Normalcy is fine for A and A+ companies, VCs say, as well as for start-ups that have been conservative with raising and spending capital. However, it's troublesome for businesses with negative gross margins (losing money on every sale), excessive burn rates, inflated valuations and those operating in competitive markets with cash-rich rivals.
Unfortunately for Silicon Valley, there's no shortage of companies in the troubled category.
U.S. start-ups raised $47.2 billion in the first three quarters of 2015, following $50.8 billion in all of 2014, by far the most since 2000, according to the National Venture Capital Association.
Thanks to hedge funds, private equity firms, mutual fund companies and foreign cash pouring into tech, late-stage investment dollars surged 25 percent in the third quarter from a year earlier.
That adds up to a lot of money chasing the hope of future returns. But hope is rapidly giving way to reality.
"The world of perpetual up rounds is over," said Ajay Agarwal, managing director at Bain Capital Ventures. "That's forcing companies that are much younger to think about cash and profitability in ways they haven't had to think about in the last few years."
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Every investor interviewed for this story said the tone has changed dramatically in the past three months. In particular, start-ups are bringing a different attitude into pitch meetings.
Agarwal said entrepreneurs are acknowledging upfront that they'll have to raise at a valuation comparable to or even slightly below their last round. Dan Scholnick of Trinity Ventures said companies that came in to pitch three to six months ago looking for certain terms are now coming back willing to accept a 50 percent cut.
Battery Ventures partner Dharmesh Thakker said the phrase he has heard a lot over the last 60 to 90 days is "open-minded" in reference to how companies are approaching their value. Meanwhile, Adam Marcus of OpenView Venture Partners said founders have stopped showing up with predetermined terms.
"Now, they say `We're raising, but we'll let the market dictate terms and there's no time horizon,'" he said. "The leverage has swung from the entrepreneur back to the investor."