Slimmer backing for start-ups

Daniel Perrett-Goluboff

Not long ago, start-up ventures in the world of technology needed not rely on any true monetization strategy as investors readily poured capital into this sort of corporation. The incredible boom that our society witnessed of non-tangible tech businesses may, however, be beginning to come to a close.

As of late, online and app-based businesses without a truly physical product have begun to struggle as investors have chosen to move their money elsewhere.

Perhaps the most commonly exemplified story of this trend is the tale of Facebook. Widely viewed as a massive success, investors poured money into Facebook quite readily.

When the time came for Facebook to issue its IPO, however, the tune of these venture capitalists quickly changed. The problem did not exist in an initial lack of value, but rather what happened in the weeks and months that followed.

When Facebook came to be traded publicly-after it crossed the 500+ shareholder mark that dictates this-it held a peak market capitalization of over $104 billion, according to the New York Times. In short, this means that all of their stocks, assets and raw product-the social networking site itself-was estimated to hold this value.

In less than a month, however, the stock lost over a quarter of that initial worth. Facebook’s value was down to less than half of its initial public offering within just three months.

As stated prior, this trend has not in any way been exclusive to Facebook. Consider the story of Groupon, a site that had its humble beginnings in selling deals on local commodities and products to members of its online community.

Groupon, once heralded as the next big thing in tech start-ups, has experienced an immense decrease in its investor backing following some less-than-stellar returns. The same can be said of many other sites this past year alone, such as Zynga, for example.

Many speculate that the main issue here has to do with these start-up companies relying too heavily on “angel-investors,” wealthy investors who donate money from their own pocket in return for the promise of a stake in the company or a significant return on their investment.

This method seems relatively sound until one realizes that the money these investors donate is incredibly finite, often not exceeding more than one or two million dollars.

CB Insights, a research company, estimates that over 1,000 start-up tech companies will find themselves bankrupt this year when venture capitalists refuse to offer more money or match the initial investments made in these companies by the angel investors.

CB Insights estimates that this will cause upwards of $1 billion in angel investments to be wasted.

The trend here is, of course, not horribly surprising when placed in contrast to the estimated $3 trillion that was lost in the dot-com bubble burst of 2000, but may be cause for alarm of another kind.

The rapid appearance and disappearance of these companies seems to be illustrating something continually more noticeable in America. Though it is easier than ever to start a business, it may be harder than ever to design a truly sustainable business model.

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