A stormy horizon for startups

by Matthew Reynolds

We have two studies in the works on pre-IPO valuations and prospects for cashing out, so we were interested in First Round Capital’s “State of Startups 2015” survey, which shows the pre-IPO landscape may be shifting.

The survey of 500 startup founders shows the majority predict that finding investors will become more difficult in the immediate future. Nearly 75% believe we’re in a bubble, and that the bubble may be close to popping. The nearly unanimous opinion is striking: 95% of respondents agree getting funded will either become tougher or stay at the current degree of difficulty in the next year.

But threat isn’t changing anyone’s behavior yet. Although the balance of power is expected to shift from the hands of startups companies to those of the venture firms shelling out the money – which is a widely accepted expectation - startups are still passing the hat around to an alarming number of investors. Over forty percent of the survey admitted to shopping with more than 10 venture firms, proving that even in the face of potential disaster, the preferred course of action is...to change nothing.

The current model of backing tech startups before IPO and becoming billion dollar companies before their first public dollar doesn’t seem sustainable. There are far too many variables in play to fully grasp how successful a company will be until the public has their say; none of these variables are more concerning than the fact that many of these companies don’t actually make any profit – something investors would undoubtedly like to see change before going public. Our continued TL research into the pre-IPO world will create some clarity on the issue.

Until then, this trend is something to keep an eye on. It might be too early to believe that a collapse of the startup economy is eminent, but I believe it’s better to be prepared for bad weather than left soaked and stranded in the storm.

Matthew Reynolds is an Editorial Assistant at Oxford Economics, where he aids research programs in a variety of industries.