Doesn’t time fly?
For many in the startup community, the first three months of the year have whizzed past. However, for the IPO market it has been a bit of a drag – actually it has been flat as a pancake (see Chris Tottman from Notion Capital’s blog post for further insight). It is the first time in 6 years that there hasn’t been a tech IPO for a full quarter. There are obvious implications to the pre-IPO market – startups and investors alike. But what the hell does this mean to earlier stage investments and investors?
The best analogy I can come up with is when you are driving down the highway minding your own business and you see a car being driven erratically ahead. The driver slams on their brakes and suddenly you can see the brake lights of the following cars flicker on – like a wave moving towards you and suddenly you find yourself braking and at a standing stop with no obvious reason. Otherwise known as a phantom traffic jam. Interesting the way to best avoid them is to enforce lower speed limits which ultimately allows the traffic in aggregate to move faster.
There are many analogies with investment market. The best investors are those who remain disciplined and recognise that it’s a marathon (which the markets have just extended) rather than a sprint. To quote a good friend “it only takes a cheque book and pen to be an investor”. Less experienced investors act more erratically, being driven by the emotional rollercoaster and wider enthusiasm – assuming that markets always move upwards. As the investment market expands with new less experienced players it will create phantom traffic jams.
What does this mean in practical terms? The IPO market is locked for the foreseeable future – conservatively assume to the end of 2016. Many of the late stage and unicorns rounds were overpriced relative to the public markets. Ratchet mechanisms mean that these investors will get their money back, but not as quickly as they hoped and the founders (and early stage) will get crushed by preference and liquidation rights.
It is my expectation that VCs will draw their wagons around, and (conservatively) assume that any follow on funding for the remainder of 2016 will have to come from their own funds. VCs are more likely to protect their reserves for their own portfolio and slow down investment into new companies. This will also be driven by market uncertainty particularly around valuation. This knock on effect will ripple down through the market and will impact earlier stage (and possibly seed investments) for the remainder of the year.
Interesting European and Israeli data published by Gil Dibner indicates that the IPO slow down hasn’t had an effect in Europe. However there were a couple of points which he made that were relevant to the comments above
- There were 4 mega-rounds in Europe – none of which attracted US VC participation
- In fact, US VC participation decreased as a percentage of deals done across Europe & Israel
But don’t make the unfortunate mistake of putting your head in the sand and ignoring the broader signals. You can be assured that the waves from this passing “west coast” ship will be eventually hit the shore – even with lesser power – and the slow down IPO market will be felt by all both geographically and at all stages.