Late Stage Investors Making More Bad Calls: VC


Another venture capitalist has come forward to say that the playing field in Silicon Valley is slated to get sparse in the coming years.

“We’re in an environment where the late-stage private investors have not done a great job on discerning between the durable companies that are going to be there for the long haul, and the companies that may have great growth, but not sustainable growth,” Geoff Lewis, partner at Founders Fund, said recently on CNBC’s “Squawk on the Street.”

Lewis said that while many startups are investing heavily in activities with high returns, some are simply spending $1 to make 85 cents — and those startups should expect to disappear in the next few years.

With a large number of so-called unicorn startups valued at $1 billion or more, tech veterans from Benchmark’s Bill Gurley to Chamath Palihapitiya of The Social+Capital Partnership have foreshadowed that unprofitable startups may see funding streams go dry.

“Unicorns are supposed to be unique,” Internet analyst Mark Mahaney told CNBC Wednesday. “If there’s 100 of them, they’re not unique. There are going to be … some players in there that don’t justify their valuations and probably aren’t going to be around. And investors are going to have to get used to something called the down round, which in other instances is called, an IPO.”

Mahaney said many highly valued startups might not gain the same favor in public markets.

Initial public offerings in the technology sector hit the lowest level in six years in the third quarter of 2015, according to data released Thursday by Renaissance Capital. Across sectors, IPOs were down 45 percent year-on-year, and for the first time in four years, average IPO returns were negative across sectors, the Renaissance report said.

As investors look forward into 2016, Renaissance sees a packed pipeline of IPOs ahead

“I’d love to see some of those [unicorn] companies go public,” Mahaney told CNBC. “It would be more opportunity for public investors to invest in some of these plays.”


Reprinted by permission.

Image credit: CC by Dolores Park Works

About the author: Anita Balakrishnan

Anita Balakrishnan is a news associate at CNBC.

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