China’s economy is at risk, which is triggering volatility in the U.S. stock market.
And those private companies with sky-high valuations — Uber is worth a whopping $50 billion — well, they’re at risk, too.
For one, China has been a big investor in startups in recent years.
Chinese investors have seen private U.S. companies as a safe place for their money, funneling over $6 billion into late-stage financing rounds of U.S. startups, according to PitchBook. That number is up from $1.4 billion in 2014 and $552 million in 2013.
Companies like Uber, Snapchat and Airbnb have all raised recent rounds of funding from Chinese investors.
“The much more hospitable place to invest is in Western companies that have been doing terrifically,” said Sam Hamadeh, CEO of research and data firm PrivCo.
For an indication of just how terrific the market appears, look at the number of “unicorn” companies, or privately-held firms valued at $1 billion or more. There are currently 132, according to CB Insights.
Investor Aileen Lee, who has published research on unicorns, found that that the number of billion-dollar startups has grown 115% in less than two years.
As startups wait longer and longer to go public, they’re raising large sums of money from non-traditional investors — which means foreign investors, hedge funds and mutual funds.
Their deep pockets are leading to sky-high valuations of companies, some of which have yet to turn a profit.
But in order for investors to see returns, they need a healthy stock market.
An acquisition or an IPO are the exit options for startups. This week’s market rollercoaster raises concerns that opportunities to IPO or be acquired will become more limited.
“Billions worth of corporate acquisitions vanish,” said Alex Lykken, senior financial writer at PitchBook, referring to the U.S. market’s volatility.
Without these opportunities, investors are going to be much more conscientious about infusing money into startups, since any return is much farther off.
“I think this is going to have a psychological impact,” added Lykken. “It’s mostly a reminder to the startup community that these valuations aren’t going to be suspended forever.”
In the coming months, analysts anticipate a number of flat and down rounds — when companies are valued lower than in previous rounds.
“When a market correction comes, the highest valuation will get corrected first,” said Richard Chen, a partner at VC firm CeYuan.
Some expect that this will lead investors to eye earlier-stage companies, where there’s less risk involved. It’s a move that VC fund GGV Capital has already started to make. GGV participated in Airbnb’s latest round of $1.5 billion, but managing partner Hans Tung said it’s increasingly looking to fund younger companies.
“You want to move to earlier stage to get protection,” said Chen, who has been investing outside China for the past two years. “More and more money will move earlier and earlier.”