Technology start-ups are increasingly settling for conservative funding deals as they attempt to get through a big dip in investor enthusiasm.
The latest example came from a big name, Snapchat Inc., which recently received $175 million from the sale of shares to mutual fund giant Fidelity Investments, a development first reported by the Wall Street Journal late Thursday. The shares were sold at the same price as Fidelity paid a year ago when it first invested in Snapchat, the report said, maintaining the privately held Venice company’s value at $16 billion.
The lack of a price change as Snapchat seeks a new round of funding, according to a source familiar with the matter who spoke on condition of anonymity, underscores a subdued view across the tech sector. Global economic jitters in recent months have led investors to take second looks at publicly traded companies’ earnings prospects. But that has trickled down to start-up land as well.
Software start-ups that raised funding in the last three months of 2015 generated the lowest median share-price gains compared with their previous financing deal in at least eight quarters, according to a survey released last month by law firm Fenwick & West.
The median price change was 29% in the fourth-quarter deals examined, down from as high as 94% for companies that raised funding in the second quarter of 2014. Many more of the deals also included more favorable terms for investors.
Meanwhile, investors have said they’ve been closing fewer deals to start 2016 than they have in recent years. Indeed, some Snapchat investors indicated they’re not planning to write new checks to the company. Fidelity also has internally valued its original stake in Snapchat at a lower amount.
But many venture investors say part of the reason they've pulled back is that they want to save money to invest in their biggest and most promising bets. The latest Snapchat funding seems to fall into that category.
Snapchat has been growing fast, doubling its workforce to about 600 employees over the past year and serving up an increasing amount of video to users. The popular app provides entertainment to more than 100 million children and young adults each day through videos about current events and news, chat functionality and photo sharing. It adds up to 8 billion video views each day and tens of millions of dollars each month in ad revenue.
But despite having raised more than $1 billion previously, more cash could allow the breakneck pace to continue, with hopes of going public potentially delayed indefinitely.
Snapchat Chief Executive Evan Spiegel has said he’s interested in taking Snapchat public, but volatility in the stock market has scared off companies and there are no signs of that changing. No tech companies have come close to going public so far this year.
Snapchat and Fidelity declined to comment.