A Year of Clipped Wings for Hot Startups

Late last month, Stephen Grocer reported at The New York Times Online that, “WeWork, Lyft, Uber, Peloton: To their early backers, these are companies that would transform the way the world works, works out or gets around.

“To public stock investors, they are companies with inflated valuations and real questions about when they will start making money.

“The two views have collided this year, disastrously in WeWork’s case. After it failed to sell its stock to the public last month, throwing its funding plans into disarray, the company was bailed out on [October 28th] by SoftBank, its largest outside investor.”

The Times article noted that, “WeWork, which is based in New York, might be the most extreme example of the rebuke that public stock investors have delivered to high-flying start-ups, but it is hardly alone.

“Across Wall Street, in Silicon Valley and at some of the world’s largest companies, a reckoning is unfolding as valuations slide for the so-called unicorns — start-ups worth at least $1 billion — that everyone was once so eager to buy.”

Mr. Grocer stated that, “Fund companies including Fidelity and T. Rowe Price, which had typically invested only in public companies, started taking part in private funding rounds, and so-called mega funds, which could make huge bets on a single firm, most notably SoftBank, were born.

“Soon the sums raised in private markets were dwarfing the money from I.P.O.s. Over the past six years, companies have raised about $550 billion from venture capital funds, easily exceeding the $320 billion of proceeds generated from I.P.O.s over that period, according to data from PitchBook and Dealogic.

“But the private money meant companies could grow without the scrutiny of public-market investors — no quarterly financial updates or demands for proof that they would find a way to become profitable. Now that they are moving into the glare, it has become evident that a number are still far from being ready to live up to the market’s demands.”

The Times article added: “‘These companies are still not mature,’ said Kathleen Smith, principal at Renaissance Capital, which provides research on I.P.O.s and manages exchange-traded funds that track their performance. ‘Maturity isn’t measured by the number of years you have been around. It’s measured by whether you can earn money. That’s maturity.'”

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