Surviving a Coming Storm: Explaining the Unique Factors Driving a Tech Market Correction, and How Technology Founders and Investors Can Persevere Through It

A close examination of both quantitative and qualitative data suggests that the tech market is reaching its peak, and that a correction is imminent.

We need to apply different analyses that take into account the amount of capital that has been invested in the venture capital industry; the size of companies at IPO and their impact on public markets; the quality of their underlying business models; and the new corporate governance reality that has emerged.

1. Weak Business Model Quality of Several Newly-Public Companies, Combined with their Large Size, May Trigger a Public Market Correction

The most relevant metric for comparison between the periods is one that reflects business model quality: profitability. On that basis, the two periods have striking similarities.

While unicorns are not as dramatically overvalued on a multiples basis compared to 2000, they are much larger in size. This increased size means that it doesn’t require nearly as many to decline in value or go out of business to impact the market.

2. Dramatic Growth in the Amount of Venture Capital Raised by Funds and Deployed in Private Companies May Erode Overall Industry Returns, Despite the Power Law Distribution

When the amount of capital returned is substantially less than the amount invested, the market corrects via an exodus of capital out of an asset class.

Even if VCs owned 100% of all exited companies, the class still wouldn’t reach a 3x overall multiple when comparing the amount of venture capital raised in 2018 to cumulative exit values in 2019, a peak year. Future years would have to generate a much greater level of exit value.

3. Relaxed Financial Controls and Corporate Governance Have Made it More Difficult to Curb Excesses

4. How These Factors May Result in a Technology Market Correction

The first reason is that the public markets are a much stronger corrective mechanism than the private markets, and companies are only now reaching the public markets due to the huge amount of capital that has been available in the private markets.

5. Important Implications for Technology Investors and Founders



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