Tech start-ups waiting ‘way too long’ for IPO
Ultra-high private valuations means no room for growth on the stock market
Tech start-ups are waiting “way too long to go public”, the head of Google’s venture capital arm has warned, highlighting a widening rift in Silicon Valley over the fate of the latest generation of fast-growing start-ups.
Many of the companies leading the current technology boom, including Uber and Airbnb, have sought to stay private as long as possible and have raised ever-larger amounts of money from successive rounds of private investment. But the mood is changing and investors are growing skittish.
Some start-ups may rue their decision to exploit the booming private markets to push for high headline valuations, rather than selling shares to the public, said Bill Maris, head of Google Ventures, one of California’s most active VC firms.
“They’re setting the bar so inordinately high they’re making life difficult for themselves,” he said in an interview with the Financial Times. “There’s going to be some fallout: some of them will lose a lot of money.”
Next year, many will be unable to raise more cash in the private markets or be forced to accept lower valuations, he predicted. Google Ventures, which is changing its name to GV, has backed more than 300 companies since its creation six years ago.
Investors who had stampeded into the private markets for a chance to back companies like Uber, Airbnb and Snapchat have become far more risk-averse in recent weeks, especially after questions were raised about the validity of claims made by blood-testing start-up Theranos.
“There’s less money, more fear, more caution,” Mr Maris said.
The prospect of interest rate increases in the US will make the private markets even more hostile for start-ups, he said, adding: “Suddenly, being a public company is going to look a whole lot more exciting.”
The warnings signal a reversal of what became received wisdom during the latest tech boom, as venture capitalists courted entrepreneurs with promises of leaving them free to stay private rather than pushing them to cash out by taking an “exit” like an initial public offering.
Venture capitalist Marc Andreessen, one of the loudest supporters of the private markets, said last month he’d be happy for the companies his firm backed to stay private for 15 years.
Mr Maris said such a course would deprive investors and employees who had been paid partly in stock of the chance to sell at a market price set by Wall Street, rather than the highly opaque private markets.
“I don’t see many examples of fast-growing companies that have stayed private for 15 years,” he said. “Let’s not ignore shareholders and employees. It’s hard to see how you give them what they need and deserve without having a market price.”
He also echoed a warning by Michael Moritz, a partner at Sequoia Capital, who wrote in the FT recently that IPOs were needed to bring more discipline to the way start-ups operated. “They’ll do better with the scrutiny of the public market,” he said.
Asked if Uber, the most prominent company he has backed, was planning an IPO, Mr Maris said: “I’m sure they’re thinking about it because I know people ask them all the time. They’re obviously a prime candidate, they have a great business.”