Tourists
Tourists taking pictures Blend Images/Sollina Images—Getty Images/Brand X

The day the tech bubble almost burst

Jun 30, 2014

When Facebook (fb) raised venture capital at a $500 million valuation in 2006, it was front-page business news (plus lots of follow-up). Eight years later, such deals seem to happen multiple times per week. If you want your company's financing to get serious attention, it had better be valued at $1 billion. If not substantially higher.

There are several reasons for why the bar has been raised, including a bull market in public equities, more general acceptance of "tech." Most important, however, has been the head-first entry of hedge funds and mutual funds into a style of investing that used to be the primary purview of venture capitalists. Names like T. Rowe Price, Fidelity Investments, Coatue, Tiger Global and Wellington Management.

All of it represents billions of new dollars flooding into the private market's later stages, allowing popular startups to remain private longer without suffering from cash constraints. It also allows popular startups to delay monetization strategies, as many of them are being rewarded more from growth than profit potential.

Earlier this year, however, many of these venture "tourists" fled the market. Not because the deal opportunities had changed, but because the public equity rocket-ship had stalled and was falling back to earth. For example, the NASDAQ lost 5.6% of its value between April 3 and April 11. Popular enterprise software plays like Workday and Splunk each fell more than 30% between the middle of February and the end of April.

Scott Kupor, chief operating officer at Andreessen Horowitz, talked last Friday at the Premoney Conference about how a lot of later-stage financings got put on hold during that period, because hedge hedge funds and mutual funds instinctively pulled back. A later-stage venture capitalist -- who really had become a mid-stage venture capitalist over the past few years -- told me that he could no longer get phone calls returned from many of the investors who had been beating down his door weeks earlier.

In the end, of course, the public markets recovered and big-ticket deals resumed -- most notably Uber raising more than $1 billion at a $17 billion pre-money valuation, led by Fidelity.

But this blip should be a reminder to the entire private market that the current funding environment is a moment in time, not a fundamental shift. Tourism ebbs and flows, but they always leave in the end. Next time they may stay away.

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