Stock markets around the world have been posting big losses for the last few days. The route was especially rough this morning, with the DOW Jones at one point falling 1,000 points in less than an hour. At the heart of the current slide is an issue which could impact many tech companies: economic weakness in China.
Two weeks ago China’s government made an aggressive move to devalue its currency. This followed several weeks of tumult in the Chinese stock market, during which the government had also interceded with force. Taken together, investors saw a Chinese market where growth was flagging. That is far from the sole cause of the recent downturn in the markets, but it was the event that really catalyzed the current selloff. China is the world’s second-largest economy, and the idea that its decades-long stretch of heady growth is coming to an end was enough to panic already jittery investors.
How would a weaker China affect the tech sector? Apple CEO Tim Cook took the unusual step of reaching out directly to CNBC’s Jim Cramer with a message today, an attempt to calm nervous investors. China has been by far the biggest driver of Apple’s recent growth. If consumers there stop spending on items like iPhones, it could put a serious dent in Apple’s earnings.
Tech stocks like Facebook, Google, and Microsoft are all down today. But that doesn’t really tell you much about the companies, since nearly all stocks are trading down across a variety of sectors. All told, global stocks have shed $5 trillion in value since China devalued its currency.
Stocks that were wobbling could crash
Unless we tip over into a long-term recession, most big tech companies will be fine. They have billions in cash and geographically diverse revenue streams. For young public companies like Twitter and Box, a major downturn would be more painful. If new customers dry up or advertisers spend less, stocks that were already wobbling could plummet.
On the startup side, most venture capitalists have been preaching for some time that a correction was in order. The last couple of years have been heady times, with dozens of new “unicorns” — startups with valuations over $1 billion — being created. Many of these companies have little to no revenue. Even the ones that are making money, like Snapchat and Uber, are spending way more than they are bringing in. And a lot of that late stage investment was coming from China.
The unicorn herd will be culled
The exit strategy for most of these unicorns is an acquisition or an IPO, and the latter is extremely hard to pull off in a bear market. That could mean startups are forced to raise a “down round”: taking on new capital but at a lower valuation than a previous funding. It wouldn’t be catastrophic to the broader economy, but it would have a massive impact on the employees, entrepreneurs, and overall environment in the tech sector, which has been reaching wild heights over the last few years.
Luckily, a bursting of the tech bubble, at least among startups, won’t have nearly the impact it did during the dot-com bust. The majority of investors don’t have major exposure to these companies, and a down round is not a death knell for a startup with a real business model. While it may seem like markets in the US and China are hurting, you need to remember that both have been on an amazing bull run for years leading up to this. We’ve got a long way to go before this is more than just a painful, but healthy, correction to very overheated markets.