Technology stock slump fuels concern startup values may follow

SAN FRANCISCO - The decline in publicly traded technology stocks is fueling concern that Silicon Valley startups will follow with plummeting valuations.

In the past month, Amazon.com, Facebook, TripAdvisor and Netflix have plunged at least 13 percent each. The trading days of April 10 and 11 marked the Nasdaq Composite Index's biggest two-day drop since 2011 and the index is off more than 7 percent since early March.

If the stock declines continue, young entrepreneurs may have to accept more realistic valuations for their companies, said George Zachary, a partner at Charles River Ventures in Menlo Park, Calif.

The slump is "restoring some rationalization to the market," Zachary said. "It's rebuilding the wall of worry a little bit."

Any pause in startup valuations would signal a sentiment shift after recent weeks of increasingly lavish funding rounds. Eight venture-backed technology companies in the U.S. raised rounds of at least $100 million in the past 30 days. Airbnb is among a small group of startups being assigned 11-digit valuations as hedge funds, private equity firms, corporate investors and mutual funds pour money in.

Still, it's too early to see an immediate effect. Movements in the private markets trail public stocks, sometimes by months.

"As you saw the public-market valuations go up, it pulled the private market valuations with them," said Byron Deeter, a partner at Bessemer Venture Partners in Menlo Park. "If public markets continue to pull back, I absolutely expect that private markets will adjust quickly."

For now, there is a public-private divide as piles of cash continue flooding into Silicon Valley startups at ever-rising valuations while public technology company stocks drop. Russell Horowitz has watched shares of his mobile-advertising company Marchex Inc. plummet 17 percent in the past month, even as startups vacuum up cash.

"Two different sets of rules are being applied," Horowitz, chief executive officer of Seattle-based Marchex, said in an interview. "There is absolutely a double standard."

Those different rules may fade if the current sell-off of public stocks ends up dampening the enthusiasm of the startup market. Any spillover may be hastened should financial results from technology companies disappoint, while strong numbers could reverse the stock slide.

Intel and Yahoo kicked off earnings season Tuesday with profit that topped analysts' estimates.

To venture capitalists who have been sounding the bubble alarm, the current sell-off is long overdue and should seep its way into the startup ecosystem. Internet startups raised more money in 2013 than in any year since 2001, according to the National Venture Capital Association.

More realistic startup valuations would benefit venture capitalists and other investors, who could buy into companies more cheaply.

"I'd rather have this than escape into total crazy bubble territory," Zachary said.

Twitter employees are paying close attention. The microblogging site's post-IPO lockup period ends next month, meaning insiders can start selling their shares. The stock is 39 percent below its high of $74.73 reached in December. Co- founders Jack Dorsey and Evan Williams and CEO Dick Costolo as well as some top investors said earlier this week that they're not planning to sell when the lockup expires.

Twitter is scheduled to report quarterly results on April 29. Rival Facebook is set to announce earnings next week along with Apple Inc. and Amazon.com.

Facebook's results have added importance for investors and employees at WhatsApp Inc. The texting application agreed to be bought by Facebook in February for $19 billion, mostly in stock. Now, the 229.8 million shares and restricted stock units Facebook is doling out are worth 13 percent less.

Private equity firms and mutual fund companies, meanwhile, are plowing into startups at a record pace, speeding up a trend that started in 2009.

Dropbox, the online storage service, filed to raise as much as $450 million this year, while Airbnb is reeling inasmuch as $500 million. In the span of a week last month, several companies raised at least $100 million, including database- software maker Hortonworks, data-management and storage startup Actifio, and video-messaging service TangoMe.

"It's the massive flow of funds into late-stage private investments that have really boosted the private company valuations," said Lise Buyer, the founder of Class V Group, which advises startups on initial public offerings.

Easy access to capital has gained such notoriety that it's causing protests in San Francisco for driving up home prices and is a central theme in the new HBO comedy "Silicon Valley," which debuted on April 6.

"Money flying all over Silicon Valley but none of it ever seems to hit us," said one of the young techies in a scene at a house party featuring Kid Rock.

Parody aside, not all investors are worried about a collapse. Dan Scheinman, a backer of companies including TangoMe, would use a dip as a potential buying opportunity.

"I would do a deal tomorrow if it was there," said Scheinman, who previously led mergers and acquisitions at Cisco Systems. "I believe we aren't done yet and that some of these lulls present value."