Times are reportedly tough for the world of venture capital (VC) and tech startups.
As the Wall Street Journal (WSJ) reported Wednesday (Nov. 13), investors are seeking returns from VC companies and startups despite a weakened initial public offering (IPO) market. The WSJ points to a report by law firm Ropes & Gray showing that IPOs this year climbed compared to last year, though is still sub-normal.
In this environment, the report said, VCs and older startups are trying to create liquidity by selling to private equity, though the rewards are often muted compared to what they’d get from an IPO.
At the same time, private equity (PE) firms are growing more active in the tech sector, the WSJ added. Tech companies accounted for 28.3% of total PE deal value in the third quarter, compared to 18.7% in the second, according to Pitchbook private equity analyst Garrett Hinds.
“Some of the VC-backed companies that have been private for longer and have sufficient scale have been in the radar of private equity,” Hinds said.
He added that private equity buyers could eventually widen their scope beyond the high value purchases that were obvious during the third quarter.
This year has seen a few high-profile PE acquisitions, such as KKR and Dragoneer Investment’s $4.8 billion deal for educational tech company Instructure Holdings and Bain Capital’s $4.5 billion purchase of financial tech company Envestnet.
Last month, Nasdaq CEO Adena Friedman said she expects the IPO market to recover this year, telling an audience at an Axios event that while the public markets have seen a banner year, not every business is benefiting, including those with lower valuations.
“It’s a little bit of a tale of two cities,” Friedman said. “Large cap, which has done very well, and you can kind of see in the S&P 500, you have a 10% kind of valuation increase in a large cap. But if you look at the small cap index, they’re actually down 10%.”
And many later stage companies, she noted, are not fully prepared for an IPO, hoping to go public after a strong year, which has been harder amid higher interest rates.
“They want to have 12 months of really strong performance before they start to think about coming out,” Friedman said.
“The cost of capital environment has made it so that companies, those that are relying on capital to continue to grow their businesses, are definitely trading at a discount.”
U.S cryptocurrency stocks fell in early trading Thursday (April 3) following the latest White House tariffs.
As Reuters reported, the sweeping new levies have left investors shaken, leading them to sell riskier assets. Bitcoin fell 2.3%, the report added, with ether down 3.3%.
While President Donald Trump appears more crypto-friendly than his predecessor, the report notes, wilder economic instability tied to the sector could still affect some companies. However, some analysts argue the price drops were less dramatic than in other industries.
“The price action highlights crypto’s hyper-democratic and borderless nature, allowing investors worldwide to hedge against the potential impact of macroeconomic uncertainties,” said David Hernandez, crypto investment specialist for 21Shares.
Crypto exchange traded funds (ETFs) could also see some retail investors who will be hunting for opportunities, Marco Iachini, senior vice president of research at Vanda Research told Reuters, adding that size of that flow could shrink in shakier conditions.
Trump’s latest tariffs, announced Wednesday (April 2) are a sweeping set of country-based levies. Though described as “reciprocal,” the president said that doesn’t necessarily mean parity, as many of the tariffs on U.S. trading partners settled at around half, or less: China was levied duties of 34%, the European Union 20%, India 26%, Switzerland 31% and Japan 24%, among others.
There’s also a 10% blanket tariff on imports, a 25% tariffs on automobile imports, and a similar tax on auto parts set to go into effect next month. This is on top of the tariffs the administration has already imposed on Canada, Mexico and China, and on automobiles, steel and aluminum.
“The implications are as vast as they are immediate,” PYMNTS wrote Wednesday. “From global supply chains to financial transactions, the recalibration of tariffs could have far-reaching consequences. As enterprises grapple with new realities, the relationship between tariffs and know-your-business (KYB) compliance has become intertwined.”
The report added that tariffs can incentivize companies to find new suppliers or partners, especially when trying to avoid higher costs.
“At the same time, when tariffs are imposed or adjusted, businesses must ensure compliance not only with customs regulations but also with broader compliance frameworks, including KYB,” PYMNTS wrote.
KYB has become a crucial part of corporate compliance, that report added, especially for financial institutions and multinational corporations managing complex supply chains.
“Increasing tariffs can create incentives for businesses to resort to fraudulent practices such as transshipment, undervaluation, or misclassification of goods,” PYMNTS wrote. “Robust KYB protocols are instrumental in helping to detect these schemes and safeguard corporate compliance and reputation.”
