IPOs

Despite all the capital that venture firms have managed to raise in the first and second quarters of this year, venture capitalists at an investor panel at Fortune’s Brainstorm conference this morning said that early-stage valuations are softening, reality is “setting in” for unicorn companies that are too richly valued to be acquired and too immature to go public, and that there’s much more focus on revenue than in recent years.

The VCs also blamed bankers on their messaging to founders, which, until recently, was to focus on growth at all costs.

When it comes to very early-stage valuations, Floodgate cofounder Ann Miura-Ko said she thinks her firm is seeing more “willingness by entrepreneurs to take much lower valuations than what their initial expectations were” for two reasons. One is increasing conservativeness on the part of venture capitalists. The other, she said, is “fear for the next round of financing. They’ve already heard from other entrepreneurs that the next round of financing is going to be really difficult.”

In terms of falling valuations for later-stage companies, general partner Roger Lee of Battery Ventures said they’re all but inevitable, given that there’s been one “truly notable” tech IPO in the U.S. so far in 2017.  As he noted, a new category of investors had emerged — including hedge funds and mutual funds — to fund these companies’ later stage funding rounds based on the assumption that there would be a brisk IPO market. Absent one, these companies now need to “focus on the fundamentals” to prove that they’re worth the valuations they were assigned.

Of course the big question, and one posed by Brainstorm co-chair Dan Primack, is why companies weren’t focusing on the fundamentals from the start. “Is it the [founders’] fault or yours,” he asked the VCs, including Spark Capital general partner Megan Quinn, who readily acknowledged that there was “certainly a point in time in the Valley when investors were funding growth above all else.” Because “public markets were rewarding it?” Primack asked. “Yes,” said Quinn, “exactly.”

It’s an observation that Jeff Fagnan, a founder of Accomplice (formerly the tech group at Atlas Venture) agreed with wholeheartedly. VCs’ focus on growth was “definitely driven by the public market,” he told those gathered. “I remember being in a couple of IPO bakeoffs, and these bankers would always focus on [growth] . . . And they said, ‘You don’t really need to worry about profit. Just grow. This is the story that everybody wants to buy.’”

More here.

Earlier today, Renaissance Capital, the IPO research firm, published a new report about the first quarter of this year, and it didn’t paint a pretty picture.

For starters, it noted the U.S. IPO market hit the lowest levels in the first quarter since the financial crisis of late 2008. It noted that not a single deal priced outside of the health care sector (which we’d flagged in this recent story). It also noted that of the eight deals that managed to price and collectively raise $700,000 million, the companies’ performance was largely propped up by their venture backers, who bought shares during and after the IPO.

There is, however, a silver lining. Echoing a conversation we’d had last week with another IPO expert — IPOScoop founder John Fitzgibbon — Renaissance Capital Principal Kathleen Smith tells us that a handful of pre-IPO companies could soon inject new life into the torpid IPO market. We talked this morning; our chat has been edited for length.

Renaissance’s new report notes that healthcare IPOs have averaged a return of 20 percent so far in 2016, but it adds that that’s thanks to “substantial buying by their existing shareholders.” Is that a bad thing?

It doesn’t mean they aren’t doing well, but it means there’s concern about their liquidity. Their tradable float is small — even smaller than their deal size would suggest.

That’s not a brand new trend, though. Haven’t health care investors long bought up shares to keep the price of their portfolio companies from dropping until the stock becomes more liquid? 

It has long helped to get the deals done. But we’ve seen the percentages increase quite a bit. It used to be that [VCs] would [buy up] 15 percent of the [IPO and post-IPO] shares; now it’s more like 40 percent, and I’d say it began ticking up over the last 24 months. In one recent deal, [for the gene editing company] Editas, insiders bought 67 percent of the float.

The goal in going public is to establish a valuation publicly that either helps other companies to understand them and perhaps buy them at that accepted valuation, or to raise more money down the road, which most [biotech companies] need to do, even though most [generate] capital from the IPO.

In the meantime, there were no tech IPOs in the first quarter. How worried should private tech investors be?

More here.

If we had to gamble on it, we’d bet the IPO market will be far more brisk this year than last year, which was the worst year for tech IPOs in particular since 2009.

Even still, it came as a bit of a surprise yesterday when not one or three but six biotech startups revealed plans to go public. (If you recall, biotech IPOs, which ticked along nicely for a couple of years, practically came to a standstill in the second half of last year.)

If you happened to miss the steady string of announcements — which, as Bloomberg notes, comes one week before JPMorgan Chase & Co’s big annual health care conference in San Francisco — here are the handful of companies that plan to test the IPO waters soon:

1.) Audentes Therapeutics. It’s a three-year-old, San Francisco-based  biotechnology company focused on developing and commercializing gene therapy products for patients suffering from serious, life-threatening rare diseases caused by single gene defects. One of those diseases is myotubular myopathy, a degenerative muscular condition that afflicts almost exclusively males and kills one in every 50,000 newborns by the time they reach age two. The company plans to raise $86.3 million offering. As the San Francisco Business Times notes, Audentes first filed IPO plans confidentially in early November, about a month after it raised $65 million in a Series C funding. According to CrunchBase, it has raised roughly $138 million altogether, including from T. Rowe Price, Venrock, Sofinnova Ventures, and 5AM Ventures.

2.) Editas Medicine. Like Audentes (and many biotech startups to go public before it), this Cambridge, Ma.-based company is also awfully young at just two years old. What it does: develop treatments to modify disease-causing genetic defects. What it’s planning: to offer up to $100 million in stock. That’s less than what it has raised from private investors to date. According to CrunchBase, Editas has collected around $120 million from investors, including Flagship Ventures, Polaris Partners, and Third Rock Ventures. (The Boston Globe has more here.)

3.) Corvus Pharmaceuticals.This Burlingame, Ca.-based company is practically brand-new, having been founded in November 2014. But that’s not stopping it from attempting to raise $115 million in an IPO for its business, which is focused on the development and commercialization of immuno-oncology therapies that harness the immune system to attack cancer cells. Its plans aren’t as crazy as they sound.

More here.