How to identify winners and losers in the start-up world
Tech "unicorns" could be getting rarer as the odds are increasingly stacked against entrepreneurs and investors hoping to back the next billion-dollar start-up.
"I think it's fair to say that over the past few months, there's been a pretty stark change in the funding environment in Silicon Valley," said Chamath Palihapitiya, a venture capitalist at SocialCapital. "The reality is that there was a lot of free, cheap money running around here, looking for the next Facebook or the next Uber or the next Snapchat. And the result of that was … many, many bad investments."
Some $28.2 billion in venture capital funds were raised in the United States in 2015, down 9 percent from $31.1 billion a year earlier, according to the National Venture Capital Association.
But after the Silicon Valley free money party dieddown, waking up with a painful hangover is a good thing, accordingto Palihapitiya. That's because it has reminded smallbusinesses and their investors that building a strong, sustainablecompany takes work, he said.
And luckily for technology start-ups, that industry may be theleast hurt by drastic market swings and shrinking pools of money, he said.
"If you take a 10- or 20- or 30-year view, the industry that is the most inoculated from all of this stuff is technology." Palihapitiya told CNBC in an interview.
Palihapitiya, who was one of the first people at Facebook and was in charge of making the company money, said the recipe for start-up success has always been the same: good ideas, a solid business model and a talented team.
"When you see great companies being built, that year over yearcontinue to grow, that can manage their expenses, that recruitgreat people, that have a really profound mission and values, thosecompanies are always sought," Palihapitiya said.
And that's not limited to tech.
"A healthy venture capital ecosystem necessitates balance, and last year provided some recalibration for the industry," the 2016 National Venture Capital Association Yearbook said. "Nonetheless, the ecosystem remains robust, covering a vast range of stages, geographies, sectors and players."
As for competition, any start-up could take a page from one tech titans' book: Alphabet's Google, Palihapitiya said. That company makes its products accessible to a wider user base. By making its products affordable, its users can get comfortable with the brand early on and grow up with it, Palihapitiya said.
"They probably have done in my opinion a better job than Apple because where Apple has stayed a little too brand-elitist, I think Google has created a fantastic line of ultra-cheap Android Chromebooks and they've done a very good job of getting that deployed into schools," Palihapitiya told CNBC.
Apple didn't immediately respond to CNBC's request for comment.