Start-Ups See Balance of Power Shifting with Venture Capitalists

Katie Benner reported in Saturday’s New York Times that, “The balance of power is shifting across tech start-up land. Not long ago, entrepreneurs had the upper hand. With investors eager to get a piece of the next Uber or Airbnb, entrepreneurs often just lifted their little fingers to get financing. Some investors let the entrepreneurs choose their own terms, while others gave multimillion-dollar paydays to start-up founders long before their companies were a success.

Now investors have the advantage. Instead of venture capitalists begging to be allowed to invest, entrepreneurs are coming to them begging for cash. Investors are exerting their newfound power by asking more questions about a start-up’s prospects and taking more time to invest. Some are pushing for management changes or for financing terms that would help cushion any losses they might face.”

Ms. Benner indicated that, “The changing balance of power is evident in the numbers. Venture capitalists have put less money into start-ups in the United States in the last two quarters, according to the National Venture Capital Association; funding dropped 11 percent to $12.1 billion in the first quarter from a year earlier. With a smaller capital pie, entrepreneurs have to work harder for a piece.

Investors have also been better able to negotiate financing terms that benefit them. According to a survey from the law firm Fenwick & West, investors of richly valued start-ups have been getting more provisions such as guaranteed payouts and minimum investment gains. Such terms are still relatively rare, but tend to become more common after the number and size of deals decline, said Barry Kramer, a Fenwick & West partner.”

The Times article added that, “Above all, investors are no longer paying any price to invest in a start-up. Since the beginning of this year, about 30 companies have had to settle for lower valuations than they previously received when they raised money, according to the research firm CB Insights. That is nearly as many as in all of 2015.”

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