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Phil Haslett | Founder & Head of Investor Relations | EquityZen
Market Movement: A Summary
For the uninitiated, the public markets across the world have taken quite a tumble, and the US was no different. The S&P dropped nearly 9% from Thursday 8/20 through Monday 8/24:
The main drivers of the market pullback include:
- China: the Shanghai Stock Exhange and Hong Kong Stock Exchange are both down over 24% the past 3 months. A Chinese economic slowdown has a ripple effect across the global markets. Furthermore, the market movement will have a large impact on purchasing power of the Chinese, given that 80% of all stock is owned by retail investors in China (compared to a dominant institutional ownership here in the US).
- Oil: Increased supply from Iran, Saudi Arabia, but most significantly through shale reserves in North America, has suppressed oil to $39 a barrel, its lowest price since 2009. While this benefits the consumer (how does $2/gallon gas sound?), America's energy businesses, which make up 7.1% of the S&P 500 Index, have suffered.
- Interest Rates: nearly 50% of analysts expected a rate hike from the Fed next month, which would increase borrowing costs for companies and consumers alike. However, this seems less likely on the heels of China's accelerated downturn.
- Tech Earnings: tech companies, which make up nearly 20% of the S&P 500, have continued to miss analysts' expectations for earnings and revenue, and their stock prices have paid the price. This chart from WSJ helps drive home the movement.
Does this spell trouble for Private Tech?
The pullback in public tech multiples (ie: the price that investors are willing to pay for revenue and earnings) will likely permeate to the private tech market. But all is not lost. For one, many late-stage private tech companies have already raised large financing rounds, and have a war chest of capital should the markets continue to slide. To quote Slack's CEO, Stewart Butterfield:
"The market could turn, and the kinds of valuations you get from V.C. investors might not be as favorable in six months or a year. But on the other hand, we will have a couple hundred million dollars in the bank, and that’s a great position to be in." (link)
Another less-highlighted point is that premier venture capital firms have been raising new funds successfully over the past two years. Some examples:
- Andreessen Horowitz, $1.5 billion, 4th fund, March 2014
- Canaan Partners, $675 million, 10th fund, October 2014
- NEA, $2.5 billion, 15th fund, April 2015
- Institutional Venture Partners, $1.4 billion, 15th fund, April 2015
There are a number of others (lists available here and here) with capital to deploy, which bodes well for private tech companies searching for future financing in the next few years. New funds tend to deploy their capital in the first few years of the funds' closing. These VCs will still be eager to invest, but may command more investor-friendly terms (and valuations) this time around. It will be important for private secondary investors to monitor what preferences are afforded to VCs in these rounds when making their investment decisions.
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