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Data Sheet—Tuesday, August 25, 2015

I’d say it’s time to start worrying, at least if your career is tied to tech, especially that corner of it dominated by high-valuation, high-growth, no-profit animals knowns as “unicorns.” These billion-dollar-plus-valuation toddlers have enjoyed a magical time these past few years. They’ve raised oodles of cash at higher and higher levels for two reasons: They have nifty businesses, and investors have had plenty of cash to invest in them.

Times might get tougher—and soon. Katie Benner, writing in The New York Times, has this cogent piece explaining why prices fetched by tech startups may fall. In short, she argues that companies that need capital most urgently will have the toughest go, especially if they can’t quickly make their businesses profitable.

Fortune’s Dan Primack raises a more obscure, and potentially far more potent, reason for fear. It’s called the “denominator effect,” which our former colleague Michael Copeland (now of venture-capital firm Andreessen Horowitz) wrote about in the dark days of 2008. The denominator effect dictates that as the public markets (the denominator) lose value, private-market investments (the numerator) become a higher percentage of the holdings for university endowments and pension funds that have been investing in them. Because these funds typically have rigid percentage ceilings for their alternative investments, if the numerator gets too big they must sell, choking off funds for venture-capital firms, who then have less to invest in startups of any size. This is exactly what happened in 2008.

Also zapped by a public-market drop would be mutual funds and hedge funds, which have been investing in private companies partly in the hopes of one day buying into their initial public offerings. If their public investments shrivel and there aren’t any IPOs because few companies go public in bear markets, well, that’s yet another reason capital could dry up for Silicon Valley’s darlings of today.

It’s enough to make a unicorn cry.

Adam Lashinsky

@adamlashinsky

adam_lashinsky@fortune.com

Your usual curator Heather Clancy is away on vacation. Fortune reporter Robert Hackett here, subbing in. You can reach me on Twitter (@rhhackett) or email robert.hackett@fortune.com. Feedback welcome.

TOP NEWS

What China’s market meltdown means for big tech. Intel, HP, Cisco, Microsoft, and Apple have all been pushing new investments and initiatives in China. But as the country’s economy slides, these companies may not see a payoff for a while. (Fortune)

How will the stock market tumble affect startups? If negativity continues to spread, a collapse in the private markets will be uneven and gradual rather than ubiquitous and sudden. Fortune’s Dan Primack says let’s wait till Labor Day to get more clarity. (New York Times, Fortune)

The Federal Trade Commission can punish companies for poor cybersecurity. Companies that tout privacy, reap profits, and then fail in their consumer-protective promises by getting hacked are about to have a rude awakening. A U.S. appellate court has decided that the FTC can sue companies for losing customer data in breaches. (Wired)

Sony unveils drone. The flying machine, which can carry up to 22 pounds of cargo, will be targeted at businesses rather than consumers. You can watch a video of the device vertically taking off here. (Wall Street Journal)

Two suicides possibly linked to Ashley Madison hack. On Monday morning Toronto police received unconfirmed reports of two people’s deaths that may be related to the infidelity site’s breach. (Reuters)

GM underestimated the number of deaths its faulty tech has caused. The real number is ten times as high as the carmaker’s initial estimate, according to a consultant who advised the company. (Fortune)

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THE DOWNLOAD

Fortune writer Erin Griffith profiles the tech industry’s China fixer.

“His name isn’t well-known in elite business circles, but in the tech hardware scene, Liam Casey is “the guy.” He’s the one you call for a factory connection, the guy you hire for your packaging design, and the one you ask about FedEx negotiations. All you have to do is find him. Casey, the 49-year-old founder and CEO of PCH International, splits his time between Shenzhen, China, and San Francisco; he lives out of hotels and carries three phones set to different time zones.” Read more on Fortune.com.

BITS AND BYTES

Internet re-routing. To avoid certain countries. (IEEE Spectrum)

Russian Wikipedia blacklisted. Goodbye, drug tutorials. (TechCrunch)

Lunar burials. Rest In Space. (Fortune)

How big is a Star Wars Super Star Destroyer? Manhattan-sized. (Laughing Squid)

Dual firework cannons. Why, how do you celebrate Fourth of July? (Sploid)

ALSO ON FORTUNE

These were the Dow’s 10 worst single-day losses by Tom Huddleston, Jr.

The real reason Caitlyn Jenner’s show is losing its audience by Tim Maleeny

Oil expert Daniel Yergin: ‘hard times’ ahead for producers by Brian O’Keefe

ONE MORE THING

Cotsco occupies its own ecological niche. Are its warehouse inventories less rewarding to investigate than a forest of birds? (Nautilus)

FINAL THOUGHT…

“Obviously I can’t predict the future, but our performance so far this quarter is reassuring.”

Apple CEO Tim Cook, writing a bolstering email to CNBC TV show host Jim Cramer about the Cupertino, Calif.-based company’s outlook. The note, prompted by investors’ apprehensions and Monday’s stock market plunge, may have violated the Securities and Exchange Commission’s Regulation FD rule, which prohibits public companies from selectively disclosing “material nonpublic information” to certain people or groups. Cramer, as a co-manager of the portfolio Action Alerts PLUS, may have been able to use the information to his trading advantage, so the argument goes. (Fortune)