Startup Investors Retrench Following Rout in Tech IPOs

"The recent stock rout is rattling the multitrillion-dollar market for startups after a long run of record investments, nosebleed valuations and rapid-fire deal-making.

Venture capitalists said a significant reset in investment behavior is beginning to take hold that is poised to reduce initial public offerings, leave some companies short of funding and crimp valuations.

Investors said several large startup backers are cutting back their investments, curtailing a flow that sprayed at full blast for most of the pandemic, particularly for older, more mature startups. And venture firms said they are advising their companies to prepare to conserve cash in a tougher funding environment.

Tiger Global Management, one of the most prolific startup investors of the last two years, in recent weeks has been renegotiating investments that had been under discussion for numerous companies, reducing the valuations, people familiar with the deals said. Venture capitalists said other investors are doing the same.

Dbt Labs Inc., a fast-expanding business-software company, recently scaled back its fundraising plans. It struck a deal with investors for a funding round that values the Philadelphia-based company around $4 billion, down from the more than $6 billion it initially negotiated, according to people familiar with the deal.

Jared Carmel, managing partner at Manhattan Venture Partners, a startup investor and adviser to venture-backed companies and their shareholders, said he watched prices for certain stock purchases of some private companies fall 10% in the past month.

"It's harder to raise today than it was six months ago," said Peter Fishman, a longtime Silicon Valley tech professional and chief executive of data-automation startup Mozart Data Inc., which he founded during the pandemic. "It is a pop of irrational exuberance."

Driving the pessimism is the particularly acute rout in shares of recently listed tech companies in the past few months as inflation concerns and expectations of interest-rate increases mounted.

Companies that listed publicly last year were down an average 32.6% since their listings through Jan. 28, according to an analysis of IPOs, direct stock listings and special-purpose-acquisition-company listings by Jay Ritter, a University of Florida professor who studies public-listings data. Less-proven companies performed worse: Those with less than $10 million in revenue when they went public were down 40.8%, compared with a 28.4% fall for those with more than $10 million in revenue, he said.

Even many of Silicon Valley's prized startups, with established businesses and loyal customers, have fared poorly since recent debuts. DoorDash Inc. is down 40% from its December 2020 listing, and health insurance company Oscar Health Inc. is down 80% from its market debut last March. Automation-software company UiPath Inc., which went public in April, has seen its valuation fall by almost half from its peak private-market level a year ago.

In comparison, the Nasdaq Composite Index through Tuesday is down about 11% from its 2021 peak in November, though still well above its level a year ago.

Such drops in newly listed tech stocks typically deter some startups from pursuing IPOs out of concerns that their valuations could suffer. Some venture capitalists said they are advising startups that had been planning public listings in the coming months to reconsider their timelines.

Investors and founders are hoping the recent tech-stock rout could reverse course, as has happened with other slumps in recent years. Even if it doesn't, startup investors have amassed record sums for future investment: some $900 billion in unspent cash as of December across funds that invest in private companies.

But startups and their backers also are preparing for the prospect that conditions could get worse.

"If inflation persists beyond a rate hike or two, we will see a larger correction," said Keith Rabois, a partner at Founders Fund and early investor in DoorDash and Airbnb Inc.

The startup market has been a powerful magnet for money over the past decade. Low interest rates were a major draw, as investors tend to hunt for returns in riskier assets like fast-growing startups when safer investments like bonds offer meager yields.

The boom accelerated during the pandemic. U.S. startups raised a record $329.6 billion last year, nearly double 2020's amount and almost four times that for 2016, according to PitchBook Data Inc.

The median price-to-sales ratios for tech company IPOs, a key measure of valuation, surged to its highest mark since the dot-com boom of the late 1990s. Companies were valued at more than 15 times their revenue during 2021, compared with around five times for much of the 2010s, according to Mr. Ritter's data.

Startup investors raised new, bigger funds and did deals faster, spending less time on background checks. Top founders gained more control from their investors, sold more stock before listing and were granted giant pay packages as venture capitalists competed for the chance to give them cash.

"Founders and investors know this game and know it's best to take advantage of these optimal conditions before the windows get tighter," said Homan Yuen, a partner at Fusion Fund.

Pat Grady, a partner at Sequoia Capital, said the reset was expected at some point. "You don't just sustain record low interest rates in perpetuity," he said. 

Still, he said, "people generally over-rotate" in response to macroeconomic swings, and solid, fast-growing companies are still good long-term bets." [1]

1. Startup Investors Retrench Following Rout in Tech IPOs
Brown, Eliot; Somerville, Heather. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 02 Feb 2022: A.1.