WSJ: Cracks in the Silicon Valley’s Billion-Dollar Startup Club

Link: http://www.wsj.com/articles/cracks-in-silicon-valleys-billion-dollar-startup-club-1417810965

There have been concerns of a technology bubble as of late. Marc Andreessen wrote one of his famous 16-part twitter insights on valuation and cash burn. Other articles focused how startups were spending their money on outrageous perks, such as 10 year leases in a converted warehouse in the SoMa district of SF. It also doesn’t help that the momentum technology stocks as of late have fallen from the lofty share prices since March 2014.

One of the major issues is the number of hot technology companies that are public, or rather lack there of. There are “at least 48 private U.S. companies valued at $1 billion or more by venture-capital firms, versus 27 at the start of the year.” These valuations are determined by the latest fundraising round, which is a static number after the round closes. And since these companies are private, they don’t necessarily have to share their financial data (Uber is famous for this), so potentially some participation in these rounds are driven by “headlines” growth or famous investors. Fundamental analysis doesn’t usually have a place in VC, but when companies are this large, there’s a reasonable expectation for profitability analysis.

The truth is that these giant tech companies don’t need to go public anymore. These startups see going public to be a nuisance and unrewarding.  Companies like Google went public kicking and screaming because of the 500 shareholders rule (which the JOBS Act raised to 2,000). Dell was taken private, and by all accounts, is doing great.

The only time these companies need to go public is when their sales rate is dropping. It’s ironic to think that this is the case, but going IPO is now viewed as a “public fundraiser” by startups. Becoming a public company still implies credibility, and there’s no better way to get free advertising than for a huge, splashy IPO. Certainly, current startup investors would be happy to have a liquidity event, but the lofty valuations based on the last round might be brought to earth when an S-1 is filed for all to see.

And this is the point of the article. For these companies (New Relic and Hortonworks) to go public, they had to drop their valuation below the $1 billion mark (New Relic filed to public at a $967m valuation as of 12/11/14). When these numbers are scrutinized by the broader market, it almost sounds ludicrous (Hortonworks at a $1 billion valuation with only $33m in revenues over 3Qs?! But then you add $47m in deferred, and it takes some of the sting off). But clearly the market’s appetite for “High Growth! Rapidly Scaling!” stories has waned, and startups know this.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s