• Who Us? VCs Blame Bankers for Emphasizing Growth Over Revenue to Startups

    gordon geekDespite all the capital that venture firms have managed to raise in the first and second quarters of this year, venture capitalists at an investor panel at Fortune’s Brainstorm conference this morning said that early-stage valuations are softening, reality is “setting in” for unicorn companies that are too richly valued to be acquired and too immature to go public, and that there’s much more focus on revenue than in recent years.

    The VCs also blamed bankers on their messaging to founders, which, until recently, was to focus on growth at all costs.

    When it comes to very early-stage valuations, Floodgate cofounder Ann Miura-Ko said she thinks her firm is seeing more “willingness by entrepreneurs to take much lower valuations than what their initial expectations were” for two reasons. One is increasing conservativeness on the part of venture capitalists. The other, she said, is “fear for the next round of financing. They’ve already heard from other entrepreneurs that the next round of financing is going to be really difficult.”

    In terms of falling valuations for later-stage companies, general partner Roger Lee of Battery Ventures said they’re all but inevitable, given that there’s been one “truly notable” tech IPO in the U.S. so far in 2017.  As he noted, a new category of investors had emerged — including hedge funds and mutual funds — to fund these companies’ later stage funding rounds based on the assumption that there would be a brisk IPO market. Absent one, these companies now need to “focus on the fundamentals” to prove that they’re worth the valuations they were assigned.

    Of course the big question, and one posed by Brainstorm co-chair Dan Primack, is why companies weren’t focusing on the fundamentals from the start. “Is it the [founders’] fault or yours,” he asked the VCs, including Spark Capital general partner Megan Quinn, who readily acknowledged that there was “certainly a point in time in the Valley when investors were funding growth above all else.” Because “public markets were rewarding it?” Primack asked. “Yes,” said Quinn, “exactly.”

    It’s an observation that Jeff Fagnan, a founder of Accomplice (formerly the tech group at Atlas Venture) agreed with wholeheartedly. VCs’ focus on growth was “definitely driven by the public market,” he told those gathered. “I remember being in a couple of IPO bakeoffs, and these bankers would always focus on [growth] . . . And they said, ‘You don’t really need to worry about profit. Just grow. This is the story that everybody wants to buy.’”

    More here.

  • Twilio’s Largest Shareholder Prepares for the Ride

    Byron DeeterByron Deeter is likely waking up this morning and wondering what kind of day he’ll have. It was Deeter who led Bessemer Venture Partners into its seed-stage investment in Twilio, a now nine-year-old company that offers services like messaging, voice, image transfers, authentication and video as a software platform, so developers can incorporate them into their own apps.

    Bessemer has since invested in each of Twilio’s private funding rounds, amassing a 28.5 percent stake in the company at a cost of nearly $70 million. And that bet — one of the firm’s largest — is being put to the test today as Twilio debuts on the public market.

    So far, there’s reason for optimism. Twilio started trading about an hour after the NYSE opened at a price of $23.99 per share, which is nearly 60 percent above its IPO price of $15. Either way, if Deeter is sweating the details, he didn’t let on yesterday when we chatted about Twilio and the kind of impact its long-awaited public offering may have on the broader market.

    Twilio last sold shares to private investors at  $11.31 a share, at a valuation of about $1 billion, and its initial IPO pricing puts its valuation just above that billion-dollar mark. You’ve said you can’t talk about Twilio’s valuation; generally speaking, do you think it matters whether a company surpasses its private market number at the time of its IPO? 

    I can’t even comment generally right now; our lawyers would get very upset with me.

    WhatsApp accounts for 17 percent of Twilio’s revenue, which Twilio listed as a risk factor, noting that WhatsApp has “no obligation” to give Twilio notice before taking its business elsewhere. Can you comment on whether you believe the company is overly reliant on any one customer?

    Can’t comment on that, either. [Laughs.]

    Bessemer has more than two times as big a stake as any other shareholder, including Twilio co-founder and CEO Jeff Lawson (who owns 11.9 percent of the company). Did you know him before he started Twilio? 

    BD: We knew of Jeff, but we met him in the context of his initial discussion with us about seed funding, when it was still a concept. But Jeff is a force of nature and an extremely compelling CEO and visionary. And from a market standpoint, [his] was a disruptive idea. There wasn’t proof at that point that the business-to-developer market was real.

    Do you think the success or not of its IPO will be seen as a bellwether?

    More here.

  • Handcuffed to Uber

    uber-cuffsPlenty of people would give everything to be an early employee at seven-year-old Uber. But Uber employees who’ve been with the ride-share company for at least a few years have discovered a considerable downside to their ride with the transportation juggernaut. They can’t afford to quit. Startup employees have to exercise their options within 90 days of leaving a company or else lose them and at Uber, that cost is simply too high.

