More start-ups, flush with funding, are staying private longer
In April, LinkedIn agreed to spend $1.5 billion for Lynda.com, the online educational video company, its biggest acquisition ever.
But such deals are rare. Mergers and acquisitions for technology and life sciences start-ups are at a 12-year quarterly low, new data show.
The number of initial public offerings of companies funded by venture capital slumped 33% in the first six months of 2015, compared to last year’s vigorous first half, and they brought in 43% less money.
Start-ups are staying private and independent far longer than they did in previous venture capital booms.
For the year’s second quarter, ending in June, start-ups received $17.5 billion in venture capital — the highest sum for a quarter since late 2000, the National Venture Capital Assn. and PwC said in their MoneyTree Report based on data from Thomson Reuters. The gusher of cash is enabling start-ups to stay private for a median of five to six years before being acquired versus two to three years in 2000.
“The high-growth companies are not for sale, and the slower-growth companies have enough cash in the coffers to delay and hope for better days,” said Hemi Zucker, chief executive of J2 Global, a hungry buyer of business services and digital media start-ups. “They’re riding out their horses.”
Letting them ride are hedge funds, mutual funds, pension funds, foundations and other big investors. Those money-heavy funds are starved for yield and are funneling investment cash into late stage start-ups or increasingly larger venture-capital funds. As long as the paper worth of start-ups keeps rising, they’re happy to oblige.
In previous start-up cycles, some of those funds would have been snapping up shares in IPOs. But few tech companies are issuing public shares these days.
“The ramp has been extended,” said Tom Ciccolella, U.S. venture capital leader for the consulting giant PwC. “The structure has changed in such a way that they aren’t forced to exit.”
In past booms, including the dot-com boom of the late 1990s, start-up founders saw an IPO as the best way to keep the company capitalized while gaining access to cash for employees and for their own personal bank accounts.
Since, then, however, the benefits of going public aren’t as clear-cut.
Public stockholders are pickier — they’re not likely to pay high prices for companies that didn’t show profits and barely showed sales, as in the dot-com boom.
Financial reporting requirements, enacted after the financial meltdown in the late 2000s, are more stringent and more expensive to comply with.
And the availability of institutional investment cash lets founders avoid having to publicly report their financial results, with more freedom to run the business without Wall Street interference.
The easy access to capital gives founders more clout when dealing with buyout offers from big companies, too. The start-ups can charge higher prices. With big cash war chests, they can afford to stare down would-be buyers.
“Are we getting an offer to sell that helps us get to our mission faster? Then hell yeah, we’ll do it,” said Ian Chen, chief executive of nightlife reservation app Discotech. “When times are good like now, we can say let’s wait it out, get greedy, for that offer.”
Big-company buyers that typically acquire smaller companies to add new technology and workers are having to adjust. Many are choosing to become venture capitalists themselves; start-up investing by corporations has risen significantly over the last year.
Companies such as Yahoo and Apple appear limited by activist shareholders pushing for more buybacks, dividends or tighter spending. That gives venture capitalist Marc Andreessen confidence that start-ups will “inherit the future,” he told investors in his fund last month.
“If [big tech companies] are not going to make the investments, if they are not going to do the M&A to refresh their product families ... and if there’s going to be talent flight from the big incumbents to the private side, then the intrinsic value getting built on the private side is very strong,” he said.
Some deal advisors, lawyers and investors aren’t ready to fret, though. They dismiss three straight quarters of declining mergers and purchases of venture-capital-funded companies as an aberration. They point to their own busy calendars and note that last year had the largest amount spent on acquisitions and the most IPOs since 2000.
The rising valuations of start-ups, which make them more expensive to buy, can’t solely explain the slide because buyers still can tap low-interest financing, said Rick Fink, chief executive of San Diego-based merger and acquisition consultant Fortis Advisors.
“Valuations causing some indigestion on the part of buyers — that might be a factor,” Fink said. But corporate buyers still prefer to buy versus making the technology internally, he said.
As start-ups engage in more complicated financing deals, the complexity of unwinding them is lengthening sale talks. And, increasingly, companies including Snapchat and Apple keep some acquisitions secret for strategic reasons. Consequently, the deal statistics could be slightly underreported, Fink said.
Yet, the available data suggest more entrepreneurs are going the way of Alex Capecelatro. He announced last week that he spurned offers from Silicon Valley companies for his Santa Monica start-up Yeti, an app that recommends nearby places to visit. In some cases, the companies just wanted Yeti’s engineers and would have abandoned Yeti’s 41/2 years of development.
Raising $5 million in funding looked promising, but he was concerned that it might run out amid a down market.
Capecelatro found an alternative. He sold some of his shares to a new investment group and moved to an advisory role so that Yeti could bring on a business-minded CEO.
“It’s usually portrayed as you either sell for a lot or go under,” he said. “But if you build something with tangible value, there’s a lot of gray space. There’s a lot more options now than selling your company to Google.”
Twitter: @peard33
