When Uber raised money in December for a $40 billion valuation, investors including TPG Capital were assured a return if the car-hailing company gets sold below a certain price. Airbnb investors got similar protections, which typically come in the form of more shares or cash.
No Exits
Underlying the concerns is the lack of investment exits already facing some venture capitalists. Tech startups are staying private longer, either by choice or market conditions, so IPOs and acquisitions have fallen off, the typical way investors realize a return.
Those conditions could worsen in a downturn as capital dries up, so some investors are telling firms they’ve backed to quickly raise as much money as possible and stick it away.
“When valuations are high, one way you hedge your bets is you take as much capital at the high prices as you can and you hold on to that capital,” said Tim Wilson, managing director at Artiman Ventures, a Palo Alto, California-based firm. “If the market does turn against you, you’ve got cash in the bank to make it.”
Other investors are simply putting less money into startups as the number of so-called unicorn companies -- those with valuations exceeding $1 billion -- soar. The Queensland Investment Corp., a $70 billion sovereign wealth fund in Australia that gives money to several venture capital firms, has trimmed its investments in technology, said Phil Cummins, a principal at the fund.
‘Powder Dry’
“We’ve been cautious,” Cummins said. “You have to be conscious of the cycles. We’re easing off as opposed to going harder.”
Karsan, the Philadelphia financier, who began investing in startups after selling his previous company Kenexa to International Business Machines Corp. for $1.2 billion in 2012, stopped backing technology companies about six months ago. He declined to reinvest in fantasy sports company FanDuel Inc. because of a high valuation.
“I’d rather sit on the sidelines and keep my powder dry,” said Karsan, who runs Karlini Capital, a family-office fund.