From shared office space start-up WeWork to ride-hailing service Uber, the star companies used to be big, but the company’s value has evaporated by $100 billion so far this year. The reality has made venture capital investors more cautious about investing and has prompted some start-up executives to place more emphasis on the company’s profitability than business growth.
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In recent weeks, both Fair, the start-up car rental company, and UiPath, a software company, have scaled back their homes. Lime, the ride-sharing company, has adjusted its operating model to prove to investors that it can be profitable.
“It’s like we’ve been at a hilarious party for five years, and now someone’s turning on the lights,” says Chris Douvos, whose company, Ahoy Capital, invests in venture capital firms and start-ups. “We’re all adjusting our eyes, and no one knows what’s going to happen next night. That’s what Silicon Valley feels right now. ”
Investors say start-ups remain cash-rich and interest rates are at historic lows, and private market values are unlikely to fall further sharply. However, the scale of the company’s loss of value has created uncertainty for the venture capital industry that has not been seen for many years. It has also prompted some investors to reflect on themselves and call on management to strengthen corporate governance.
Entrepreneurs, venture capitalists and start-up advisers say it now takes longer to raise money. Venture capitalists say it took a month or more for a consumer technology company to complete a financing deal in a week or two just six months ago. Adam M. J. Epstein says start-ups planning to raise $80 million to $100 million are now being told by investors that they expect to be between $20 million and $30 million.
WeWork’s stubborn decline was particularly alarming when WeWork’s parent company, We Co., filed a listing application detailing huge losses, loose corporate governance and multiple conflicts of interest. In the latest round of private-equity, We Co.’s stubbornness was $47 billion. When Japan’s SoftBank Group bailed out the company last month, it was valued at just $8bn.
Uber’s market capitalisation is now about $33 billion below its valuation at the time of its initial public offering in May, while Lyft has lost about $10 billion since it went public in March. E-cigarette company Juul Labs said earlier this month it would cut about 16 per cent of its workforce. Its biggest investor cut Juul’s valuation by $14 billion after it shelved its best-selling e-cigarette products under pressure from regulators.
“Every few years it’s a good idea,” Epstein said. “WeWork’s impact on the financing market is huge. I saw it with my own eyes. ”
In the past two months, some limited liability partners have once again expressed concern about repossessing their investments at meetings with venture capital firms, according to investors. The number of U.S. IPOs fell by more than a third in the second and third quarters of this year, according to Renaissance Capital, a fund manager and IPO research firm. In the third quarter of this year, the amount of financing from so-called “unicorn” start-ups and the average dollar value of those financings fell to their lowest level since the second quarter of 2018, according to Data Firm PitchBook.
If investors choose to impose tighter controls or demands on businesses, the effects will soon be apparent.
The spending of cash and competition and regulatory challenges have raised considerable doubts among investors about the spending of the slain Lime’s last round of financing, which ended in the first quarter of this year, taking twice as long as expected by company executives, the sources said. Now Lime has focused more on the profitability of its urban business. ‘Lime has made a profit in some cities, in part because it has improved the durability and maintenance speed of electric scooters, ‘ the person said. The person also revealed that company executives had visited their warehouses by skeptical investors to demonstrate new efficiencies.
Lime is back in funding, the person said, hoping to raise hundreds of millions of dollars by December or January. In addition, the company plans to rely more on debt to fund its electric scooters. Lime said it expects to make a profit by 2020, after deducting certain expenses such as taxes.
Investment Management Association Inc. Vitaly Katsenelson, chief executive, likened the current situation to an adjustment in internet stocks 20 years ago.
“We’re in the age of dotcom bubble 2.0, but it’s not happening in the open market, it’s in the private market. In October, Mr Katzenalson’s Colorado investment firm sold its stake in SoftBank because of doubts about the Japanese investor’s planned second Vision fund.
In an industry that has been booming for the past decade, even subtle signs of tightening can be noteworthy. According to PitchBook, annual venture capital investment in the U.S. jumped from $27 billion in 2009 to $138 billion in 2018.
New York-based UiPath is a start-up that sells automation software to businesses. A company spokesman said it laid off about 400 employees in October because of a renewed focus on profitability, though she said UiPath was still hiring. People familiar with the matter said the job cuts came after the company failed to meet some of the targets investors had expected.
Fair, a Santa Monica, California-based car rental company, cut about 290 jobs last month with only one month’s salary and one week of health insurance. In less than a year, the company has invested most of its $380 million in marketing, hiring, real estate and other growth plans. Fair, backed by SoftBank’s $1,000 Vision Fund, buys cars and rents them out to consumers or drivers working for Uber. The latter is also the company in which the Vision Fund invests.
When Scott Painter, The former chief executive of Fair, went to SoftBank’s headquarters to conduct a joint review of the company’s finances, before And ePo cancelled, according to former Fair employees, when Scott Painter, The former chief executive of Fair, went to SoftBank to ask for more money.
In the wake of the WeWork crisis, SoftBank is seeking to shorten the time it takes to make a profit and seek stricter governance standards for the start-ups it invests in.
Mr. Pate, who is still chairman, is seeking more money to keep the company running. Less than a year ago, SoftBank valued Fair at $1.2 billion.