Startups hoping to secure seed funding in 2016 may find themselves in a pinch as investors are tightening their belts and looking ahead for returns on their investments, but many Mission tech workers aren’t expecting a cataclysmic crash and are preparing to forge ahead toward sustainability.
Growing expectations among investors about the profitability plans of companies seeking their money have curbed valuations and slowed funding nationwide. Venture capital funding plummeted globally last year — dropping by 30 percent between the third and fourth quarters of 2015 — and some ripples reached the Bay Area. San Francisco residents told the New York Times they are hoping for a crash. But many local CEOs say that talk of a “tech bubble” bust is amiss.
“It’s a timing thing. There was a right time to [raise money] and we made that threshold,” said Lawrence Coburn, CEO of the mobile event engagement app DoubleDutch. He, and others who were able to convince investors of their ability to turn a profit before the industry-wide slowdown in the last three months of 2015, expects to weather the slowdown that carried over into 2016.
But young startups in the early stages of seeking funding or those unable to deliver on profitability expectations in later rounds could be facing tougher times.
“The companies that were planning to raise money now and that are almost out of money, they have a problem on their hands,” said Coburn.
As caution seeps from the Silicon Valley to San Francisco, where many new startups are headquartered, recent layoffs and the funding slowdown are forcing many tech entrepreneurs to shift their focus away from high valuations and rapid growth and towards building for longevity.
“Big venture firms are doing less seed deals, and there has definitely been a slowdown in funding,” said Analyst Matthew Wong of CB Insights, a research firm that tracks venture capital.
A funding report published by the firm shows that 2015 was a record year for venture capital investments, seeing some $20.8 billion invested into startups nationwide. However, investors quickly pulled the brakes, and the year finished with that total dropping to $14.5 billion in a matter of months.
“A lot of startups haven’t found a clear path to becoming profitable and sustainable businesses,” said Wong. “We are seeing that investors are being more careful with giving startups money because that path is becoming less clear. Investors are waiting to see which startups figure it out.”
In recent years, venture capital has helped fuel the explosion of wealth— and a widening wealth gap— in the city. In the Mission, startups that pulled in cash while entering 2016 remain generally optimistic about tech’s future in the Bay Area.
“There is still a lot of excitement about tech in Bay Area, but you don’t hear as many crazy ideas floating around,” said Bhautik Joshi, a Mission-based software engineer. “Folks are starting to collect on their debts now, and when that happens there is going to be a natural shrinkage in some of the excess.”
Investor Slowdown Felt Locally
Seeking connections and inspiration, Shehab Hamad, the founder of a Dubai-based fashion startup, moved to the Mission in 2014 with the hopes of expanding his company in the local market.
“There’s so much knowledge sharing that takes place here. This is where experiments are tried first, and that’s always going to draw entrepreneurs here,” he said.
But Hamad has felt the shift from investors and is witnessing many of his peers struggling to keep money flowing. “Investors are still taking meetings and writing checks, but the bar is just so much higher now than it was six months ago.”
Coburn, of DoubleDutch, said that one way the “dramatic shift in investor expectations” is being felt is by companies hiring less.
“As an unprofitable company you have to listen to market expectations,” he said. Over the course of a year DoubleDutch’s workforce nearly doubled, causing his roughly 200-employee strong company to trade in its Mission offices for a larger space in Potrero Hill. But the company is not yet profitable, and Coburn said that he, too, plans on dialing back on the pace at which his startup is growing.
Funding Opportunities Remain for Companies with Impact
German tech entrepreneur Nik Myftari believes that a good product will be a hit regardless of current market trends. Early this year, he moved to San Francisco seeking the sponsorship of Bay Area venture capitalists for his hyperlocal socializing app, Spotted.
Myftari spent three years bootstrapping his company while hatching a business plan. He recently secured $15 million during an early funding round from a German investor and is only slightly alarmed by increased prudence among investors here — his app comes equipped with a payment model that he is ready to roll out, should investors ask for it.
“A startup is successful when users love your product and you grow organically,” said Myftari. “If users see a realistic need for your service, they will pay you for it.”
Tracy Young, co-founder of the Mission-based construction startup PlanGrid, a mobile app designed to help architects and builders access construction plans, echoed the sentiment that companies identifying and solving a “real need” efficiently are still likely to receive ample funding by investors.
“Investors are starting to see that if they don’t put their money in the right companies, the ones that solve real problems and that people love and will pay for, then they are not getting a return on their investment,” said Young.
Since PlanGrid launched in 2011, the company has grown into a leading mobile construction software platform with some 40 employees. Plangrid raised $40 million from investors during a funding round last November, enabling the company to focus on growth while others are cutting costs.
“We grew ourselves, and that meant not paying ourselves for a very long time. We had $1.5 million in seed funding that we kept in the bank pretty much the entire time,” she said.
Young credits PlanGrid’s success in becoming profitable early on by tapping into a real industry need— digitizing construction plans— and because the company never relied solely on investor funding.
That focus on providing a service people actually want, Coburn said, is part of what sets this generation of startups apart.
“It’s different in 2016 because many companies have real revenue now,” said Coburn. “We can argue that many startups right now are overvalued, but we can’t argue that they aren’t real businesses.”