Five Reasons VCs Are Bullish About This Year's Outlook for Startups

After a rough patch for startups, investors now see hopeful signs.

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Technology startups have faced a tough climate over the last year. The Bloomberg U.S. Startups Barometer, a weekly gauge that tracks both the funding flowing into private tech companies as well as the exits that make their investors money, is now near its lowest level since 2014.

But venture capitalists are optimistic that things will turn around this year. Here's why.

1. Investors expect more IPOs this year

Last year was a particularly slow one for initial public offerings as well as acquisitions within the tech industry -- so it’s not surprising that investors expect 2017 will be better.  The hope is that successful IPOs from some of the largest startups such as like Snap Inc., which filed publicly last week for an initial share sale, will encourage smaller companies that have been on the fence to go public as well.

“Most bankers are predicting 30 to 40 IPOs, and that’s up substantially over 2016,” said Scott Raney, a partner at Redpoint Ventures. “A lot of companies think it’s a good time to go public, and a lot of companies have the ability to go public.”

But the industry got a bit of a shock when AppDynamics, which was expected to be a trendsetter for the year’s tech IPOs, announced a surprise sale to Cisco Systems Inc. the day before it was supposed to price its shares. 

2. Venture capital firms are stockpiled with cash

Venture capital firms raised $41.6 billion in 2016, the most since since 2001, according to research firm PitchBook Data and the National Venture Capital Association. With that amount of cash sitting on the sidelines, there's a good chance it will be put to use in the near future, said Nizar Tarhuni, an analyst at PitchBook.

3. The stock market is booming

On Jan. 25, the Dow Jones Industrial Average cracked 20,000 for the very first time. Public companies, "seeing their stock price go up, are more emboldened to acquire smaller companies,” said Maha Ibrahim, general partner at Canaan Partners.

4. Favorable policies could free up cash at big tech companies

President Trump has suggested cutting taxes on companies’ accumulated offshore earnings to persuade them to bring back that money to the U.S. If his repatriation plan goes into effect, many companies may start making use of their overseas profits -- not just to build factories and create jobs, as Trump has intended, but also to fund domestic investments.

“If that happens, I would assume there’s going to be a ton of M&A,” said Marvin Liao, a partner at 500 Startups. “There’s a very good chance of that happening under his regime.”

5. Even non-tech companies are interested in startups

It's not just the tech giants like Google and Facebook that are interested in startups -- there’s a new batch of buyers in industries like retail that are looking to acquire the talent, the strategies and the customer base that their smaller rivals have developed. 

There's been "a rush of non-tech incumbents active in private tech markets as of late, like Walmart and, Unilever and Dollar Shave Club, Under Armour and MyFitnessPal," said Vas Natarajan, a partner at Accel Partners.

For large companies, spending a few billion dollars to acquire a tech business is a small price to pay to mitigate the threats that these startups pose to their core business, according to Natarajan.

Check back in every Monday for a new weekly reading of the Bloomberg U.S. Startups Barometer. The index tracks the business conditions for venture capital-backed private technology companies that are based in the U.S.