Does the recent public market turmoil spell doom for private companies?
While the plunging stock market could help cool the hot environment for startup investment, a precipitous drop in private investment activity is unlikely, The New York Times reports. Why?
Unlike the daily fluctuation of public stock prices, the value of shares in startups typically goes up and down only when private companies raise new funding. So it may be a while before startup founders see the impact of the stock market volatility on their company valuations.
Founders who go out to raise fresh capital in the near future could encounter higher levels of discipline from investors, however, which might create problems for companies that need cash just to keep their businesses afloat. Investors who previously were willing to back startups demonstrating healthy growth may switch their focus to a company's ability to demonstrate profitability, the Times reports.
On the bright side, there is plenty of capital to go around, so startups that are already profitable or approaching profitability should be able to continue attracting funding from investors. Total venture capital investment during the second quarter of 2015 reached more than $17 billion for the first time since 2000, according to data from the National Venture Capital Association cited by the Times.
The decline in the public market poses more of an immediate threat to the late-stage funding market that has increasingly attracted capital from mutual funds and other public market investors. As these investors watch the value of some of their private shares decline each quarter, negative sentiment could spread quickly to other private companies in the same industries.
"If you see down rounds and mutual funds report losses on private companies, then things will spiral down very fast," Venky Ganesan, a managing director at Menlo Ventures, tells the Times.