SAN FRANCISCO – Fred Wilson, a venture capitalist at Union Square Ventures, recently published a blog post titled "The Great Public Market Reckoning." In it, he argued that the narrative that had driven the startup hype and value judgments for the past decade has now fallen from each other.
His post was quickly wiped out over Silicon Valley. Other venture capitalists, including Benchmark's Bill Gurley and the Foundry Group's Brad Feld, soon weighed in on their own fiscal responsibility warnings.
At some startups, entrepreneurs began to behave more cautiously. Travis VanderZanden, CEO of scooter startup Bird, stated at a San Francisco tech conference last week that his company was now focused on profits and not growth. "The challenge is trying to be disciplined," he said.
The new change is driven by stumbles from some high-profile "unicorns" – the new ones that were valued at $ 1 billion and into the private markets – just as they reached the stock market.
The most visible of these was the office rental startup WeWork, which dramatically fired its CEO and withdrew its original offer last month, at the same time cratered shares of Peloton, a training startup and SmileDirectClub, an online jaw orthopedic company, immediately after the companies were published. And Uber, Lyft and Slack – which also listed its shares this year – has similarly tackled falling stock prices for several months.
The lackluster performance has raised questions about the Silicon Valley startup formula to spend a lot of money on growing profits. (All these companies loses money.) It seemed they had no investors in the public market.
"Many of these high Valued companies have run into Wall Street cases where they question or remind us that profitability matters, says Patricia Nakache, a partner at Trinity Ventures, a venture capital firm Silicon Valley.
She added that she expected a "ripple effect" on private startup assessments that would start with the largest, most valuable companies and trickle down to the smaller, younger ones.
For startups and investors who were used to tough times and big expenses, that means it may be time for a reset.
Aileen Lee, an investor in Cowboy Ventures, a venture capital firm in Palo Alto, California, said she was considering dusting off a four-year-old "winter is coming" email she had sent to start-ups in 2015 asking they are preparing for a downturn. She has not resurrected the warning yet, she said, because "I worry about being the boy who cried wolf."
Other venture capitalists are more forthcoming. At Eniac Ventures, a venture firm in New York and San Francisco, the partners recently fought through the companies and identified "gross margins" – a measure of profitability – for each one, says Nihal Mehta, the company's general partner. This was not something the company regularly looked at, he said, but they were inspired by Mr. Wilson's cautious blog post.
They ultimately decided that in future meetings with entrepreneurs they would push for more detailed economic models, even though the companies are very young, Mr. Mehta said. While Eniac had looked at this when investing before, "it's more important now," he said.
Technical start-ups have long gone through different cycles of fear and disgust. When the 2008 recession began, Sequoia Capital, one of the highest-profile venture firms, convened a mass meeting with the startups and presented a slide deck titled “ R.I.P. Good Times, which featured a graphic of a "death spiral" and a skull.
The event was intended as a way of shocking newcomers to reining in costs to survive the decline. Sequoia's presentation quickly became talk of Silicon Valley, which did not fall into as deep economic funk as other parts of the United States.
Yet other alarms about the state of the startup economy fell on deaf ears.  In 2015, as newly established unicorns sucked in billions of dollars in funding and rose to stratospheric valuations, Mr. Gurley of Benchmark lamented "the complete absence of fear" in Silicon Valley, saying that "dead unicorns" would soon emerge. In 2016, Jim Breyer, a venture capitalist who was an early Facebook investor, also predicted "blood in the water" for the unicorns.
However, the money continued to flow into tech start-ups from foreign investors, private equity companies, companies and SoftBank's Wisdom Fund. This allowed the entrepreneurs to order higher valuations and delay publication. By the end of 2018, start-ups in the United States had raised $ 131 billion in record funding, surpassing the amount raised during the late 1990s dot-com boom, according to Pitchbook and the National Venture Capital Association.
Mr. Gurley gave up his warnings of excess. "You have to adapt to reality and play the game on the field," he said in an interview last year.
(Complaining about high valuations is a long-standing pastime among venture capitalists, of course, since most people prefer to invest their money in low-cost start-ups rather than expensive ones.)
This year, the warnings are revived. In his recent blog post, Mr. Wilson wrote that many of today's startups are focused on traditional physical industries such as real estate, exercise or transportation. They should not command high valuations that pure software companies – which tend to have less overhead – have written, he wrote.
In several exchanges of messages, Wilson said that he has already seen that since the start of criticism of WeWork over the past month, some start-up funds for lower valuations and with more stringent terms than the companies had hoped.
"What I want to see is a little more rationality, and I hope I get it," he said.
Late last week, his words seemed to sink elsewhere.
At a startup conference held by the tech publication TechCrunch at a convention center in San Francisco, around 10,000 founders, investors and "innovators" interviewed some more well-known founders, investors and "innovators" from a dark, cavity. On the scene, entrepreneurs lamented the unforgiving stock market and the challenging investment environment.
Postmates, a food delivery startup that confidentially submitted to go public in February, participated in the confab. The company has not yet gone public because the markets have been "choppy when it comes to growth companies," Bastian Lehmann, PostCamera's CEO, said at the event.
Bird, the scooter startup, announced $ 275 million dollars in fresh funding at the conference. But CEO VanderZanden said he was only able to raise the money because his unprofitable company had taken steps this year to increase the loss. Many scooter companies have lost their luster this year due to regulatory setbacks and safety concerns.
The shift toward making money wasn't easy, VanderZanden said. "I'm an ex-growth guy and sometimes it's painful for me," he said.
But spending fast on growing fast just wasn't possible anymore, he added. It is now difficult for "a price-growth company that burns hundreds of millions of dollars with a negative unit economy" to get financing, he said. "This is going to be a healthy reset for the tech industry."