The once-fruitful relationship between startups and investors is unraveling.
Ah, the winter holidays. It’s a joyous time filled with family, friends, and the occasional crackling fireplace. For startup founders and other tech industry hangers-on, it’s also an opportunity to toast another year of hypergrowth at plush parties thrown by the venture capital firms that invest in them.
It’s usually a celebratory circuit. But this year things felt different. Founders who would normally be “crushing it” were instead “just grinding away.” Investors who would normally brag about a new deal traded intel on which startups hit their annual revenue targets and which ones badly missed. And gone were the debates over whether we’re in a tech bubble. (We are, according to 73% of founders who responded to a recent survey by First Round Capital.) Instead, the tech industry’s seasonal revelers debated whether or not to include mutual funds like Fidelity and T. Rowe Price in their startup’s next round of funding.
Why shut out the funds? Because that money is a gift that comes with strings attached. For example, late-stage investors have taken to demanding “ratchets” that prioritize their shares if things go sideways. When the November IPO of payment processor Square priced below the company’s most recent private valuation, its last investors (who arguably took the least amount of risk) boosted their returns by diluting the shares of earlier investors. Wall Street funds also tend to regularly recalculate and publish the value of their holdings, leading to sometimes uncomfortable disclosures that weigh on an ascendant startup’s narrative. When Fidelity marked down the value of some of its startup holdings in November, it set off a wave of negative headlines that raised doubts about highly valued companies like Snapchat and Zenefits.
Those moves have added tension to an already awkward relationship between Silicon Valley and Wall Street. Neither side would admit it, but each sees the other as the “dumb money.” For a long time, that view didn’t matter because the arrangement was equally beneficial. When mutual and hedge funds poured huge sums into startups at massive valuations, early-stage venture capitalists could claim another so-called unicorn—a startup worth $1 billion or more—in their portfolio. Founders could keep their companies private for longer, sidestepping public market scrutiny. And the funds gained early exposure to fast-growing companies.
But that relationship has soured. Investors tell me that the vast majority of the 131 startup unicorns missed their 2015 revenue targets, leaving their Wall Street backers seeing red. If a public company missed its expectations, management would have explaining to do. But startup CEOs? “They’re not even humble about it,” one investor grumbled at a holiday cocktail party. “It’s the bravado of someone who doesn’t take their guidance very seriously.”
Founders know the easy money is drying up—nearly all of them believe it will be harder to raise capital next year, First Round says. So all the anxiety about late-stage money felt at this year’s holiday parties may not matter. For the Valley and the Street, the breakup is mutual.
A version of this article appears in the January 1, 2016 issue of Fortune.