When startups raise funds by selling shares at lower prices than in earlier rounds, it could either be because the business is not doing well or venture capitalists are becoming less optimistic.
These so-called “down rounds” have happened quite often in recent quarters.
There are other warning signs, too. More startups are cutting back on their payrolls or closing money-losing projects.
Some are reportedly looking to sublease unused office space to save costs.
Shrinking valuation is a tough reality for many startups.
Founders prefer a situation where everybody wants to invest in their companies, not going hat in hand and trying to pitch their businesses to potential investors.
Such changes, along with the still lofty valuation of some startups, point to a serious bubble in Silicon Valley, some analysts said.
There are 193 unicorns, or startups worth at least US$1 billion, with a total market value of US$721 billion, according to Techcrunch.
But some are less worried, noting a lot of startups are not listed. Even if their valuations decline sharply, they won’t have a huge impact on the market.
Numerous unicorns like Uber and Airbnb have clear business models, and that will limit their downside, the analysts said.
Also, in 2000, the average price earnings ratio of Nasdaq-listed firms was as high as 170 times; it’s now around 24 times.
Some US$4 trillion in market value is said to have been wiped out between March and December 2000, but any setback this time around is expected to be of a smaller scale.
– Contact us at [email protected]