Fred Wilson, founder of Union Square Ventures and a Silicon Valley investor who has backed Twitter, Tumblr, Foursquare, and Kickstarter, says in a blog post today that the IPO market for tech companies with multi-billion-dollar valuations may be “disappearing.”
He cites Box and Square as examples of companies that have delayed their IPOs because they were losing so much money and didn’t want to withstand the scorn investors’ would have thrown at their red ink. Box filed for an IPO but now that offering is delayed. Investors did not like the way the company was spending more money on marketing than it generated in revenues. Jack Dorsey’s Square delayed a possible IPO and raised more money instead.
Wilson’s post will be read keenly in Silicon Valley, where companies like Snapchat have become darlings of the tech scene because they got investment rounds at valuations of $US2 billion.
The problem, Wilson says, is that those sky-high valuations are a “trap” for companies that are burning cash but cannot get their investors’ money back without either staging an IPO or by getting lucky with a deep-pocketed acquirer.
Once a company has taken a bunch of funding at a massive valuation, investors options for getting that return on their dollars becomes sharply limited. there are only a small number of Facebooks or Googles willing to shell out the billions necessary to make those investors whole. Snapchat turned down Facebook; so Facebook bought WhatsApp instead for $US19 billion. Snapchat, of course, has little to no revenue.
Companies with smaller valuations or robust revenues have advantages — they are cheap enough to be acquired by others at a satisfying multiple, or they can go public.
The combination of sky high valuations, equally high burn rates, and a disappearing IPO market is not a pleasant one. I am fairly confident that both Square and Box can and will navigate the valuation trap, but it will require making some hard choices in the coming months.
So the moral of this story is that you can push valuations when you have investors knocking down your door, but unless you are cash flow positive and expect to remain so for the foreseeable future, you do that at your own risk.
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