This past week there has been fear circulating among founders and private investors who hold stock in certain early stage startups that have achieved sky-high valuations.
Why the fear?
The startups in question are privately held, meaning that the founders and early stage investors own shares in the companies, but shares have not yet been offered for sale to members of the public.
Many of these startups have achieved record valuations, based largely on a hope among investors that they will be able to sell shares in these companies to members of the public at even more inflated prices when the companies are eventually sold via IPO.
Early stage investors are willing to bet big because they are desperately searching for the next big win, the next Facebook, Airbnb or Whatsapp. And they have been comforted by the fact that, if their optimistic expectations don’t come to pass, they should still be able to break even or turn a small profit by passing the buck onto a hapless public.
This form of aggressive investing has produced a record number of unicorns (that is, startups with a valuation of more than $1 billion). Unfortunately for all the Venture Capitalist cowboys, though, prices for tech companies in the public markets have been falling, and this has started to make unicorns that are yet to float on the stock market look over valued. Business Insider reports that “[o]ver the past year, LinkedIn shares have fallen by about 52%.”
Falling prices in the public markets means that a fear of missing out on the next big thing appears to have morphed into a fear of losing money. Early stage investors will need to reset their expectations, ignore the startup hype and return to investing basics by looking for companies with a proven business model.