    A quick scan of LinkedIn for former employees underscores the point. Of Uber’s roughly 6,700 employees, only a tiny fraction have left, and in most cases, those hires weren’t around long enough to be worrying about vested options.

    Employees of privately held companies have long wrestled with this issue. (We wrote about it here last summer.) With valuations of many privately held tech companies having soared so dramatically in recent years, the amount of capital needed to buy employee options has escalated at an unprecedented pace for employees at a variety of places.

    Uber appears to be the most extreme example ever, however. In a completely hypothetical example, let’s say an early, top Uber engineer was given .5 percent of the company. Now let’s say this person was awarded options in 2011, when Uber raised $11 million in Series A funding at a reported $60 million valuation. His ownership stake at the time would have been $300,000. Yet today, that same stake (undiluted) would now be worth $300 million at Uber’s reported current post-money valuation of $60 billion. That’s a paper gain of $299,700,000.

    It’s very hard to cry about that, it’s true. But there is bad news: at a 40 percent tax rate for short-term gains, if the engineer opted to leave Uber, he’d confront a tax bill of $119,880,000, not including that earlier $300,000 needed to exercise the options. And leaving Uber would start the clock. He’d have just 90 days to come up with the $300,000, and he’d have to come up with the rest of the money for the much larger tax bill by the next April 15.

    Maybe Uber will be publicly traded by then. Maybe it won’t.

    Some highly valued companies have tried to ease this issue for employees by allowing them to sell some of their sales to preapproved secondary sellers at certain points. Not so Uber, which amended its bylaws in 2013 to restrict unapproved secondary sales. Not only does it not allow employees to sell their shares to secondary buyers, it also won’t allow them to use services like those offered by 137 Ventures, which makes loans to founders and early employees, using their stock as collateral. (Snapchat, Dropbox, and Airbnb have similar policies.)

    Our sense is that the company doesn’t mess around, either. Four secondary players have told us of employees who’ve tried to find ways around Uber’s regulations, only to be stymied. “We’ve been approached by big groups of early employees, and I know a lot has been written about loans or hypothetical products to get around its policies,” says one source. “But Uber’s position is that if it learns [of a sale or loan] that goes around its share-transfer restrictions, there will be consequences.”

    It may seem uncharitable on some level, but it’s very much by design, according to insiders, who say Uber CEO Travis Kalanick has two primary motivations for keeping his company’s shares on lockdown.

    More here.

    (Photo: Bryce Durbin)

  • IPO Pros Expect Window to Open in Q2

    20140630_ipo-calendar-2014Earlier today, Renaissance Capital, the IPO research firm, published a new report about the first quarter of this year, and it didn’t paint a pretty picture.

    For starters, it noted the U.S. IPO market hit the lowest levels in the first quarter since the financial crisis of late 2008. It noted that not a single deal priced outside of the health care sector (which we’d flagged in this recent story). It also noted that of the eight deals that managed to price and collectively raise $700,000 million, the companies’ performance was largely propped up by their venture backers, who bought shares during and after the IPO.

    There is, however, a silver lining. Echoing a conversation we’d had last week with another IPO expert — IPOScoop founder John Fitzgibbon — Renaissance Capital Principal Kathleen Smith tells us that a handful of pre-IPO companies could soon inject new life into the torpid IPO market. We talked this morning; our chat has been edited for length.

    Renaissance’s new report notes that healthcare IPOs have averaged a return of 20 percent so far in 2016, but it adds that that’s thanks to “substantial buying by their existing shareholders.” Is that a bad thing?

    It doesn’t mean they aren’t doing well, but it means there’s concern about their liquidity. Their tradable float is small — even smaller than their deal size would suggest.

    That’s not a brand new trend, though. Haven’t health care investors long bought up shares to keep the price of their portfolio companies from dropping until the stock becomes more liquid? 

    It has long helped to get the deals done. But we’ve seen the percentages increase quite a bit. It used to be that [VCs] would [buy up] 15 percent of the [IPO and post-IPO] shares; now it’s more like 40 percent, and I’d say it began ticking up over the last 24 months. In one recent deal, [for the gene editing company] Editas, insiders bought 67 percent of the float.

    The goal in going public is to establish a valuation publicly that either helps other companies to understand them and perhaps buy them at that accepted valuation, or to raise more money down the road, which most [biotech companies] need to do, even though most [generate] capital from the IPO.

    In the meantime, there were no tech IPOs in the first quarter. How worried should private tech investors be?

    More here.

  • Biotechs Hit the Ground Running

    SyndaxIf we had to gamble on it, we’d bet the IPO market will be far more brisk this year than last year, which was the worst year for tech IPOs in particular since 2009.

    Even still, it came as a bit of a surprise yesterday when not one or three but six biotech startups revealed plans to go public. (If you recall, biotech IPOs, which ticked along nicely for a couple of years, practically came to a standstill in the second half of last year.)

