This week one of the world’s largest investors radically revised down its investment into one of the world’s most valuable private companies.
SoftBank’s decision to slash its investment in the shared-office provider WeWork from $16bn down to $2bn will have sent shockwaves through Silicon Valley board rooms. The Japanese investor also revealed that its Vision Fund, backed by Saudi Arabia and Abu Dhabi, was no longer involved in the deal. So, has this spelt the end to soaring valuations and mega-funding rounds for start-ups?
Anand Sanwal, chief executive and co-founder of CBInsights, does not think so.
“This is mostly about WeWork being revalued as a real estate company rather than tech company. This does not signal a wider market slowdown in private markets,” he said.
Mr Sanwal may be right. Private markets are awash with cash. Venture capital-backed companies raised $207bn globally in 2018, up 25.9 per cent year on year, while the aggregate value of tech unicorns in the US hit a record $526bn.
If technology companies Uber, Airbnb, Pinterest and Slack were to float this year at their rumoured initial public offering valuations, they would all rank among the 10 largest venture-backed IPOs by value.
But no one is immune from the weakening sentiment seen in the public markets. One leading European venture capitalist said: “I think there is a lot of reason to believe that it will trickle down. It has to trickle down.”
He believes it will be tough for private companies who are preparing to raise a new round of funding and value themselves against comparable public companies whose share prices have recently tumbled.
“There is probably more merit in waiting than in rushing” to close a new round in the current climate, the investor added.
And those with untested business models could also be at risk. Mr Sanwal suggests that for a lot of tech start-ups, their business model is just about raising money. He sees a flight of capital if the malaise in equity markets and economic outlook continues to weaken.
“Over the last many years, tech investing has seen what folks might call tourists entering the space. All the cool kids investing in tech attracted lots of capital — from hedge funds to sovereign wealth funds. When sentiment changes, those folks may run back to their core,” he said.