February 10, 2016 By FTI Consulting
Global VC investment has cooled markedly this last quarter and into the New Year, dropping 30% – its lowest quarterly activity since Q1 2013. Sky-high valuations and underwhelming stock performances have led investors to re-evaluate and write down some of their investment portfolios, with venture capital confidence clearly rattled.
With interest rates at all-time lows, there is a lot of extra cash in the market, leading a number of tech start-ups to choose to defer their public market debut in favour of private IPOs. The result? Analysts and media commentators alike are fast raising the question of a tech bubble frothing, reminiscent of 2000. At the same time, major investors have also been spooked and haven’t been shy in giving a word of warning.
While volume of investment may decline, investors will continue to pump money into compelling technology companies. There is, however, one major difference between the tech bubble of the early 2000s and the rumours today – earnings. Today tech is contributing a lot more to net income than it ever did before. Goldman’s Chief U.S. Equity Strategist David Kostin notes that at the peak of the tech bubble, IT generated only 16% of the S&P 500’s earnings, compared with 20% currently. Add to that low interest rates and larger more established companies looking to invest in new technologies, and we can expect investment to continue in the sector.