Tech Start-Ups After Brexit: Valuations will be Tested

Christopher Mims reported in today’s Wall Street Journal that, “The world economy is again being tested by an unexpected shock following Britain’s vote to exit the European Union. The pound sterling and stock markets globally have been hammered. What does it mean for technology startups and venture capital, which can sometimes appear virtually immune from macroeconomic forces?

“On one level, it is simple: the Brexit vote means companies large and small are in for a period of uncertainty. And such times are bad for the kinds of speculative investments that are the lifeblood of startups.

“In some respects, the tech industry has been preparing itself for an event like this for a while. Scarred by the big crash of 2000, many who were in the industry then have a muscle memory for what can follow. Venture investors like Benchmark’s Bill Gurley have been sounding the alarm for some time on outsize valuations, clearly trying to tap the brakes on an overly exuberant funding environment.”

The Journal article noted that, “Fewer new companies will be funded, and others will be unable to grow from seed stage to profitable enterprise. The herd of highly valued startups, the so-called unicorns, would be thinned.

“Still, nothing will happen overnight. Venture firms raised record amounts of capital in the first quarter of this year, and will need to deploy it one way or another.

“Moreover, tech isn’t nearly as exuberant now as at the peak of startup-investment mania a year ago. Even before Brexit, the funding environment had cooled.”

Mr. Mims also pointed out that, “A global economic slowdown, and declining equity values, could prompt more M&A activity. Tech has already been the busiest sector for mergers this year, and potential acquirers are sitting on record piles of cash. Witness Microsoft Corp.’s recent acquisition of LinkedIn Corp., at $26.2 billion its largest ever and yet still just a fraction of its more than $100 billion cash hoard.

“Such consolidation could help in another way. Arguably, tech’s most precious resource is the constrained talent pool, which has been fragmented across startups with deep pockets as they compete with each other for employees.”

Today’s article added that, “Lean times can inspire discipline in startups. Famously, Facebook was started in 2004, during the dark years after the tech bubble of the late 1990s burst.”

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