, according to people familiar with the situation.
“There’s definitely a degree of anxiety” among venture investors, said Anand Sanwal, chief executive officer of technology-industry information provider CB Insights. “VCs who’ve been at it a while remember the first dot-com implosion and know things can’t always go up.”
Fueling the concern is the fact that even companies with little or no revenue can raise fresh financing at eleven-digit valuations. Snapchat Inc., whose free app lets users send photos that disappear after a few seconds, recently inked a deal with Yahoo Inc. and others that valued it at $10 billion, people familiar with the transaction said. Snapchat first began showing users ads just last month.
Bad Hangover
A June deal with backers led by Fidelity Investments valued taxi-app Uber Technologies Ltd. at $17 billion. And Chinese smartphone manufacturer Xiaomi Corp. is in talks with investors that value the company as high as $50 billion, people familiar with the matter said last week.
U.S. venture capital investment this year has already surpassed the total for 2013. Through September, about $33 billion had gone into U.S. venture deals, compared with $30 billion in all of 2013, according to the National Venture Capital Association.
“Like any good party, it’s a lot of fun to be in the business right now,” said Todd Dagres, a partner at Boston- based Spark Capital. “But like any great party there’s the potential for a bad hangover.”
Wine App
Few technology-industry players are predicting a collapse on the scale of the 2000 dot-com bust, which helped trigger a recession. Sales at Twitter, Facebook, and other social media companies continue to grow - if more slowly than some investors would like - and companies from Apple Inc. to Groupon Inc. have reported recent earnings that beat analysts’ estimates.
“Investing in technology generally is still a good idea,” said Justin Kan, a partner at Y Combinator, a start-up incubator that has supported Internet and social-media companies including Airbnb and Dropbox. “More spending is shifting online.”
Thanks to mobile technology, the structures of digital businesses are also radically different this time around, Jim Bankoff, chief executive officer of web group Vox Media, said in Dublin. With millions of consumers glued to their smartphones and tablets, “there’s a ton more consumption, and that creates a whole lot more economic opportunity,” Bankoff said.
Entrepreneurs and investors are warning their companies to brace for tougher times. London-based Balderton Capital, which has backed online retailer Yoox SpA and wine app Vivino, is trying to ensure portfolio companies perform well enough to be “able to raise money in a more sensible capital markets environment than the current one,” said partner Daniel Waterhouse.
Pub Crawls
The organisers of this year’s Dublin event were nonetheless upbeat. As the 20,000 attendees gathered for the conference on Tuesday, one of the co-founders, Paddy Cosgrave, remotely rang the opening bell for the Nasdaq stock exchange alongside Irish Prime Minister Enda Kenny, saying he hoped attendees would include “dozens of companies with potential to go public.”
The three-day meeting featured hundreds of start-ups seeking investor and media attention, summits for subjects like marketing, food, and sports, and organised pub crawls across Dublin’s Georgian city centre.
A tech-industry veteran with top billing in Dublin, Business Insider founder Henry Blodget - a booster of the 1990s boom who was later barred from the securities industry - struck a more cautious tone. He warned entrepreneurs that the same investors happy for them to spend freely today could suddenly become much more conservative once the music stops.
“Tech has always been cyclical,” Blodget said. “We are coming probably toward the peak.”
Bloomberg, edited by ESM