    If you happened to miss the steady string of announcements — which, as Bloomberg notes, comes one week before JPMorgan Chase & Co’s big annual health care conference in San Francisco — here are the handful of companies that plan to test the IPO waters soon:

    1.) Audentes Therapeutics. It’s a three-year-old, San Francisco-based  biotechnology company focused on developing and commercializing gene therapy products for patients suffering from serious, life-threatening rare diseases caused by single gene defects. One of those diseases is myotubular myopathy, a degenerative muscular condition that afflicts almost exclusively males and kills one in every 50,000 newborns by the time they reach age two. The company plans to raise $86.3 million offering. As the San Francisco Business Times notes, Audentes first filed IPO plans confidentially in early November, about a month after it raised $65 million in a Series C funding. According to CrunchBase, it has raised roughly $138 million altogether, including from T. Rowe Price, Venrock, Sofinnova Ventures, and 5AM Ventures.

    2.) Editas Medicine. Like Audentes (and many biotech startups to go public before it), this Cambridge, Ma.-based company is also awfully young at just two years old. What it does: develop treatments to modify disease-causing genetic defects. What it’s planning: to offer up to $100 million in stock. That’s less than what it has raised from private investors to date. According to CrunchBase, Editas has collected around $120 million from investors, including Flagship Ventures, Polaris Partners, and Third Rock Ventures. (The Boston Globe has more here.)

    3.) Corvus Pharmaceuticals.This Burlingame, Ca.-based company is practically brand-new, having been founded in November 2014. But that’s not stopping it from attempting to raise $115 million in an IPO for its business, which is focused on the development and commercialization of immuno-oncology therapies that harness the immune system to attack cancer cells. Its plans aren’t as crazy as they sound.

    More here.

  • Employees Wise Up

    timthumbThis week, a Bay Area founder was taken aback when an engineer being recruited by his startup asked for both its cap table and information regarding the liquidation preferences of its venture backers. The candidate presumably “worked somewhere where he discovered that these things matter,” says the founder, who asked not to be named in this story.

    Though the startup is still debating how much information to give to the candidate, it will likely need to come up with a policy around such requests soon. The amount of information that privately-held companies share with employees is becoming a bigger issue, largely owing to the rise of so many billion-dollar valuations.

    Just yesterday, CB Insights, the research firm, published an attention-grabbing report about “unicorn” valuations, reporting that 2015 has already seen growth of $143 billion in combined unicorn valuations year-to-date, a 47 percent increase over their aggregate valuation at the end of 2013. It also reported that the number of still-private companies now valued at $1 billion or more has grow by around 50 percent in 2015. (That jump represents a stunning 39 companies that have been assigned billion-dollar valuations by their investors this year.)

    More here.

  • An IPO Survey Hints at Trouble

    nowhere to runThis morning, the law firm Fenwick & West published its most recent report on the state of the IPO market. Its “2014 IPO Survey” doesn’t hold many surprises, but it does underscore an important point: Public market investors have grown more discriminating than they were in the late ’90s — and that’s bad news for the many late-stage companies that are being assigned bubble-era valuations.

    Let’s start with the number of IPOs in the U.S. across all industries last year. Sixty-eight life sciences companies went public (up from 41 in 2013). Meanwhile, 38 U.S.-based tech companies went public, which is almost exactly how many went public in 2013 when 37 IPO’d. (For some context, in 1999, 308 U.S. tech companies went public.)

    Life sciences offerings were on average smaller than technology deals, reports Fenwick, and they faced more pricing uncertainty. Of the life sciences deals in the first half and second half of 2014, approximately 44 percent and 52 percent priced below the bottom end of their expected range, compared with 15 percent and 27 percent of tech deals.

    Then again, they went public much faster, says Fenwick, which reports that of the tech companies that priced in the second half of last year, roughly two-thirds were on file for more than five months before pricing.

    Either way, the trend, post offering, was downward. According to Fenwick, those tech companies to go public in the first half of last year saw their shares fall by an average of 16.2 percent by the time their lock-up periods had expired. On average, shares of life sciences companies to go public in the first half of last year were down 1.3 percent by the end of their lock-up periods.

    Castlight Health, the cloud-based health-care tech company whose shares soared 149 percent on its opening day roughly a year ago, probably factors meaningfully into the above figures. Almost immediately after its IPO, its stock began to spiral. Today, those shares, originally priced at $16, are trading at $9.

    Still, the second half of the year looked much the same. In fact, first-day pricing appears to have grown even more rational, with tech stocks falling an average of 3 percent by the time their lock-up periods had ended, and life sciences shares dropping by 1.5 percent.

    That lack of drama is good for the public market investors, who are plainly approaching new offerings more carefully than they did during the go-go days of the late ’90s Internet boom and bust.

    It’s bad news for the many still-private tech companies have been raising money at exuberant valuations. (They can’t all be the next Uber.)

    You can download Fenwick’s full report here.

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