Investors have created 132 privately held companies valued at $1
billion or more each, according to tracker firm CB Insights,
including ride-hailing service Uber [UBER.UL], accommodation service
Airbnb and messaging app Snapchat. After a turbulent week for
equities, prompted by worries about the faltering Chinese economy,
it may take longer for companies aiming to join their ranks to raise
multi million-dollar funding rounds, and they may not get the
investment terms they want.
"Many companies in the market for funding right now are struggling
to meet their valuation expectations and are going to have to
reassess," said Jon Sakoda of venture firm NEA.
In the last couple of years, the biggest VC-backed firms, dubbed
"unicorns" in 2013 by venture capitalist Aileen Lee of Cowboy
Ventures, raised increasing amounts of money at a rapid pace. Airbnb,
for instance, raised three nine-figure funding rounds starting in
2011.
In June it sealed a $1.5 billion deal that propelled its valuation
to $25.5 billion, the third-largest among venture capital-backed
companies worldwide.
Venture capitalists started seeing indications a few months ago that
late-stage investors, the ones who back unicorns, would be less
willing to write nine-figure checks for all but the most impressive
startups.
"Investors are now being much more selective identifying which
companies can succeed under the scrutiny of the public markets,"
said Roger Lee, an investing partner with Battery Ventures.
An end to the six-year stock market bull run seemed inevitable, they
said, and they are less confident that all of these companies will
live up to their hefty valuations when they go public, which is how
these investors make money.
The number of IPOs trading at less than their offering prices has
bolstered their doubts. As of late last week, 58 percent of the 38
tech and biotechnology IPOs so far this year were underwater,
according to data provided by market-intelligence firm Ipreo and
analyzed by Reuters.
To gauge investor faith in late-stage companies, Barry Kramer, a
lawyer at Fenwick & West specializing in venture capital, keeps an
eye on whether more deals come with strict protections for
investors.
MONEY BACK
One of several he's watching is known as a "senior liquidation
preference," where new investors are guaranteed their money back
before any other investor in the event the company is acquired at a
price below what the investor paid.
At the end of last year, about 26 percent of late-stage Silicon
Valley venture deals came with that protection, but today, it's
about 40 percent, Kramer said.
"That's an important signal to me," he said, adding it's too early
to draw conclusions after just two quarters. It can also indicate
less negotiating leverage for the start-up, another sign of
weakness.
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Still, the biggest and fastest-growing of the group will likely be
insulated from the market unease.
Take Uber, which just closed a $1 billion funding round in China
ahead of schedule and with more investors than it could accept.
It is difficult to know how much effect the recent market rout has
had on the valuation of the biggest VC-backed companies, because
start-ups are typically valued when they seek funding, perhaps once
a year.
One indicator could be GSV Capital, a Nasdaq-traded fund that buys
shares of private companies from early employees and others. The
fund, which as of June 30 held 12.5 percent of its assets in
data-analysis company Palantir and 7.7 percent in storage company
Dropbox, has dropped 6 percent since Aug. 20.
Some companies said they have noticed worry among investors. San
Mateo, California-based Apttus, which provides cloud software for
businesses, closed a $108 million funding round about three weeks
ago.
"There is very much concern about frothiness and an impending
correction," said Apttus CEO Kirk Krappe.
Apttus raised the cash it wanted, but other companies got the
brush-off. One late-stage venture investor said that five to six
startups he declined to fund last quarter because of what he
considered pricey terms came back willing to re-enter negotiations
after being turned down elsewhere.
A year ago, he would have heard back from only one or two in that
situation, he said. The investor didn't want to be identified for
fear of offending his portfolio companies.
(This story has been refiled to add word 'be' in the first
paragraph)
(Editing by Stephen R. Trousdale aand John Pickering)
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