Should family offices go easy on venture?

As long as interest rates stay low, there is every chance that venture capitalists backing tech-driven opportunities will remain active. 

According to PitchBook, exits are hitting 10-year highs. A stream of money continues to be invested in a range of opportunities. Ritesh Agerwal geared up to invest $700 million in his highly ambitious Indian hotel group Oyo alongside Softbank in a $1.5 billion fundraiser. 

Next Insurance has raised $250 million from Munich Re. Topgolf, which operates driving ranges, is hoping to pull off an IPO worth more than $2.1 billion. And so on. 

If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at WeWork, order DoorDash for lunch, take a Lyft home and get dinner at Postmates, you have interacted with companies that will collectively lose nearly $14 billion this year 

But, while staying at high levels, data provider Preqin says global venture capital deals fell to $52 billion in Q3, against $70 billion. The US and China were worst hit, amid trade and economic uncertainty. 

The mood music is also subdued, in the wake of WeWork’s failure to pull off a $20 billion IPO following news of omissions in its prospectus, including the existence of a $60 million Gulfstream company jet used by founder Adam Neumann. Recent biotech IPOs have also disappointed investors.

Uber shares have slumped 49% since its IPO, rival Lyft is down 45% and Peloton has fallen 23%. SmileDirectClub, the newly-floated teledentist, has fallen nearly 60% following dentistry legislation which sets out to protect dental patients in California. Postmates, the food delivery firm recently valued at $2 billion, has decided to postpone its float.

Stock market investors have steadily been rotating from tech-driven growth stocks to more traditional value opportunities, following an increase in market volatility. 

They are fretting about whether tech-driven opportunities can possibly make money, once they have burned through their cash reserves to achieve market share.

As The Atlantic magazine has pointed out: “If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at WeWork, order DoorDash for lunch, take a Lyft home and get dinner at Postmates, you have interacted with companies that will collectively lose nearly $14 billion this year.” 

Right now, venture capital and stock market investors are subsidising the lifestyle of millennials, and others, as competition between start-ups continues to grow. A restaurant app called Seated actually pays users who make a reservation through its platform.

All this tech-driven competition is keeping down price inflation and restraining wages at traditional rivals which help to restrain US interest rates and keep the sector buoyant. Money from IPOs is being willingly reinvested. 

It amounts to a virtuous circle which cannot keep turning without repercussions.

Not just yet, maybe, but the penny may be dropping at SoftBank. According to founder Masayoshi Son: “I’ve been telling founders to know your limit. Knowing your limitations will help unleash limitless possibilities.” Oyo Rooms, a hotel chain, has been quick to make it clear it does not want a float.

Governance hawks and stock market investors are particularly keen to set to limits on the behaviour of tech-driven founders. Some are also criticising investment bankers for rushing to advise on floats, where managements are ill-prepared.

WeWork’s Neumann has now been stripped of his status as chief executive, and criticised for his extravagance, which has just contributed to redundancies for 2,000 staff. Forbes has reduced its estimate of his wealth from $1.4 billion to $600 million. 

Neumann, and his backers, have demonstrated that lifestyles tolerated by venture capital backers do not reassure stock market investors who expect a sober approach. Opacity needs to give way to tighter corporate governance. 

And, as SmileDirectClub has found, bad news can have a disproportionate impact on a highly-rated stock price which needs to be addressed head-on. 

None of this means the punch bowl is going to be removed from the venture capital sector just yet. Facebook has shown that companies can get over a disappointing market debut in 2012.

But recent events will have a sobering effect on entrepreneurs who are currently dreaming of a Wall Street listing. 

Family offices keen to back new venture capital opportunities might be well advised to go a little more easy, out there, or, at the very least, turn poor sentiment to their pricing advantage.