Companies that raised capital in rosier fundraising times before the current slowdown may need to start thinking about their next steps before they come to the end of their financing runways, according to SVB Financial Group CFO Dan Beck, speaking at a conference Wednesday.
Amid the uncertain financing environment that has emerged in recent quarters, many companies have been curbing their “cash burn” in order to extend the time that their existing financing will last. Some are also loath to venture back into the current volatile markets to tap more capital.
“Companies don’t want to take a down round in this type of environment,” Beck said during a fireside chat talk at the Goldman Sachs 2022 US Financial Services Conference. “They look at the uncertain IPO [initial public offering] environment and they’re trying to figure out how to slow that level of cash burn so they can make it to a much more clear environment.”
The U.S. IPO market has dried up this year, with many U.S. companies having been forced to take a hair cut to their valuation during their funding rounds in what venture capital firms call a “down round,” according to an Aug. 9 Reuters report which cited Pitchbook data.
While Beck did not define a down round in his talk, Investopedia defines it as an event in which a private company offers shares for sale at a lower price than they had previously been sold for.
Asked how long companies will be able to hold out on the sidelines before coming back into the public markets to refresh their coffers, Beck said the money and time may be running out.
“If you think about money raised at the end of ‘20 and into ‘21 we’re starting to tick every quarter closer to that moment where they’re going to have to think about what to do next,” Beck said.
The fundraising market was so attractive roughly two years ago that many companies have been sitting on a cash cushion. They commanded strong valuations that allowed them to tap financing that could last two to three years, Beck said. But given the uncertainties in the current environment, he said that companies have to start thinking about their next steps once they get down to having about 12 to 15 months of funding left.
When it comes to IPOs, year-to-date data suggests that many CFOs and their companies are waiting out the market turbulence. U.S. IPOs plunged 74% during the first nine months of 2022 compared with the same period last year, slammed by market volatility, inflationary pressure, surging interest rates and risks posed by COVID-19 and Russia’s invasion of Ukraine, EY said.
Santa Clara, Calif.-based SVP is the parent of Silicon Valley Bank. The company reported consolidated net income for the third quarter ending Sept. 30 of $429 million, compared to $365 million in the year-earlier period.
Greg Becker, SVB’s CEO and president, in October stated “while the challenging environment is pressuring balance sheet and NII growth — and we expect these conditions to persist for the foreseeable future until public markets stabilize — we believe it is a matter of when, not if, the markets return,” according to the company’s earnings release.
