Even companies that have not yet gone public are suffering from the prospect of a full-blown stock market crash.
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In particular, the so-called "unicorns" - startups with valuations of $1 billion or more - face a major shake-up. Potential ramifications include less available venture capital, reduced valuations, and delayed initial public offerings (IPOs).
Most of these unicorns are tech companies that Money Morning Chief Investment Strategist Keith Fitz-Gerald says are particularly at risk because they've become so overvalued.
"According to The Economist, the top 10 highest-valued private equity companies are valued at $156 billion despite having revenue of only $4 billion," Fitz-Gerald said.
That makes them especially vulnerable to a stock market crash.
With the tech-heavy Nasdaq index down nearly 14% from its July highs, some venture capitalists already have begun to sound the alarm.
A Stock Market Crash in Tech Has Changed the Game
"When many venture investors are seeing their personal public portfolios tank, it creeps into their business lives and creates an emotion that is less risk tolerant, whether they're aware of it or not," Mark Suster, a partner at Upfront Ventures, wrote in a blog post.
Bill Gurley, a general partner at Silicon Valley venture capital firm Benchmark, described a more direct impact from a stock market crash in his tweetstorm on the topic on Aug. 20. Benchmark has invested in such tech startups as Zillow Group Inc. (Nasdaq: Z) and Uber, currently the biggest unicorn of them all.
"Tech stocks have been getting crushed the past six weeks. Many names are down 25%-50% from their highs," Gurley tweeted. With stock declines driving valuations lower, he predicted "an adverse impact on late-stage private market liquidity and valuation."
Gurley envisioned "the end of a cycle where growth is valued more than profitability." In other words, unicorns spending capital recklessly on growth instead of focusing on becoming profitable could be in for a rude awakening.
The frothy valuations of so many tech startups is reminiscent of the dot-com bubble days. The difference then is that a lot of those companies did have IPOs - and shortly afterward crashed and burned.
To see why venture capitalists are turning cautious, look at what's happened to the tech startups that had their IPOs earlier this year...
Box Inc. (NYSE: BOX) is down 44%. Etsy Inc. (Nasdaq: ETSY) is down 57%. Of all the tech companies that have had an IPO in 2015, 62% were trading below their IPO price as of Tuesday.
"Over the last week, I've seen a lot of deals go into hibernation," entrepreneur Jason Calacanis said on the CNBC program "Squawk Box" yesterday.
Calacanis added that startups with high burn rates of cash that fail to adjust to a world where venture capitalists prefer profitability over growth will find themselves in trouble.
One in Four Startups Could Die
"What you're going to see is a shake-out," Calacanis said. "It would not be surprising to me if we're sitting here a year from now and 25% of the startups are gone."
All this means that investors will probably need to wait longer for the IPOs of unicorns like Uber, SpaceX, and Airbnb.
Even then, Money Morning's Fitz-Gerald says investors shouldn't get caught up in the inevitable hype.
"I recognize that it's hip to glom onto the latest IPOs, but doing so is exceptionally dangerous for your money," Fitz-Gerald said. "Investors would do well to stay away from the next best thing on Wall Street and, instead, concentrate on far more stable choices where less risk actually equals more reward."
Follow me on Twitter @DavidGZeiler.
How to Cope with Market Volatility: Wild market swings like those we've seen over the past week make most investors nervous - and rightfully so. But if you have the right strategy in place, a volatile market doesn't have to be so worrisome. The top Money Morning editors have developed several ways for investors to protect themselves from these rocky markets - and you can find them all right here...
Related Articles:
- CNBC: How the Stock Rout Could Make VC More Cautious
- CNBC: What Stock Market Volatility Means for Tech IPOs
- Twitter: Bill Gurley's Tweets on Unicorns
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.