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Playtime is over, unicorns

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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.

A version of this post originally appeared in Data Sheet, Fortune’s daily tech-business newsletter. Click here to subscribe.

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