By Alastair Goldfisher
One of the themes we at VCJ are keeping an eye on in 2017 is how venture-firm portfolio companies are doing.
Following last year’s robust fundraising, in which U.S.-based firms collected more than $40 billion in commitments, it’s going to come time to fish or cut bait. Will investments go belly up or will they go public or get acquired? And will the prices match valuation?
Law firm Fenwick & West addressed this last week, releasing a report that said unicorns have been winning smaller valuation markups from their investors, but few have suffered down rounds. While up rounds have steadily declined since mid-2015, deals are increasingly being done at flat valuations, the study found, as reported by VCJ.
Women.vc recently polled its members with similar queries on VC-firm portfolio companies, asking in its Questions of the Month:
“Dozens of startups are laying off staff: Medium, The Honest Company, Github and others. Why do you think it’s happening and what consequences — good or bad —will it have for these companies?”
Women.vc shared some of the responses, in partnership with PE Hub and VCJ.
Among those who responded were “Maia D. Heymann, a general partner at Converge Venture Partners, who pointed to the high level of deal investing in the previous two years and said the layoffs are an expected outcome.
“Over-hiring almost always happens, especially when the cash coffers are full,” she wrote. “And then the realization of diminishing productivity becomes apparent, to those who are looking for it, at least. The layoffs, while painful for everyone who’s affected, are the necessary, corrective measures for any company who’s over-hired and over-spent. It’s painful, but it’s healthy.”
Jalak Jobanputra, founder of Future\Perfect Ventures, which has set out to raise $30 million for a second fund, said companies need to improve margins to get to profitability.
“You see this happen every cycle, particularly when companies have raised large amounts of cash and hired quickly,” Jobanputra wrote. “This is a necessary process, although difficult for employees and management.”
Susan Choe, co-founder and managing partner of Visionnaire Ventures, said it depends on the stage of the company announcing layoffs.
“If it’s early stage and they are laying off people, that is probably not a good sign,” Choe wrote. “But if it is a more mature company that can afford experimenting with a product or service line, which didn’t work, and they are laying off staff in connection to these lines, it doesn’t mean all the rest isn’t working.”
Women.vc also asked: “Venture investments are known to be the riskiest, yet, investor lawsuits against Theranos, Fisker, Zenefits, and others keep popping-up. Aren’t VCs supposed to perform due diligence to avoid having their investment decisions later prove problematic when portfolio companies and founders break the law or generate negative press?”
Susan Mason, a general partner with Aligned Partners, responded, “VCs perform due diligence and invest based on a thesis and understanding of a company’s situation. All VCs know that things change rapidly in a startup, so there is no illusion that the path to build a startup will be easy and unchanged.”
She added: “In my experience, VCs are not prone to lawsuits unless there are circumstances around a commitment of outright fraud.”
Vanessa Larco, a partner at New Enterprise Associates, said VCs are responsible for diligence with each investment, but they are limited on how deep they can go without being immersed in a company on a daily basis.
“Throughout the whole process there is an underlying assumption of good faith and that the data presented is accurate,” Larco wrote. “As VCs, we need to trust founders to build the right culture, hire the right team and abide by the law — and nearly all of them do.”
At VCJ, we’ve heard from some LPs who are shifting their strategies slightly in preparation for a downturn in 2017. How much money they commit to funds this year will depend a lot on the outcomes of the portfolio companies.
Whether the VCs are emerging managers or are running established funds, we will be watching with sharp interest, and regularly reporting on, how the chips fall for investments, whether they’re unicorns going public or distressed companies.