FALLING RETURNS – Growing no. of $1bn startups signals bubble

Overvaluations Make It Harder For VCs To Find Exit
The number of mobile internet startups with valuations crossing $1 billion has jumped by a third in just eight months and that’s spelling trouble for some venture capitalists looking to cash in on their investments.Already , there are signs of worsening returns. The ratio of mobile internet exits -startups that are either sold or go public -to investments has plunged over the past six quarters, excluding one outlier deal, according to consulting firm Digi-Capital.

“Mobile is frothy and bubble-like,“ said Rajeev Chand, managing director and head of research at Rutberg & Co.Companies that would have gotten $8 million to $10 million in investments a few years ago are now getting as much as $50 million, he said. “There’s way too much money going into mobile delivery companies. The economics are fundamentally not sustainable.“

Investors have jumped into mobile internet startups as services from dog walking to shopping to food delivery became available via smartphones.In 2014, global mobile data traffic was almost 30 times the size of the entire global internet in 2000, according to Cisco Systems. As a result, mobile internet companies that crossed the $1-billion threshold -known as unicorns -have swelled to about 90 for a combined valuation of more than $800 billion, Digi-Ca pital said in a report last month.

It wasn’t so long ago when there might have been 10 unicorns in an entire decade, said Matt Murphy , a managing director at Menlo Ventures. Venture funders, who typically recoup their investments in five to seven years, may have to wait two to three years longer and perhaps with less rosy results, he said.

WhatsApp represented a bright spot last year when Facebook bought the mobile messaging service for $22 billion. Still, excluding that one deal, the ratio of exits to investments declined for six straight quarters, Digi-Capital said in the report.

While investments in the second quarter amounted to $16 billion, exits were just $13.5 billion, half the $26-billion peak they reached a year earlier, the researcher said.

While in the past, venture capitalists tended to spread their money around, some are now pouring more into fewer companies, and their risks have skyrocketed, said Tom Taulli, a mergers and acquisitions consultant in Los Angeles.

Firms, particularly those that stepped in during later funding rounds when mobile startup valuations were higher, could see losses, and have less money to reinvest.

Source: The Times of India

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Author:

Neeraj; an entrepreneur & a visionary in the field of Railway, Defense & Automobiles, is a graduate in commerce and a Harvard Business School Alumni. He’s an expert in govt. liasoning & contracting and has an exceptional network & connections at both local as well as global level. He’s an expert in Market Strategy & Planning and has served number of overseas companies as an advisor/consultant. He takes a profound interest in upcoming startups & is very receptive towards ground-breaking ideas & innovations. He likes to brainstorm those ideas and if the values & philosophies matches; he is even ready to invest his resources, serve as a mentor or act as an incubator to futuristic businesses.

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