It looks like unicorns are going to have to learn to stand on their own four feet.
The third-quarter funding numbers are starting to come out, even though everyone who's collecting the data expects some more info to trickle in over the next few weeks. But the consensus is clear: Early-stage funding, while a small percentage of the total, is holding steady. Big late-stage rounds are drying up. That means the highly valued unicorn companies that have been relying on those late-stage rounds may suddenly find it's time to plan an initial public offering instead.
TechCrunch calculates that, factoring in money that is yet to be counted, seed-stage investments could fall by 7 percent year-over-year. But late-stage investment has dropped by almost half. In the third quarter of 2016, investors put $6.43 billion in companies raising C or later-stage rounds. That compares with $12.5 billion just three months earlier and $12.2 billion a year ago.
Uber has had some of the more unconventional financing: $300 million in private equity financing after its series F round (so yes, after raising six prior rounds, plus seed funding), followed by $3.5 billion from the government of Saudi Arabia. Airbnb has had six rounds of venture capital and two of private equity, and then teed up a $1 billion line of credit. Its backers include mutual fund giants T. Rowe Price and Fidelity.
These late-stage financings, often from mutual fund companies and other nontraditional players in venture capital, have played a unique role: They've helped companies last longer without an IPO. Now, with the chances of nabbing a large, late-stage round becoming slimmer, it's hardly coincidental that the IPO market is seeing signs of life after a quiet year. "It's costly to be public," says Neil Dhar, a PricewaterhouseCoopers partner who leads the firm's U.S. capital markets group. "Especially because the secondary markets have become so sophisticated and liquid, and there are other places to get capital."
A few hardy tech startups have already started to break the ice, although, overall, activity has been ridiculously slow, with Bloomberg reporting that only nine tech companies have gone public so far this year. Cloud communications company Twilio went public in June at $15 a share, and has recently been trading at about $37. Nutanix, an enterprise cloud company, went public in September. Coupa Software, a cloud-based company for procurement management, went public in early October. BlackLine, a cloud-based provider of financial software, is expected to go public this week.
Now, Snapchat--recently renamed Snap--has reportedly hired Goldman Sachs and Morgan Stanley to lead an IPO that would likely take place in the spring, and could possibly value the company at $25 billion to $35 billion. On Wednesday, at The Wall Street Journal's D Live conference, Palantir CEO Alex Karp, who has long said he is "philosophically" opposed to going public, sounded a lot like he was preparing for just that. He said employees needed to be able to cash out some of their shares at a fair price. "Obviously, the simplest thing to do is to do some kind of public offering," he said.
Meanwhile, longstanding rumors about Airbnb and Dropbox preparing for IPOs seem newly plausible, helped by the fact that the stock market appears healthy and stable, and that the U.S. presidential election season is coming to close. That could make 2017 a busy time for blockbuster IPOs--or at least their wannabes.