Investors urge tech start-ups to hoard cash

Venture capital investors are warning their start-ups to hold more cash as worries about the global economy and stock market volatility threaten to trickle down into private tech financings.

“We are certainly telling [entrepreneurs] they need 18 to 24 months of runway right now, to make sure they can weather any situation,” said Danny Rimer, a partner at Index Ventures.

Just a year ago, Mr Rimer would recommend companies to hold enough cash to cover nine to 12 months’ worth of expenditures and delay raising new funds if they thought they believed they could achieve higher valuations in future. Now, he suggests start-ups seek more capital sooner rather than later, and at more modest valuations.

Venture capitalists make record investment in 2018. Deal value increases from $40bn in 2008 to over $120bn in 2018 in the US

Ten years ago, Silicon Valley venture firm Sequoia sparked concerns about a tech bubble with a presentation to its entrepreneurs declaring “RIP good times”. Sequoia’s presentation, which was sent out to portfolio companies at the height of the financial crisis in late-2008, warned that any start-up without a year’s worth of cash in the could find itself in trouble as the economy slowed.

While investors are not yet using such dramatic language, some have warned tech companies that a downturn in the economy could cause bigger businesses to cut IT spending and make it more difficult for funds to raise capital.

“We’ve started to be a little more cautious about that run rate . . . it should be a year or one-and-a-half years,” said Klaus Hommels, founder and chief executive of Zurich-based venture firm Lakestar. “The likelihood of being refinanced and achieving a huge valuation is less.”

SoftBank’s decision to slash a planned investment in WeWork, the shared office company, from $16bn to $2bn has also led to fears that valuations for private tech companies will come down, just as they have for high-flying public tech companies such as Nvidia, Snap or Apple in recent months.

However, some investors say there is far more capital available for tech companies now than in 2008. Investment has flowed into both traditional venture capital firms and later-stage funds such as Softbank’s $97bn Vision Fund, in search of better returns while interest rates remained low.

Nonetheless, despite the emergence of more start-ups with multibillion-dollar valuations, tech start-ups are still seen as a riskier investment than the public markets.

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UK augmented- start-up Blippar was forced into administration before Christmas after a shareholder dispute over funding when Malaysia’s sovereign wealth fund blocked emergency investment from property tycoon Nick Candy. Last month, the company relaunched under the same name after Mr Candy’s investment firm bought its intellectual property assets.

It is not uncommon for tech start-ups to end the year without enough cash to cover a year’s worth of costs, in anticipation of future funding rounds.

According to its most recent public filings, London-based artificial intelligence start-up BenevolentAI, which is valued at more than $1bn, had £19.6m of cash and cash equivalents at the end of 2017, but that year recorded research, development and administrative expenses of £36.7m. The figure includes £12.2m of share-based payments that only impact cash holdings when employees leave.

But the following April, the company was able to raise $115m from investors including Woodford Investment Management.

For investors, the concern is that start-ups founded in the last 10 years will only have experienced a strong economy and could be unprepared for a downturn.

“This year we want to look at all the companies in the portfolio and see they have enough cash in the bank,” said Lars Fjeldsoe-Nielsen, general partner at Balderton Capital. “There are some companies that are burning a lot of cash right now . . . many of the companies we invest in haven’t seen the downside.”

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