The Bloomberg U.S. Startups Barometer, which tracks the business conditions for U.S.-based private technology companies, reached a record high. A 44 percent increase from a year earlier was driven by a surge in the number of businesses that raised money for the first time, reflecting investors’ appetite to back the riskiest companies. […]
Among the businesses that announced an initial round of financing in recent weeks include Seattle-based Tomorrow, which sells life insurance and offers estate-planning services through an app. Founder and Chief Executive Officer Dave Hanley said that he had a much easier time raising money this time than when he was leading prior businesses.
“I actually never got on an airplane to raise any of this money,” said Hanley. “Investors came to us.”
But here’s the kicker:
More worrying is the slump in the number of companies that get acquired or file for initial public offerings. Exits, which deliver returns to investors so they can reinvest that capital to younger companies, are down 29 percent from a year earlier. Disappointing post-IPO performances of Blue Apron Holdings Inc. and Snap Inc. may further discourage private companies from listing in public markets. Blue Apron shares have fallen almost 50 percent since the company went public; Snap shares have declined 19 percent.
Time will tell, but I think it’s entirely possible that the two phenomena are related, at least partially. Whenever capital chases investments, bubbles are rarely not far behind, whether in private or public markets. But when it occurs in private market, there can be consequences for later capital formation when firms go public. Even for tech.
Simply put, when young companies are awash in capital, they may not face sufficient pressures to be efficient or profitable, even when they proceed to a public offering. Plus frothy markets, and a global competition for listings, have enabled dramatic curbs on shareholder governance that do not enhance the value proposition for investors (and negatively impact liquidity). And business plans and supply chains may not even be fully operationalized. In any event, once some firms seek to go public, or go public, heightened transparency can bring legacy and governance problems to light that can depress stock performance.
More money in, less money out may not exactly be the most apt description—but it’s not entirely off base, either.