All current investment trends are of particular interest for both investors, wishing to keep their money safe, and startuppers, looking for perspective deals. As a rule, capital movement is very dependent on so-called herd-like behavior, especially typical of the financial world. We already mentioned the tech startup bubble development, which is also one of those particular herd-like market reactions. Now we would like to continue with a short analysis of the investment markets.
Around 10 years ago, there was a kind of gold rush in the world of tech startup companies: high valuations, flourishing capital markets, endless crowds of investors. Then in 2008 financial crisis significantly damaged that positive spirit. After that major crush, markets were gradually recovering, so now the situation is relatively stable. However, tech startups’ IPOs are down, people are rather uncertain about possible market volatilities: all this implies the tech bubble once again, with a growing presence of high-risk investments.
Naturally, there are two major forces influencing flows of tech investments: greed and fear. The first one refers to prosperous times, when market uncertainty is low: capitalists are more willing to make high-risk investments in pursuit of profits, which is in turn very good for startuppers, getting access to cheap capital. In the times of fear, markets experience high instability and volatility: it gets too expensive to acquire capital and venture funds are extremely selective about their investments, which is logically bad for startup founders. In this case, only the strongest companies survive.
According to some experts, the current situation is quite stable, causing no fear, but slightly implying some uncertainty. Private valuations are normalizing, fewer tech startups are going public and VC groups are coming back in action again. Still, several market trends make us stay on alert:
-fall in China’s economic growth;
-low interest rates;
-decline in commodities’ prices.
All this keeps investors away from risky deals. That is why most tech startups with poor business models are very likely to die, and some of them will not even have enough time and opportunities to prove the value of their innovative ideas. However, those initially powerful startup companies must adapt to the situation and survive these hard times in the tech industry. For example, they can cut down their spending on marketing and product development and direct most of the investments on improving gross margins. As for investors, they are rather selective about the deals: no tendency of taking high-risk opportunities. This is positive actually – the capital acquires better quality and the general health of investments improves.
It is possible to conclude that one of the key economic rules is working: markets are cyclical. Now it will take some time for valuations to normalize, investors will pour money in more disciplined ventures. And then all this will lead to a period of growing business success, active flows of capital and high-risk deals again. So let’s wait for another gold rush.
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