The US economy does look like it is on solid footing but Wall Street is still nervous. This week the major indexes plunged by more than 4%.
Some of the reasons include uncertainties with US-Chinese relations and Fed policy. But it also looks like programmatic trading is having an impact. “Much of the trading is not from human beings,” said Ajay Royan, who is the co-founder and managing partner of Mithril Capital. “It’s bot-driven. These bots are backward looking and can trigger at the same time, exaggerating the volatility.”
And yes, the tech sector has suffered the brunt of the selling. Just look at the cloud stocks. Companies like Zuora (NYSE:ZUO), Docusign (NASDAQ:DOCU) and Dropbox (NASDAQ:DBX) are well off their highs.
So in light of all this, might the environment get tougher for cloud startups – say with funding? Or is all this trading activity just noise?
Well, according to Cloud Apps Capital Partners’ Matt Holleran, he thinks the situation could get tougher in the coming months. His firm provides venture capital to early stage cloud companies.
“Will this market correction hold?”, said Matt. “I predict it will and that it could be deeper and longer than most people anticipate.”
First of all, he believes that late stage fundings for cloud companies will cool down, especially with new series C and D financings. “VC firms leading large rounds are increasingly unsure about valuations,” said Matt. “They also don’t know if the IPO window has shut and whether and when late-stage cloud companies will still be able to go public. As a result, late stage firms will work with the CEOs of their portfolio companies to reduce the overall rate of spending in 2019 including reining in hiring that will temper employee salary expectations throughout the industry.”
Unfortunately, the mortality rate of seed stage deals will rise. This will largely be due to “headless syndicates” of angels. “The problem is that the companies they’ve already funded start looking for more capital to weather the storm just when more capital is growing scarce,” said Matt. “It’s scarce because the large series A and B firms that would typically provide the next round of funding will instead concentrate their capital and time on helping their existing portfolio companies to buy time to grow into their last round valuations.”
But with lower valuations, there will probably be a pick-up in M&A activity. Let’s face it, old-line tech companies need to find ways to retool their platforms for the cloud. “The M&A wave is already on its way,” said Matt. “A notable example is SAP’s acquisition of Qualtrics. The company was planning to go public and was days away from announcing its IPO pricing. But clearly the high acquisition multiple and the unsettled public markets caused the Qualtrics board to reassess. I expect to see similar deals in the coming months, as both strategic buyers and sellers in the cloud market recalibrate their thinking post the correction.”
Now for entrepreneurs, the changed environment has its benefits. It means that there should be less competition and there will be a need to be more lean (which usually benefits smaller companies).
“Historically, some of the best technology companies, including Google and Salesforce, have been launched in down periods,” said Matt. “Similarly, for the right entrepreneurs focused on the right opportunities, 2019 will be the perfect time to grow their businesses—the old-fashioned way. By that I mean hiring the right people with the right salary expectations, and raising the right round sizes at the right valuations from the right firms.”