The Strategist

Technological Startups Stuck Starting

12/09/2015 - 15:55

Many high-tech start-ups has recently preferred to stay private companies as long as possible, engaging huge sums of money in successive rounds of financing. However, say analysts at the venture division of Google, the investors mood is changing and it is possible that owners of many start-ups will soon regret relying on the booming market private investment and not holding IPO.
"These companies raise the bar so high that they themselves complicate their life, - said Bill Maris, CEO of Google Ventures. - We will soon see the negative effects, some companies will lose a lot of money." According to Maris, in 2016, many start-ups will fail to attract additional investment in the private market or will be forced to accept a cut assessment of its value. Google Ventures, now renamed to GV, has invested in more than 300 start-ups, including Nest and Uber, during the six years of its existence. This year, Google Ventures’ investments have decreased by 20% compared to last year. Meanwhile, amount of investments in individual companies rose. For example, the company has invested in 57 start-ups in 2014; then the number of investments decreased to 34 in 2015. In addition, GV refused management of individual funds for foreign investments – such a decision is expected to make the decision-making mechanism more flexible.

Investors, recently hurrying to invest in promising companies like Airbnb, Uber and Snapchat, have become more cautious now. They have doubts about justification of the highest ratings of start-ups. In particular, it relates to Theranos company, which offers innovative tools for analyzing blood. "As a result, number of available money is reduced, and new concerns proceed to raise - warns Maris. - Expectations of higher interest rates make the situation even less favorable for start-ups. Surprisingly, being a public company is much more convenient."

In November, venture capitalist Marc Andreessen, one of the most active advocates of the private market, said that he would prefer to keep his company private for 15 years. However, Maris notes that this approach deprives investors and employees of startups a chance to sell their company at a price set by the open market. "There are very few examples of companies that have grown rapidly and remain private for 15 years - said Maris. – One cannot ignore interests of shareholders and employees, but it is very difficult to consider them if a company has no market price. "

Michael Moritz, a partner at venture capital fund Sequoia Capital, also believes that IPOs are important to "discipline start-ups management." "They will do better being under scrutiny of the public market", - says Moritz. One of the most famous start-ups supported by Sequoia Capital is Uber. Asked whether Uber’s management plans to hold IPO, Moritz replied in the affirmation: "I am sure they thought about it, and people are constantly asking them such questions. It is clear that this company is an obvious candidate to conduct IPO, they have a very successful business."