For a company at an early stage, it is becoming more and more difficult to find a buyer.
A report released by pitchbook on Wednesday showed that the exit value of U.S. venture capital backed start-ups in the second quarter was the lowest in more than five years.
After the already slow first quarter, analysts estimated that only 831 people withdrew in the first half of this year, equivalent to an exit value of $49billion. In 2021, there were 883 transactions worth $372.2 billion in the same period.
Venture backed start-ups hope to liquidate their shares or withdraw, so as to return cash to shareholders. The company can be listed by applying for an IPO or merging with a publicly traded special purpose acquisition company, or it can try to be acquired by another company.
However, analysts said that as interest rates rose and the recession loomed, exit activity was slowing rapidly.
Pitchbook found that the number of venture capital supported start-ups listed through IPO reached a 13 year quarterly low, and only eight were completed in the second quarter of this year. The report said that in the first half of this year, the total number of companies listed through IPO was only 22, lower than 183 in 2021, a year-on-year decrease of nearly 88%.
According to the report, many late stage companies that may be on the road to public listing may need to reconsider their exit strategies. It added that startups that rely on open market valuations to price financing rounds need to “cool pricing expectations”
In the Northwest Pacific region, companies without venture capital support were listed through IPO or spac merger in the first half of this year. At the same time, Seattle start-ups that successfully listed in 2021 through merger with spac are struggling, and each is down more than 50% from the previous peak.
Ginger chambers, head of research at J.P.Morgan chase commercial banking, said in the report that the longer the IPO market remains calm, venture capital backed companies may evaluate mergers and acquisitions.
She added that “there is a lot of liquidity over the counter”, referring to $2trillion of cash on the balance sheet of Companies in the S & P 500 index, and $750billion of U.S. private equity financing has not been spent.
Nevertheless, according to geekwire’s M & A and IPO list, in the Pacific Northwest region, there were only 10 M & A or public listing transactions in the first half of this year, compared with about 60 in 2021.
The report said that when listed companies decrease during the economic downturn, they should theoretically “start a series of new acquisitions”. However, at present, several factors may slow or inhibit this rise.
Many publicly traded technology companies use stock purchase companies. However, during the economic downturn, these quotations are not attractive to sellers, the pitchbook report said. Listed companies have also been suggested to limit their spending, and they can abandon acquisition activities completely.
“Cash is no longer free.”
Another factor is that in the current environment, the valuations of many start-ups (the price buyers need to pay for their companies) are frustrating. According to the report, private companies usually use multiples of comparable listed companies as the basis for their own valuations, which means that the decline in the stock market also means the decline in the share price of their start-ups, which may hinder the current exit of start-ups and their investors.
Aviel Ginzburg, general partner of seattle’s founders’s co OP, said that many entrepreneurs and venture capitalists did not agree with their expectations of their entrepreneurial value and the price the market was willing to pay for it.
He said that the company acquired start-ups to obtain talents, but because many companies are cutting costs and layoffs, these types of acquisitions “make little sense.”
Jinzberg said that acquisitions in the technology sector are usually also to expand the company’s product or service portfolio. He added that in times of uncertainty, they would choose to insist.
“If the market is more concerned about profitability and fundamentals than growth, then such an acquisition is meaningless,” he said. “Cash is no longer free.”