Just about every venture capitalist I know is predicting that a correction is coming soon to the booming valuations for investments in emerging companies. But not everyone agrees if it will be a small fix or a catastrophic one.
Will this bull market be followed by a bear market as long-time tech investor Harry Edelson predicts? Or it will only be a slight blip before a continuous upward cycle begins anew in six to seven years, as forecast by a panel of optimistic VCs on a recent Silicon Dragon program in New York.
Leading VC Jim Robinson of RRE Ventures points out that valuations to invest in startups are higher than they've ever been, and there's more money flowing in than during the dotcom period. He says the market is entering a cycle of "natural cleansing" of 20% in "overdone" deal pricing before the next two years is up.
Bull markets come and go, and Robinson observes that this current up cycle has been outlasted by only two of the prior 18 bull markets over the past 100 years. "We're six years into a very, very strong bull market," he noted at the recent NYC event at NASDAQ where Edelson made his dour prediction from the audience. See video of venture panel.
For venture capitalists who have been chasing the "high fliers," investment returns could be hit badly. "Momentum investing works in the early and mid parts of a bull cycle but is dangerous later and is a game of musical chairs," he adds.
While investors are encouraged by the burst of technology innovation in many sectors of this connected era and see plenty of promising startups, they are becoming more cautious about which ones to back and at what price.
"VCs are becoming more price sensitive now and there's a crash coming in these high valuations we've been seeing," says Nihal Mehta, founding general partner of Eniac Ventures.
"If someone else wants to pay three to four times for a deal, then I will walk and will have no problem finding other companies to invest in," says Claudia Iannazzo, a partner at Pereg Ventures. She adds that she's looking to back companies of intrinsic value that can weather the storm and then be ready to go public in six of seven years from now.
Brian Cohen, chairman of the New York Angels, notes that he's seeing a slowdown of angel investing but an evolution of the earlier vanity style "stupid money" deal making to professionals who can work with entrepreneurs on scaling their businesses and profit. Still, he is concerned investments returns are being hit by a lack of exits from portfolio companies. "We are in the exit business and we want more exits, more liquidity events," he says, while adding that he doesn't "see the sky falling."
Going public has been in decline as businesses have been able to raise higher and higher amounts in what amounts to a private IPO market. Meanwhile, the development of a private market exchange at NASDAQ where deals between private buyers and sellers can be facilitated has become a new alternative to listing.
Should entrepreneurs raise as much cash as they can now at inflated valuations? Probably not. It's better to go for a reasonable valuation that can lead to a next round of investment at an upward level, says VC Mehta. He says entrepreneurs that raising huge financings risk not being able to "fill the shoes," of investor expectations and could face a so-called down round or worse, get stuck with no new funding. That is words to the wise in these perilous times.
