Downside Protection
“We don’t want to be in a situation where we wake up on a Monday nine months from now and say, ‘What the heck have we done,’” he said.
On the other side, Andreessen Horowitz, one of the most prominent venture capital firms in Silicon Valley, published a detailed report last month insisting that a bubble doesn’t exist. The continual flow of venture money in part reflects that companies are staying private longer, requiring more capital, according to the report.
Regardless, some investors have adopted a variety of methods to hedge their bets.
Accel has become pickier about its late-stage investments - - opting to avoid some larger rounds where valuations are especially high -- and more aggressive in investing in new companies. These early-stage startups can absorb the ups and downs of the market in the five to ten years while they are growing.
Sell Now
“The best way to invest in them is to invest $6 million in a Series A and not to pile on $50 to $60 million in something much later,” said Accel’s Wong. “There’s a next cycle that’s coming, and this is a buy-low, sell-high game.”
Accel also is suggesting that founders who don’t have the desire to build their company for another three to five years consider selling or going public now, moves that might assure a return to the firm.
Those venture capitalists who continue to invest in late- stage companies are demanding -- and getting -- protections that guarantee them a return even in a downturn, according to a study of 37 startups this year by law firm Fenwick and West LLP.
All of those startups, valued at more than $1 billion each, protected investors in the event the company sold for a lower amount, Fenwick said. About 30 percent of them also offered downside protection in the case of a weak IPO.