As one of Silicon Valley’s hottest start-ups, Confluent expected to double in value when it began pitching investors for new funding earlier this year.
The data management company, backed by blue-chip venture firms such as Sequoia Capital, Benchmark Capital and Index Ventures, posted almost 100 per cent annual revenue growth last year and counts Credit Suisse and Rakuten as clients.
But its plans hit a bump following a coronavirus-led stock market decline. The company, which had sought a $5bn valuation, instead settled for a $4.5bn estimate following negotiations with the tech investor Coatue Management, which led its $250m funding round last week.
“We actually feel really lucky,” said Jay Kreps, Confluent’s chief executive. “It’s a very hard time overall to raise money in the private markets.”
The recalibration of Confluent’s expectations reflects the increasing caution in Silicon Valley in the wake of the coronavirus crisis.
Venture capital firms are sitting on a record $120.4bn of unspent cash at the end of September, according to data provider Pitchbook. Yet the fear of missing out on the brightest prospects has largely evaporated, slowing their pace of investment.
Instead, company founders are having to accept tougher terms, if they can raise money at all. Many start-ups that were recently turning away would-be investors are now announcing deep job cuts and spending freezes to prove they can be disciplined about costs.
“At least for the short term, gone are the days where it is a founder’s world,” said Rachel Proffitt, a partner at the Silicon Valley-based law firm Cooley. “That is going to be a little bit of a stark reality for the current generation of young entrepreneurs.”
Hans Swildens, chief executive of Industry Ventures, said about 80 per cent of venture capitalists will be investing at “flat” or “down” prices compared with previous funding rounds. “Most of them are in the market looking for things today, but they’re not feeling like they have to do anything,” Mr Swildens said. “They kind of went from fear of missing out to a more patient stance on investments.”
Many Silicon Valley companies have some headroom after raising money last year. But more than a quarter of US start-ups are still projected to run out of cash before the IMF expects the world to return to economic growth later this year, according to research by Silicon Valley Bank.
“The reality is that companies will shut down — at a higher rate than what is inherent to this risky industry — and there will be waves of lay-offs,” the National Venture Capital Association wrote in a report this week.
Other hot start-ups that have had to reset their expectations include Samsara, which makes sensors and cameras for factories and vehicles. It raised $300m in a funding round valuing the company at $6.3bn last September but has recently held advanced discussions with investors about raising additional capital at a lower price, people briefed on the matter said.
A spokesperson declined to comment on fundraising but said Samsara’s revenues tripled last year and the company is on a path to profitability.
TripActions, a travel management company valued at $4bn last year, has also held discussions with investors about a discounted funding round, two people briefed on the talks said. But one potential backer, the private equity firm Insight Partners, passed on the deal, one of the people said. Insight and TripActions declined to comment.
And while the stock-trading app Robinhood recently tapped investors for more money valuing the company at $8bn — a premium to its last funding round in July — investors negotiated clauses that would protect their stakes if the company falls below that price in a sale or public listing, according to two people with knowledge of the negotiations. Robinhood declined to comment.
The start-ups in high demand tend to be those in sectors benefiting from the lockdown, such as telemedicine, cloud computing and collaboration software. Figma, a web browser-based design app, increased its valuation to $2bn following a new funding round this week — five times its estimated worth in February last year.
Tech advisers said many young companies face a difficult road ahead. Cynthia Hess, a partner at the law firm Fenwick & West, said she was working on a funding round carrying investor-friendly provisions she had not seen since the 2008 crisis. “It’s bold and risky to be giving a company a term sheet in this really uncertain environment, and to give that investor downside protection does not seem unfair,” Ms Hess said.