Many venture capitalists are forecasting 2017 as a year in which large amounts of money will flow into startups. Considering startups experienced a shortfall in VC funding this year, a 15% drop to $67.8 billion, the lowest level in four years, their bullishness could seem delusional. It's not since the total average return in IPOs climbed 23% in 2016 from a negative 2.1% return in 2015, according to the New York Times. This bodes well for startups going public next year, particularly for the popular photo messaging app Snapchat. (For more, see also: Snapchat's IPO Could Affect Other Unicorn Riches.)

But make no mistake about it: 2016 not was exactly a wonderful year for unicorns. Investors, which include hedge funds and large mutual funds, became far more skeptical and cautious this year with their purse strings, demanding higher stakes while contributing less capital versus previous funding rounds. As a result, startups curbed their spending, laid off staff and focused more on profitability versus “skyrocketing user growth,” noted the Times.

Leaner and Meaner Unicorns

The leaner times were evidenced by the fact that only 12 companies became unicorns in 2016, a startling 70% decline from the previous year, reported the news outlet, citing data from CB Insights. And of the 105 companies that went public this year, a 38% drop from 2015—per Renaissance Capital data—$18.8 billion was raised from these IPOs. This aggregate amount was also a 38% drop from last year.

Then there were the once-heralded darlings of the unicorn set, such as blood-testing company Theranos and business software start-up Zenefits, which suffered abject high profile falls from grace. In Theranos’ case, the company shut down its lab operations and laid off about 40% of its staff as skepticism about its technology reach stratospheric proportions.

And following BuzzFeed News’ report that Zenefits had used unlicensed health insurance, the company was sued in several states. It had since made settlements and is currently rehabilitating its tarnished reputation, said the Times. 

2017 Can Only Get Better

Investors are predicting that 2017 will be a marked improvement. Many are pinning their hopes on Snap, parent company of Snapchat, which is expected to go public as early as March and could raise enough capital giving it a valuation of over $30 billion. (For more, see also: No Delay for Snapchat's IPO's Road Show.

Popular music-streaming startup Spotify is also expected to go public as soon as 2017, said the Times.

Venture capitalists might have tightened their belts in 2016 but they did not shun making investments. According to PitchBook, VCs, which include top-tier Silicon Valley venture firms Andreessen Horowitz and Founders Fund, raised about $40.6 billion for the year. That’s a whole lot of money needing to be deployed.

However, that doesn’t mean problems befalling certain startups are over, either. Excessively high capital infusions might be good for the short-term but they could pose longer-range harm by backing weaker unicorns, opined Benchmark Capital’s Bill Gurley in a blog post.

“More money will not solve any of these problems,” he wrote. “It will only contribute to them.”

 

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.