Thu. Jan 23rd, 2020

A startup sector slowdown in 2020 could be unexpectedly bad news for the tech giants (FB, GOOG)

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A startup sector slowdown in 2020 could be unexpectedly bad news for the tech giants (FB, GOOG)

  • If the startup sector cools off in 2020 it could be bad news for tech giants.
  • Bank of America analyzed six key startups that IPO’d in 2019 and found that the growth of their total ad spend is rapidly dropping.
  • If this is representative of the broader startup ecosystem, it could mean Facebook and Google will start to lose an easy source of revenue growth.
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A slowdown in the startup sector in 2020 might not just be bad news for entrepreneurs and investors — it may also throw an unexpected wrench into Facebook and Google’s businesses.

A report published by Bank of America analysts earlier this month makes the case that the markets’ rough treatment of newly-public startups could — if it continues next year — translate into a broad slowdown in ad spending by startups. That, in turn, could crimp revenue for the advertising-based business which rely on those startups.

The report underscores the interconnectedness of the modern tech sector, and how events in one corner can ripple out and affect the broader market in unpredictable ways.

To make its case, BofA analysts took six major startups that IPO’d in 2019 — ride-hailing firms Uber and Lyft, social network Pinterest, fashion company RealReal, fitness company Peloton, and pet food retailer Chewy — and looked at their ad spend as a percentage of their total revenue.

On average, this dropped over the last 12 months — from 28% in 2018 to 24% expected for 2019. The financial services firm anticipates it’ll drop again next year, down to 22% in 2020.

“If this deceleration in ad spend is reflective of start-up sector,” the analysts wrote, “Facebook and Google could see an unanticipated slowdown in ad spend in 2020.”

Of course, that’s not guaranteed. The six startups identified may not be truly representative of the broader ecosystem, and the disappointing IPO results that the industry did see in 2019 may not be repeated in 2020. 

BofA also doesn’t attempt to precisely quantify the size of the hit Google and Facebook will take, but it will by no means be ruinous. All six companies are modeled to continue to grow their total sales and marketing spend year-on-year from now through the end of 2021, albeit at successively slower rates.

bofa startups sales and marketing spend

But what it does mean is that an easy growth engine for the advertising giants is at the risk of drying up — an unanticipated complication that may frustrate investors’ insatiable hunger for growth, and force Facebook and Google to think harder about future sources of revenue.

It would not be the first time that trouble with startups affected more established tech companies that had become reliant on the free-spending startup customers. During the dotcom boom two decades ago, Oracle and SAP saw business boom as a wave of young startups snapped up their products in a frenzied race to build websites. When those startups’ businesses proved unviable and the startups failed, the big tech companies lost an important source of revenue and were forced to readjust their own operations.

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