Jul 12, 2017

VCs say too few "unicorn" IPOs is causing liquidity crunch

Lowenstein Sandler LLP

Law firm Lowenstein Sandler recently hosted dozens of venture capitalists and limited partners in San Francisco to discuss some of the latest trends in their business. Axios sat in on a discussion about "unicorns"—startups valued at more than $1 billion—and late-stage investing. Highlights:

  • Uber will be fine.
  • Liquidity needs are growing, which means that secondaries are becoming more common.
  • VC rounds are taking longer to complete, in part due to increased competition within niches.

Near-term Uber: Despite several people in the room admitting they've stopped using Uber, no one seemed to doubt that the company's business is continuing to move along. As for the fate of its next financing, opinions were mildly optimistic. Battery Ventures VP Jeffrey Lu said it will likely raise a down round, though it wouldn't be a big deal, he added. NextWorld Capital principal Tarun Kalra predicted a structured round at a flat valuation, which is currently about $70 billion.

Staying private longer: Overall, this is happening because companies aren't ready to be public, investors said. Some may not be performing well enough, posited Sapphire Ventures principal Kevin Diestel. Other companies raised funding earlier than they should have and are now taking longer to grow to the point at which they could be public, added Benchmark partner Sarah Tavel.

Liquidity: One consequence of unicorns staying private is the growing need for liquidity. Sapphire's Diestel said he's seeing a secondary as part of almost every deal these days, while Tavel says there's an uptick in private tender offers. 137 Ventures partner Elizabeth Weil said that companies aren't fighting the secondaries' discounts because deep down, they know those are the rational prices for their shares. She also added that laws around tenders sorely need to evolve to be more in line with employee needs (Weil went through the process years ago as a Twitter employee).

Slower investment pace: VCs are taking more time to invest because several companies with a similar idea are cropping up, making it more difficult to pick the potential winner, according to Benchmark's Tavel. Investors also have big funds, making it easier to wait and write a bigger check if needed to invest in a hot company, added Accel partner Brian O'Malley. "You don't get fired for lighting $10 million on fire—you get fired for putting $5 million in the eventual No. 2 company," said First Round Capital partner Phin Barnes.

Bridges and extensions: Startups are raising more seed round extensions (extra funding prior to raising a Series A) lately, said Floodgate partner Iris Choi. There's also an overall uptick in bridge rounds, said Lowenstein's Ed Zimmerman, who chairs the law firm's tech group.

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