As Venture Capitalists Grow Pickier, Some Startups Cash Out Before IPOs

Rolfe Winkler reported on the front page of today’s Wall Street Journal that, “ Inc.’s decision to scrap its ambitious plan to challenge Inc. in favor of a $3.3 billion sale to Wal-Mart Stores Inc. marks the third time in recent weeks a cash-guzzling startup has chosen to sell [The other two are: Uber Technologies Inc. selling its China car-hailing operation to Didi Chuxing Technology Co….and…unprofitable razor retailer Dollar Shave Club Inc. selling itself to Unilever PLC].

“With venture capitalists growing pickier, the IPO market largely shut, and investors newly insistent that startups operate in the black, flush corporations are providing lucrative paydays for some startups that once had grander ambitions.”

Today’s article noted that, “Other startups haven’t been so lucky. Dozens of venture-backed companies have laid off staff, raised capital at lower valuations or shut down.

The common denominator, say venture capitalists, is tighter capital markets.

“By this point last year, at least 53 startups raised capital at a valuation of $1 billion or more for the first time, according to VentureSource. This year, nine have reached that milestone. Also so far this year, just nine U.S.-based tech companies have staged an IPO, according to Dealogic. That is down from an average of 24 through the first week of August the prior four years.”

Mr. Winkler also noted that, “For two years, mutual funds and hedge funds flooded tech startups with cash, but last fall they dialed back. Volatility in stock markets, starting in China, and a lack of lucrative IPOs discouraged investors.

“A February drop in public tech stocks splashed ‘cold water on the face of the venture guys,’ says Michael Brown, general partner with Battery Ventures. ‘Growth at all costs may not be rewarded in public markets, and profitability will matter.'”

Today’s Wall Street Journal article added that, “Venky Ganesan, managing director at Menlo Ventures, says the tighter funding environment puts cash-hungry companies into three buckets: those going out of business, those boosting prices because capital isn’t available to subsidize losses, and those raising ‘bridge’ financing from existing investors while they try to fix their business model.

Venture firms still have ample capital to invest, especially in companies that show the most promise.”

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