Shulou(Shulou.com)11/24 Report--

It is reported that American technology startups have traditionally relied on deep-pocketed investors in Silicon Valley to provide capital to support rapid growth. For now, however, these start-ups are being forced to look for other sources of financing to maintain their business while avoiding a sharp fall in valuations.

The number of venture capital financing in the US has fallen sharply over the past year, while the sluggish performance of the IPO market has left many unlisted technology companies facing a cash crunch. Leading technology startups have begun to cut costs aggressively, setting off a wave of layoffs across the technology industry. Meanwhile, as more and more companies are strapped for cash, they are looking for innovative financing arrangements, according to interviews with venture capitalists, entrepreneurs, pension funds and bankers.

At present, entrepreneurs begin to pay attention to debt financing channels, including bridge loans, structured equity financing, convertible bonds, publicly participable bonds, and liquidation preferential terms. Debt financing helps entrepreneurs avoid a "scary next round" of new equity financing at well below previous valuations.

"everyone is taking corrective measures," said an investor from Sand Hill Road, a Silicon Valley venture capital mecca. Sand Hill Road brings together Silicon Valley's top venture capital firms, including Sequoia Capital and Anderson Horowitz.

With the market downturn likely to last into next year, the investor said that even the founders of cash-rich technology companies are studying what adjustments are needed to survive longer. and how to postpone the financing planned for next year to 2024.

Arctic Wolf, an information security company, has launched a huge round of debt financing this year. The company issued $400m of convertible bonds in October, twice its previous largest equity financing. Arctic Wolf is currently valued at $4.3 billion and has received funding from investors such as Owl Rock Capital.

Gopuff, the takeout app previously funded by Softbank Corp., raised $1 billion in convertible bonds in March and continues to explore how to increase borrowing. The company completed a round of financing of more than $2 billion in the middle of last year, valuing it at $15 billion.

These convertible bonds usually carry a conversion premium and investors can eventually convert them into shares at a price higher than the IPO offering price. Such a deal means that investors think the company's share price will rise after it goes public.

Chris Evdaimon, an investor at private equity firm Baillie Gifford, said convertible bond financing was "kicking cans to the side of the road". "most of the financing is led by existing investors, who say they don't want to get involved in unpleasant valuation discussions right now."

Well-known private equity firms such as Coatue Management and Viking Global Investors have traditionally focused on public equity deals. Earlier this year, however, they began to raise money specifically for structured equity deals in start-ups.

Coatue aims to raise $2 billion for its fund. "for an unlisted company, a sudden 75 or 80 per cent drop in market capitalization poses a huge risk," said Philippe Laffont, founder of the company. "We can now provide another financing channel to give you more time to develop your business."

Such large-scale debt financing used to be rare for technology startups. Over the past decade, well-performing technology startups have received large amounts of investment from venture capitalists to drive rapid growth.

In the first 11 months of this year, however, the total volume of new venture capital deals fell 42% from a year earlier to $286 billion, according to investment industry data firm Preqin. Cooley, a Silicon Valley law firm, says the total value of late-startup venture capital deals it serves has fallen sharply by nearly 80 per cent this year.

The reasons behind this trend include a sharp fall in technology stock prices, uncertainty in the macroeconomic environment and rising interest rates. At present, the size of IPO in the US stock market has fallen to its lowest level since 2009, causing mature non-listed companies and their investors to lose a key financing and investment exit channel.

"next year will be the toughest year," said Ravi Viswanathan, founder of New View Capital in California. "one day, even if the company has held capital for 18 to 24 months, it will have to raise capital. This will bring great pain."

At Sand Hill Road, venture capital firms are evaluating their portfolios and warning entrepreneurs that their capital markets may remain closed for another year and that their strategies should shift from growth to survival. The companies that are most difficult to raise new money may be capital-intensive companies such as battery manufacturing and robot development that have not yet made a profit.

"We are in an environment bordering on madness," said one institutional investor. "if you raise money at a low valuation and feel you are doing a good job as a founder or management team, you will now be robbed."

The investment manager of a large pension fund that invests heavily in the technology industry said it was an "old strategy" to find new ways of financing to protect the company's valuation, but "We haven't seen such a large amount for a long time." it affects everyone.

Other companies are trying to persuade investors to invest more at the same valuation as the previous round, while accepting basic terms that are relatively unfavourable to the company.

One investment banker says "dirty" financing deals are circulating as start-ups become more desperate. These financing schemes ostensibly maintain the current valuations of the invested companies, but the conditions are more beneficial to new investors.

Glen Kernick, head of Silicon Valley at Kroll, the consultancy, said: "investors say we will buy shares at the same price but want priority and top priority in terms of liquidity arrangements." According to some of the financing agreements he has seen, new investors can get twice as much return as other shareholders if the invested company is sold or goes bankrupt.

According to media reports, Tonal Systems, which develops smart fitness devices, reached such a financing agreement earlier this year.

If the company's valuation falls, such a financing structure will be cruel to past investors, including employees who hold corporate options. This is a tradeoff for the company's management team to accept either a decline in the company's valuation or punitive terms that could cause discontent and conflict among shareholders or erase the value of employee shareholdings.

Some companies are repricing internal shares to improve the upward space for employee options. In October, takeout app Instacart cut its internal valuation for the third time in a row, to $13 billion from $39 billion in 2021. Similarly, Checkout.com, Europe's most valuable technology start-up, slashed its internal valuation to about $11 billion, down from $40 billion in January.

The internal valuation and the preferred stock price determined by external investors are separate from each other. Therefore, lowering the internal valuation can reduce the cost of holding options for employees, benefit employees, and provide employees with more profit margins when they sell IPO or companies in the future.

"We are telling the invested companies that they should no longer rely on valuations from the extraordinary boom of the market a few years ago," said the Sand Hill Road investment manager. "it's best to take the medicine now."

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