NEW ORLEANS — Foursquare, which became the poster child for slashed start-up valuations when it raised its latest round of funding, is now turning the scenario into a sales pitch.
"Raising $45 million is a testament to how well our company is growing... only companies with real momentum get funding," said Foursquare CEO Jeff Glueck last week at the Collision tech investing conference here. Through services including location-based analysis of consumer spending, Foursquare should triple its market valuation over the next several years, Glueck predicted.
Welcome to high-tech's new math.
Forget market valuations, the estimate of how much a private company would be worth in a sale or IPO. When Foursquare raised its latest round of funding, its valuation was marked down 60%, to $250 million, according to estimates published in the Wall Street Journal and other outlets.
The point is that it raised money, period.
"Good companies will still raise money in bad environments. The thing we haven’t seen is there’s a whole generation of entrepreneurs who only have raised money in good times and took really for granted how easy it was," said Saar Gur, general partner at venture capital firm Charles River Ventures, in a USA TODAY podcast. "They're about to get a rude awakening."
A confluence of factors — a nearly nonexistent tech IPO market, tightening funding and murmurs of an impending bubble — have start-ups focusing on profits and unsure of when or if the next cash infusion will come. And when they do raise money, the estimated valuation is likely to show investors think the company is worth a lot less than they did two years ago.
That was the clear message among the hundreds of early-stage companies that descended on the Collision conference here last week.
“It is harder to raise money from the venture and IPO markets because the business models (of tech companies) are under more scrutiny,” said Raj De Datta, CEO of BloomReach, a data science and machine learning company that raised $56 million in funding in January, in a phone interview. “There is a little bit of paralysis.”
Glueck, who replaced CEO Dennis Crowley at Foursquare in January, wouldn't comment on the new valuation of the firm after its latest round of capital.
He's among scores of executives who face the same delicate dance: Raise funds as valuations are scaled back and investors more closely scrutinize profitability, burn rates and long-term business prospects.
Venture capitalists poured $12.1 billion into 969 deals for start-ups in the first quarter of this year, down 11% for each category, from the same quarter a year ago, according to a report from PricewaterhouseCoopers and the National Venture Capital Association.
It isn't quite the dot-com bubble of the early 2000s or the 2008 financial crisis, but it's beginning to feel like it, start-up execs say.
The IPO of Dell cybersecurity division SecureWorks, the first in tech this year, was flat its first day of trading in April. Ride-sharing service Shuddle shut down last month. Gilt Groupe, a "flash sale" e-commerce company valued at $1 billion in 2011, was sold for $250 million in January to Hudson Bay, owner of Saks Fifth Avenue and other department store chains.
Subscription firm Birchbox announced a 15% workforce reduction, or 45 jobs, in February. Zenefits, once valued at an eye-popping $4.5 billion, slashed 250 jobs, or 17% of its workforce, also in February.
"Investors are more discerning," said Cassian Scott, chief financial officer at nixplay, a cloud-based WiFi service that came to Collision to meet with prospective investors.
Concerns among investors are reflected in an Ernest Young survey of 1,700 executives in 45 countries, released last week. It found tech executives are resigned to a "low-growth" economy and revamping their business strategies and deal-making plans. Barely half expect merger and acquisition growth, compared with 80% six months ago.
"It's harder for mediocre start-ups to be funded now than, say, five or even two years ago," added Shama Hyder, an angel investor in female-led tech companies. "There's not as much stupid money. Investors are savvier."
THE LAND OF ENDANGERED UNICORNS
There are currently 161 unicorns, privately held start-ups valued at $1 billion or more, according to CB Insights. In 2012, there were 31.
But that number is in jeopardy, as more funding rounds like the one with Foursquare lower the market valuations of some private companies, said Ted Schadler, an analyst at Forrester Research. "This will play out over months, quarters," he said. "We expect more down rounds as the markets cool."
Jim Breyer, CEO of Breyer Capital, an investment and venture philanthropy firm, is blunter: He sees a bleak future for 90% of them, predicting "a great deal of blood on the streets," he told CNBC at the World Economic Forum in Davos, Switzerland, in January.
Money is still out there. But in the course of a year, the horizon is suddenly closer.
"Funding is an option, but not round after round," says Chris Schultz, CEO of Launch Pad, an incubator for start-ups with operations in New Orleans and Charleston, S.C.
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