The Washington PostDemocracy Dies in Darkness

How the stock sell-off could kill off some tech unicorns

One of the most anticipated start-ups is Uber, valued around $51 billion. (Andrew Harrer/Bloomberg News)

Apple chief Tim Cook sure sounded like he was spooked Monday.

After a steep plunge in China's stock market and as Apple's stock prepared to nosedive ahead of the open of U.S. markets, he took the unusual step of sending an e-mail to CNBC's "Mad Money" host Jim Cramer saying that Apple was going to be okay.

"I can tell you that we have continued to experience strong growth for our business in China through July and August," Cook wrote, noting he gets daily updates on Apple's business in China.

That Cook, head of the world's largest company by market capitalization, would take the time to pen such a missive seemed to perfectly capture the depth of panicky concern hitting the markets Monday, especially in a tech sector struggling to weather China's economic storm. At the same time, the jittery markets stoked fears that a host of tech start-ups preparing to go public would delay their plans.

Cook's brief letter, which was shared on Twitter by Cramer's CNBC colleague Carl Quintanilla and then read on-air, appeared to calm market jitters, even as it raised eyebrows. As Cook's note was being shared widely, Apple's stock -- which initially plummeted as much as 13 percent -- made up most of those losses and ended down 2.6 percent. The reversal helped lift the rest of U.S. markets, as well.

The Dow fell more than 1,000 points just minutes out of the gate Monday for a 7 percent drop, breaking below the 16,000 level for the first time in 20 months. (Video: Reuters)

The wild gyrations of Apple and U.S. markets highlighted a deepening concern that the tech sector may be saying goodbye to a years-long boom. More than in other industries, the sky-high stocks of Apple, Facebook and Google are built on the assumption of future growth and the ability to exponentially expand sales of gadgets and acquisition of new subscribers outside the United States.

For a while, the potential for growth looked spectacular, driving share prices up. But any hint that global sales of smartphones or other services may fall short makes those stocks fall even harder.

Shares of leading tech companies were among the hardest hit early Monday, with Facebook down as much as 13 percent and Google down 4 percent at one point. The tech-heavy Nasdaq composite index was down as much as 5.1 percent before closing down 3.82 percent to a 10-month low of 4526.25.

"The tech industry is a barometer of economic progress and innovation. Therefore its success is an indicator of general economic progress, which eventually translates into growth," said Cristian Tiu, a professor of business at the University of Buffalo School of Management.

But what's really terrifying executives and investors in the technology sector is the chilling effect a global markets slide could have on the many richly funded start-ups that aren't even trading yet on exchanges.

With so much uncertainty and market volatility, Silicon Valley firms could postpone initial public offerings, cooling a white-hot market for venture funding that has fueled the most lucrative environment for start-ups in history.

Already, executives at RainDance Technologies, a firm that makes genomic tools to detect cancer and other diseases, announced Monday they have pulled their plan to go public, according to Reuters.

And the big question is what will happen to the hundreds of start-ups -- a record 131 are valued at more than $1 billion -- that are now all dressed up for IPOs but with no place to go.

One prominent venture capitalist in Silicon Valley is warning of casualties. Benchmark partner Bill Gurley, who has invested in start-ups including Uber and GrubHub, wrote in a series of tweets last week that the stock market movements will directly affect the start-up environment.

"Tech stocks have been getting crushed the past 6 weeks. Many names are down 25-50% from their highs. Today was very tough," Gurley wrote in a tweet last week. "One might reasonably assume that this would have an adverse impact on late stage private market liquidity and valuation. I certainly do. If so, we may be nearing the end of a cycle where growth is valued more than profitability. It could be at an inflection point."

Known as "unicorns," the venture-funded firms with valuations of more than $1 billion have exploded in number to 131 companies valued at a total of $485 billion, according to venture capital research firm CB Insights. The sheer quantity of unicorns has for months caused concern of a start-up bubble, with investors racing to put money into bleeding-edge innovators and their many imitators, when logically not all will thrive or even survive.

Among the most anticipated start-ups are Uber, valued around $51 billion; AirBnB, valued at $25 billion; and Snapchat, valued at $16 billion.

None of those valuations is really a problem if the markets are steady -- or, even better, continuing to rise. These tech start-ups aren't profitable and are spending heavily on their expansion into global markets. Some haven't shown a path to profit but are built on the promise of future growth.

Many, including Uber and AirBnB, have attracted massive investments by venture capital firms with the promise they will expand into China, India and other emerging markets.

After early investments from seed and venture capital firms, the way to continue growing and to raise capital for expansion is typically through two paths: initial public offering on stock markets or acquisition.

Now, with stocks in turmoil, the fates of these companies are in question. They will have to rely on venture investments for their expansion plans. Venture capital investors will be more cautious about their bets. If China's growth continues to slow and global markets stay in a slump, eventually the funding of venture capital firms could soften.

"It's worrying for companies who were planning to go IPO and are now forced to stay private," said Matthew Wong, a research analyst at CB Insights. "Those big funding rounds in the last year or two will be crucial to moving forward because the IPO window is closed right now."

Related:

Here's what you need to know to help your portfolio make it through the ups and downs of the stock market. (Video: Jason Aldag/The Washington Post)
Loading...