Uni­corns may be mauled by bear mar­ket

The Pak Banker - - COMPANIES/BOSS -

Af­ter a year in which freeflow­ing cap­i­tal fu­elled un­prece­dented growth in so­called tech uni­corns, the sec­tor is brac­ing for a slow­down that could thin the herd.

Uni­corns-a term coined for the usu­ally rare bil­lion-dol­lar, pri­vately funded start-ups-have been pro­lif­er­at­ing in the US, China and else­where as ven­ture cap­i­tal in­vestors bet on the next Google or Face­book. But the prospect of a "bear mar­ket" where prices are fall­ing, com­bined with other fac­tors, could send uni­corns run­ning for cover, ob­servers who fol­low the sec­tor say. Some warn­ings have al­ready ap­peared.

Ven­ture-backed start- ups glob­ally saw a 30% drop in fund­ing in the fourth quar­ter to $27.2 bil­lion, ac­cord­ing to a sur­vey by KPMG and re­search firm CB In­sights. A sep­a­rate sur­vey by 451 Re­search found more than half of tech in­vest­ment bankers pre­dict ven­ture fund­ing will tighten in 2016 com­pared to last year, the most bear­ish out­look since the 200809 re­ces­sion.

Some uni­corns have seen their value slashed by in­vestors aim­ing to put a fair mar­ket eval­u­a­tion on their hold­ings. Mu­tual fund com­pany Fi­delity last year marked down the value of its Snapchat hold­ings by 25%. In this sce­nario, cash­hun­gry uni­corns are likely to face a harder time get­ting fresh cap­i­tal, said David Erick­son, a se­nior fel­low at the Univer­sity of Penn­syl­va­nia's Whar­ton School and for­mer Wall Street banker who led tech­nol­ogy share of­fer­ings.

The weak stock mar­ket could im­pact pri­vate firms, po­ten­tially forc­ing a de­lay of ini­tial pub­lic of­fer­ings (IPOs). If they need to raise cash, it will likely be "down rounds" with a lower val­u­a­tion than prior fund­ing ef­forts. "Val­u­a­tions will typ­i­cally come down," he said. Since the "soft­ness might be pro­longed, ven­ture cap­i­tal firms will be fo­cused on pro­tect­ing the value in their ex­ist­ing in­vest­ments rather than spend­ing too much time in­vest­ing in new names".

Erick­son said there are some sim­i­lar­i­ties to the tech bub­ble of 1999-2000, even if the new firms have more de­vel­oped busi­ness mod­els. "While the com­pa­nies are more sea­soned, the is­sue sim­i­lar to 2000 is that many are burn­ing tons of cash," he said. "If they need to have enough cash to break even and if they can't ac­cess cap­i­tal ei­ther through the pub­lic mar­kets or pri­vate mar­kets, then they face more dif­fi­cult de­ci­sions."

Erick­son added that "we are not quite at that dire stage now", but that if cap­i­tal dries up, it may mean that promis­ing start-ups would ei­ther need to sell them­selves or "hit the wall". The uni­corn pop­u­la­tion­es­ti­mated by Forbes this month at 173 com­pa­nies worth a col­lec­tive $585 bil­lion- is still alive, but some are hurt­ing.

CB In­sights chief ex­ec­u­tive Anand San­wal said he ex­pects to see "some wounded uni­corns" but that there is still cap­i­tal avail­able from pri­vate equity and cor­po­rate ven­ture funds. "Some of those com­pa­nies that got ahead of them­selves on val­u­a­tion are go­ing to have dif­fi­cult con­ver­sa­tions. You can't just keep sell­ing your dream and your busi­ness model can't be rais­ing ven­ture cap­i­tal," he said.

Char­lie O'Don­nell at Brook­lyn Bridge Ven­tures said many of the uni­corns are likely to face a "down round" if they need new cap­i­tal, be­cause in­vestors are more cau­tious. "It's not that they are con­cerned that the world will im­plode and that start-ups won't still be a good bet over the long term," O'Don­nell said in a blog post. "They are just.... busy tak­ing care of their wounded."

A re­port by KPMG and re­search firm CB In­sights found that 2015 was a block­buster year for start-up ven­ture fund­ing de­spite a cool­ing in the fourth quar­ter. For the year, the re­port found $128 bil­lion in ven­ture fund­ing for start-ups, up 44% from 2014. The num­ber of fund­ing rounds was more than 7,800. But it noted that some com­pa­nies which went pub­lic "fell short of re­cent pri­vate val­u­a­tions, no doubt rat­tling VC (ven­ture cap­i­tal) in­vestor con­fi­dence". The most prom­i­nent in the group was mo­bile pay­ments start-up Square, led by Twit­ter co-founder Jack Dorsey.

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