All the good deals are taken.
💥A Boom with a View💥 is a column about startups and the technology industry, written by Erin Griffith. Find them all here: fortune.com/boom.
The age of unicorns, while glorious, is over. So far this year, fewer startups have hit the prized billion-dollar valuation than did any in a single quarter last year. Profitability and sustainable growth have come into vogue, and it almost feels gauche for startups to aspire to unicorn status. Rather, executives brag about “clean terms”—meaning favorable liquidation preferences on their term sheets—and reasonable valuations.
But we’re not in the Age of Workhorses yet. Bill Gurley, the prominent venture capitalist at Benchmark, is still issuing sky-is-falling bubble warnings. He’s not a lone Chicken Little. Fellow investors echo his sentiments behind the scenes.
The difference now is that Gurley and his peers are done warning about out-of-control spending at overcapitalized startups. The savviest startups spent 2016 cutting their burn rates, scaling back overly ambitious growth plans, and bragging about being on track for “profitability in 2018.” The not-so-savvy ones, well, they’re dead or coasting on fumes.
Instead, VCs are fretting over increased competition. Low interest rates and public market jitters have lured too many new sources of capital to the closed-off world of startup investing. For the past few years hedge funds and mutual funds have flooded the market with showy $100 million checks. But those unsophisticated investors, known behind closed doors as the “dumb money,” retreated this year. They felt burned by bad early-stage bets or tired of waiting for the “pre-IPO” companies they backed (ahem, Uber) to get on with the IPO already. We’re not likely to see a giant hedge fund do another early-stage deal, such as Tiger Global Management’s $15 million Series B investment in Kitchensurfing in 2014. The on-demand chef service collapsed this spring.
The mutual fund retreat hasn’t stopped new sources of venture money from emerging. Sovereign wealth funds, multi-corporate venture funds, ambitious pension funds, and Fortune 500 companies with billions in cash on their balance sheets are now dabbling in startup investing. SoftBank and Saudi Arabia’s sovereign wealth fund recently announced a $100 billion tech fund, for example. Traditional VCs are raising increasingly bigger pools of capital to keep up.
For more on SoftBank, watch this Fortune video:
But the new dumb money isn’t quite as dumb as the VCs would like us to think, nor is it as fickle as its mutual fund predecessors. With fewer new unicorns and a focus on profitability, it has become easier to tell which companies have a working business model and which ones are doomed for the dead pool. That means the competition to invest in Silicon Valley’s small handful of winners is even stiffer.
Investment bankers say their phones are ringing more than ever with new money looking to back startups. Demand is soaring as unicorns become as rare as they were before this so-called bubble. Until the sluggish IPO market makes a comeback, stiff competition will be the norm. No guts, no glory.
A version of this article appears in the December 1, 2016 issue of Fortune with the headline “Age of Dissonance.”