In Depth

Will Wall Street Carnage Hurt Startups?

When the stock market slump is over, and when the carnage is tallied, with investors licking their wounds and taking inventory of what went wrong and when – will startups be among the biggest casualties?

That’s certainly the topic of conversation around the virtual water cooler these days. And unsurprisingly given all the buzz about the bulging roster of “unicorns,” the fanciful moniker bestowed upon companies with $1 billion plus valuations. Companies in this rarefied pantheon, including Uber and Snapchat and Square and Stripe, have yet to go public, though rumors pop up all the time about when they might.

But, companies that have reached dizzying valuation heights, with implied market caps standing at multiples of the funds already raised, or most recently raised, may be in for a bit of pain when they do go public.

If they go public at all.

We may have seen a shot across that bow at the end of last month, when genetic test maker RainDance Technologies shelved plans for an initial public offering for roughly $60 million, an event that had been anticipated since its winter 2015 filing with the Securities and Exchange Commission. The reason cited? “Adverse market conditions.” There were no indications that the company will be looking to return to the public markets anytime soon.

The options for those with an intended IPO are few – very few. Well, there are essentially two during a market downturn: Lower the offering price or simply decide not to list shares.

Both strategies smack of expectations that 1) company shares are not worth what others thought they were worth before the IPO filing. This implies that neither the executives nor the investors — be they venture capital firms, banks or individuals — know how to value the company amid turmoil. Or that 2) investors would send shares lower anyway.

There’s already been a downdraft of sorts, with several IPOs, including a couple of alternative lending players, OnDeck and Lending Club, trading below their offering prices. And no less a poster child for the Internet than Twitter has also fallen from grace, trading below its initial debut on the public markets.

In an environment like the one just described, the ultimate and quickest losers are the investors that gave early and later stage capital. The easiest “exit strategy” has been effectively closed off, and now backers must wait either for an eventual market rally and an eventual IPO. Or they could hope for, or actively seek, a buyout. But in a falling market, valuations shrink, and so too do the premiums that would be paid to the “smart money” that got in during a startup’s early days.

And what of the companies themselves?

Amid a protracted, and steep market downturn, the entrepreneurs with stars in their eyes about IPO riches may blink twice – perhaps they may never move beyond the planning stage. For those executives who have gotten, say, Series A under their belts, going back to the well may be an arduous task, with pressure on valuations limiting funds raised the next time around (known as the “down round”) or would-be investors negotiating for a bigger slice of the pie for a relatively stingy investment. Liquidity is the lifeblood of young companies, and things are looking less liquid.

That could have a real dampening effect in areas where innovation can truly transform lives, such as in emerging markets, or in industries that have potential but are just getting started, like the Internet of Things, or mobile commerce, or…you name it. After a while, innovation stymied has an effect that moves beyond the stock market and impacts everyday life. And that may be the biggest and most unfortunate impact of all.


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