Venture capitalists and angel investors are closing, selling and otherwise dispatching portfolio companies at a rapid pace, eager to avoid the losses that plagued the industry after the dot.com bust.
In some instances, companies are sold for the cash on their balance sheet, essentially valuing their businesses at nothing, say entrepreneurs and investors.
Investors selling companies faster than they should
In others, an acquirer’s obligation in a buyout might be little more than the liability of a severance package for employees to be let go.
In many instance, VCs are simply unwilling to fund the youngest of their companies for what they calculate could be four years or more. That’s how long some worry it could take for the IPO market to open up again.
“I think the funds are picking their winners and losers really fast,” says Scott Yara, president and co-founder of the database startup Greenplum.
The rapid realignment of the venture business since late September contrasts sharply with slower shakeup that followed the dot-com bust in 2001, when VCs and angel investors held onto their companies hoping for a quick turnaround. Back then, several years of a slow economy led to write-downs, company failures and poor returns for funds.
VCs are reacting “much faster than last time,” says Ben Smith, chairman and co-founder of MerchantCircle, “much faster than they should.”
Investors reason that their companies will have a hard time getting additional financing or hitting business milestones – which would increase their attractiveness to future investors. At the same time, forecasts for growth are coming down 50 or 60 percent.
Without the prospect of new capital, companies burning through $500,000 a month will need to turn to their original investors for more money. This burden could quickly add up to more than a venture fund is willing to pay. Selling them for next to nothing and getting a small equity stake in a better-financed acquirer is seen as a worthwhile option.
A lot of good companies are being killed off or sold, says Smith.
[...] but about what’s really happening in the cosy venture capital world of Silicon Valley today: fire sale of startups; cram-downs, slashing startups valuations; venture capitalists layoffs; venture firms closing, [...]