The L.A. tech industry had a great run in 2015 and is set to keep that going this year.
Venture capital investment in Los Angeles County tech companies is estimated to reach a record $1.6 billion this year, according to CB Insights of New York.
But in 2016, they could face headwinds.
Controversies surrounding overvalued firms, such as blood-testing company Theranos Inc. of Palo Alto, have highlighted the dangers of investing based on untraditional business metrics, chilling enthusiasm for riskier startups. Plus, a slowdown in global economic growth and an expected increase in the Federal Reserve’s interest rate suggest a more difficult economic environment for businesses this year.
Venture capitalists and tech executives don’t expect another dot-com bubble implosion, but rather foresee a cooling off in tech funding and valuations.
We spoke with several L.A. executives and investors about tech industry issues to watch in 2016: Alex Lidow, chief executive of El Segundo semiconductor maker Efficient Power Conversion Corp.; TX Zhuo, managing partner of Santa Monica venture capital firm Karlin Ventures; and Richard Wolpert, chief executive of West L.A. technical support startup HelloTech.
Back to basics:
Increasingly, tech companies will have to justify their valuations based on traditional business metrics.
Lidow: “Companies looking for late-stage financing will see a greater emphasis on fundamentals such as revenue, margin and cash flow, and a lower emphasis on less tangible metrics, such as the size of an audience without strong monetization.”
Higher interest rates:
The Federal Reserve boosting its interest rate will have little direct effect on venture capital investments, but might impact the wider economy, including tech companies.
Zhuo: “The cost of doing business will go up, whether this takes the form of direct costs such as the interest rate on the working capital line or the indirect pass-through costs from business partners who now have higher costs as a result of the change.” Also, “it is probable that consumers will cut back on nonessential, discretionary spending, so startups need to focus on maintaining their share of their customer’s wallet.”
Less IPO enthusiasm:
Bigger private investments and a less hungry retail investor market will continue to dampen the fanfare surrounding initial public offerings.
Zhuo: “In the past, retail investors could only get access to tech companies once they were public, explaining why tech companies would see a big markup in valuation when they went public. But now retail investors get access to the best private tech companies through the Fidelitys of the world, so there is no pent-up demand when a company goes public.”
For reprint and licensing requests for this article, CLICK HERE.
Stories You May Also Be Interested In
- SpaceX Moves Ahead of Competition After Rocket Landing
- SpaceX Gets Starring Role in Moon-Landing Competition
- SpaceX Nails World’s First Launch, Landing of Reused Rocket
- As Car-Sharing Startup Grows, So Do Costs
- Silicon Beach Report Dec. 3: SpaceX Sends 64 to Space
- L.A. Tech Execs Make 2016 Predictions
- Silicon Beach Report Feb. 20: Whatsapp Updates with Snapchat-Like Vanishing Content
- Silicon Beach Report March 29: Santa Monica’s DogVacay Purchased by Rival Rover.com