Investment into start-up tech firms slows down

this time is an ongoing debate and the subject of many research activities.

Comparing the history of hydrological changes in the region with artefacts from the Middle Stone Age showed a striking correspondence. Climate-driven pulses in southern Africa were probably fundamental to the origin of key elements of modern human behaviour in Africa. But also to the subsequent dispersal of Homo sapiens.

Human development

One of the reasons for this is that humans need water, plants need water and so, too, do the animals that humans hunt and eat. These conditions are favourable for population growth. As human population density increases, people are able to network more readily, share ideas and invent technologies.

Looking ahead, many of the projected changes in climate are within the range of historical natural variability. But there are also significant changes that exceed the range of natural climate variability.

The main difference between the climate change happening now and that of the geological record is the timing in which these changes occur: climate changes today are occurring at an unprecedented rate.

SILICON Valley’s moment of sanity is likely to be short-lived. Two contradictory trends are swirling in the world of tech start-ups. First, what had been a torrent of money rushing into young tech companies has become a babbling brook in the past six months. This has been a healthy development that has forced Silicon Valley to migrate slowly back to the altar of profits.

The second trend, though, is incompatible with the first. Venture capital firms – that is, the financiers who write those cheques to start-ups – are collecting more money than they have in years.

We know how basic economics work: When there is an increase in demand (money that needs to be invested in startups) and a finite supply (start-ups that seem worthy of investments), a bubble inflates. And the phenomenon does not show signs of going away. That means Silicon Valley’s moment of sombre reflection and realisation – hey, companies cannot burn cash forever – is not likely to last.

First, a bit more about trend number one. The amount of money venture capital firms are investing in young companies has declined for two consecutive quarters, according to data from CB Insights and KPMG International. That is the first time since 2012 that there has been a six-month stretch of falling dollars flowing from venture capital firms.

Dotcom bubble

On the other hand, those same venture capital firms are pulling in money at levels reminiscent of the dotcom bubble. In the first three months this year, US venture capital firms collected nearly $12 billion (R175.3bn) from pension funds, university endowments and others hoping for a shot at outsized returns. All over Sand Hill Road fundraising dinners are heating up.

It was the biggest quarterly figure since 2006 for the Silicon Valley financiers, according to data from Thomson Reuters and the National Venture Capital Association. Annualised at the rate of the first quarter, US venture capital firms could pull in more money this year than in any year since 2000. When the words “Silicon Valley” and “the most since 2000” appear in the same paragraph, everyone should worry. Venture capitalists must eventually spend their money writing checks to startups. That is what VC firms do. The spigot, then, will open up again for tech start-ups, and it could get ugly.

David Hornik – yes, a venture capitalist with August Capital – recently did some back-of-the-envelope math that is pretty scary. If that pace of fresh funds for venture capital firms is annualised for the year, and if you assume venture firms on average own 10 percent of each company in which they invest this year, those startups will need to be worth a collective $680bn for investors just to break even.

Gone public

That is an incredibly high bar. Consider that 65 technology firms have gone public in the US since 2014, and they have a collective current stock market value of $333bn, according to an analysis of Bloomberg data. And it is not like the IPO (initial public offering) market has been wide open to venture firms that want to cash in their tech investments. No tech companies have gone public so far this year. Let us repeat: Zero.

To be fair, the money being raised on Sand Hill Road will not be spent tomorrow. Typically, venture funds are open for 10 years. A lot is going to happen in a decade, and start-up investors say they are being patient rather than overfunding bad tech ideas. It will be hard to hold back, however, if the investment dollars keep piling up.

That is too bad, because the respite from start-up money mania has been good for Silicon Valley and for investors everywhere. Young companies are no longer maximising growth at all costs – behaviour that has sometimes disastrous outcomes. Even Uber, a symbol for setting money on fire in the quest for more and more revenue, is starting to change its ways.

Let us hope this change in behaviour holds even if the money picks up again.

This column does not necessarily reflect the opinion of Bloomberg and its owners.

Hornik used different data than I did for venture capital (VC) fund-raising. Hornik’s source, Pitch book, figures $17bn was collected by global VC firms in the first three months this year. The analysis excluded some very small IPOs. – Bloomberg