2017 promises to be a strong year for venture capital, surpassing the achievements and challenges of 2016. Although there is mixed opinion about whether 2016 was a great year or just a decent one, analysts agree that foundations laid last year will lead to an all-around more successful 2017.
Several key factors are expected to lead to strong venture capital investment this year. First, many venture capital firms have plenty of money to invest, and their money will go further because startup valuations have become “more reasonable” than they were in the past. In addition, mergers and acquisitions in the technology industry are robust while the industry’s IPO market continues to improve. Finally, there is less focus on funding unicorns at super high prices at the expense of smaller companies, which signals healthy venture capital availability throughout the tech sector.
These factors developed thanks to the rebuilding that occurred last year. Early-stage startups, in particular, experienced a decline in funding in 2016. However, 2016 saw a decline in investment across the board for the first time in four years. Moreover, a number of company valuations fell, some of them sharply, and a weak technology IPO market undermined prospects for startup exists until the very end of the year. However, venture firms had little problem raising new funds and overall funding for companies is considered good despite the decline in the number of deals made over prior years. Because venture firms were able to raise and stockpile money in 2016, they are now well-positioned to examine and invest in early-stage companies, whose prices are very reasonable thanks to declines in valuations that led into this year.
Venture firms’ stockpiles of cash are the biggest reason for optimism in 2017. Just in the first half of 2016, 134 firms closed funds totaling $22.5 billion. According to PitchBook, an M&A, Private Equity, and Venture Capital database, this is a “record-setting pace.” The decline in the number of new unicorns leaves even more money at venture firms’ disposal to invest in earlier-stage startups. Only nine companies became unicorns in the final quarter of 2015, down from 23 in the preceding two quarters, a downward trend that continued through 2016. Just 12 companies joined the unicorn list last year. However, because unicorns have a tendency to whittle funds away from smaller companies, this is good news for early-stage startups.
A record number of mergers and acquisitions in the tech industry also signals a healthy year ahead. Big data analytics and the Internet of Things is already driving such deals as Microsoft’s $26 billion acquisition of LinkedIn and Symantec’s $5 billion acquisition of Blur Coast Systems, a privately held company. But with company valuations priced as well as they are, 2017 is poised to set a new record in technology M&A deals as a growing number of major companies move to acquire smaller companies outside of their traditional business lines like Microsoft did with LinkedIn.
The surging stock market and renewed vitality of technology IPOs are yet more signs of a strong 2017. Tech IPOs declined in 2016 due to uncertainty about, and the volatility of, the stock market. Only 105 offers priced last year, down 38 percent from the year before. However, the stock market and the economy as a whole are now performing well, and the economy is expected to perform even better under a Republican-controlled Congress and Republican president. The president’s promise to develop major infrastructure, expected to be supported by Congress, is set to keep the economy growing, which will, in turn, bolster investment in private technology companies. Additionally, with companies like Snap and Spotify poised to start trading shares later this year, trading momentum is expected to pick up.
However, while 2017 looks bright for technology and venture capital as a whole, venture funds looking to invest in troubled startups are cautioned to avoid doing so. According to a warning by Bill Gurley of Benchmark Capital, pouring additional investments into companies with insurmountable problems can only hurt returns. Regardless of how much money is available for such companies, troubled startups may be temporarily propped up but will not be saved in the long run.
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