If there was any doubt that the tech industry is in a bubble, it's all gone now. In the past couple of months, valuations for the biggest private tech companies have in many cases peaked and started to come down, with "unicorns" like Snapchat and Zenefits getting written down by investors. Venture capital funding of startups fell sharply in the fourth quarter of 2015, according to the research firm CB Insights, and many top VC firms say they started pulling back as early as . . . well, the summer of 2015. Yet the bloating effects of bubblemania are still very much in evidence, from sky-high commercial rents in startup hotbeds like San Francisco and Austin to a drum-tight talent market for engineers and designers.
You might think all that makes 2016 an inauspicious year to launch a startup. In fact, it will be at least as good a time to do so as the past year -- and in some ways perhaps a good deal better.
"Great companies are like great captains," says Jason Calacanis, the angel investor, founder of Inside.com, and host of "This Week in Startups." "They make take advantage of smooth sailing times like now, but are not afraid of rough seas that eventually show up."
That's because rough seas are what separate the real sailors from the dilettantes. The steady upward climb of valuations and the easy availability of start-up capital has attracted pestilential swarms of the latter to Silicon Valley over the past half-decade. That raises the level of competition not only for real estate and human capital but also for the attention of potential investors, customers, and the media. Entrepreneurs more skilled at building businesses than gaming the hype cycle may well benefit from a reduction in the general noise level, says Mike Abbott, general partner at Kleiner Perkins Caufield & Byers.
"We'll stop seeing particular folks starting a company for the sake of starting a company, because they see it as this romantic endeavor," Abbott predicts. "People who moved to Silicon Valley for this startup rush may start moving back to wherever they came from, or moving to larger companies that are safer bets."
"If you talk to venture capitalists, they'll all tell you the best time to start a company is in a downturn," says Jeff Grabow, EY Americas venture capital leader. Abbott says that was his experience when he raised a Series A for his first company, Composite Software, in August 2002. "You're forced to have discipline on many things earlier on, which is a good thing," he says.
While the funding climate warms and cools, all signs point to the pullback in the fourth quarter lingering into 2016, and making its way from late-stage companies raising very large rounds to earlier-stage ventures, says Anand Sanwal of CB Insights. "Folks are more likely to invest at the early stage if they feel like there's a healthy supply of follow-on funding," he says. "It's definitely going to be more challenging than 2015."
But it would be a mistake to think these wax-and-wane cycles have much to do with the prospects for long-term success, says Scott Kupor, managing partner at Andreessen Horowitz. "For launching a company, the year itself is largely irrelevant," he says. "There is ample seed funding, which is a good precondition to being able to start a company. But, most important, we are at the early stages of deployment of the mobile/cloud ecosystems, which means the ultimate market opportunity for great ideas continues to expand."
Grabow seconds that. In particular, he says, the shift to mobile-first ways of doing business "has a huge tail," he says. "If an entrepreneur sees what he believes is a viable market opportunity, there's a risk to not launching now."
Or, as Abbott puts it, "At some level, if you're building a great product, it's always a great time to launch a company."