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Tech start-ups are getting tougher to value, says investor

The number of IPOs priced in the second half of 2015 is the smallest in three years

PUBLISHED : Tuesday, 10 May, 2016, 12:41pm
UPDATED : Tuesday, 10 May, 2016, 3:14pm

The lack of IPO activity in the tech sector is making it much more difficult to judge what high-valuation start-ups are actually worth, one investor said at a technology panel Monday.

Chris Douvos, managing director and general partner at Venture Investment Associates, graphically described the lack of IPO activity as an "exit sphincter" leaving LPs, investors that fund venture capital funds, out of money to reinvest. Douvos' comments came at a Monday panel at TechCrunch Disrupt in New York City.

Only 51 IPOs priced in the second half of 2015, the smallest batch since 2012, according to Proskauer's Capital Markets Group's 2016 IPO study. The first half of 2016 is on track to add even fewer.

"If I could wave a magic wand, I would invent a way to short, at times, private companies. That would bring back the equilibrium," he said.

Now, investors are faced with undesirable merger options at valuations that seem "divorced from fundamentals," said Union Square Ventures partner Andy Weissman.

"A lot of venture funds look amazing on paper," Douvos said. "As an industry, we're headed for this moment where the unrealised becomes the unrealisable. And that's the moment of nausea."

Valuations of private start-ups have soared in recent years — with the number of companies valued at more than US$1 billion growing to 150 from one since 2009, according to CB Insights. But start-ups that have gone public, from Twitter to Square, are sinking below their IPO prices. It's a situation akin to minor league baseball players making more than their major-league counterparts, said Josh Kopelman, partner at First Round Capital.

"We're seeing this first kind of chill," Douvos said. "We are starting to see tech company layoffs."

Douvos has in the past blamed "entitled founders" and "founder-friendly" venture capitalists for Silicon Valley's problems. But VCs are tasked with the difficult job of finding the best comparisons in determining valuations, said Kopelman. For instance, Kopelman asked, should the value of financial technology companies be compared to technology marketplaces or lenders?

Some have argued that the popularisation of the mobile phone is driving the creation of companies that are fundamentally two to three times more valuable than anything that could have been created in the past, justifying the higher valuations, said Weissman. But while amazing companies are being built, Kopelman said he doesn't agree they are all as "epic" as their valuations imply.

Despite the slight dip in start-up valuations, the industry is far from the kind of grinding-halt downturn of the dotcom bubble of the early 2000s, the trio said. The world of venture capital isn't falling apart — it's just different, Weissman said.

"It's still an attractive time to be an entrepreneur," Kopelman said.