Silicon Valley startups fueled growth of the technology industry, and it would be unfair to say that day is over. However, a Wall Street Journal report has touched off a debate about the latest spate of startups, many of which are reportedly running out of money.
The Journal reported yesterday that startups are having a hard time securing follow-up funding. Although most of these companies are centered in and around Silicon Valley, it's important to note most of these are specifically Web-based startups. The problem, says one venture investor, is too many startups seeking a limited amount of capital.
Even though this news adds to the general malaise around the economy, it could help avert a disaster like we saw in 2000/2001, when the last over-hyped tech bubble burst and the closure of dotcom companies rebounded on the hardware supply chain.
What is fueling startup fever, the Journal and venture blogs report, is the valuation of companies such as Facebook, Google, and LinkedIn. At the same time, Web-based companies such as Groupon have delayed their IPOs because they haven't raised as much interest as expected. Web-based music business Pandora went public, but with a lot less fanfare than expected.
So venture capitalists are holding back — a trend that is confirmed by the latest data from the National Venture Capital Association. Quarter-to-quarter IPO activity fell by 77 percent in the third quarter of 2011, reports the NVCA and Thomson Reuters, with only five companies going public.
Here's the good news: four out of those five deals were in the US, and four out of five were in the IT sector. Two were Internet-specific; one was in computer hardware and one in computer software and services.
One of the reasons VCs are pulling back, according to the Journal and the NVCA, is a lack of “quality” IPOs. In VC parlance, a quality IPO is one that makes big bucks for its investors. In electronics supply chain parlance, a quality IPO is one that has staying power, results in job growth, and may spur hardware sales. The Internet continues to be a driving force in tech, and increased demand for digital music, streaming video, and other types of content sells lots of smartphones, tablets, PCs, and big-screen TVs.
Another dotcom bubble would be a disaster for the supply chain, but it looks like investors are checking themselves before it gets out of hand. The blog TechCrunch puts it best: the market's going through “a form of tech start-up Darwinism, weeding out bad deals for companies deemed worthy.”