Investors Strike Back on Silicon Valley Valuations

Beepi co-founders Ale Resnik and Owen Savir
Paul Sakuma Photography

The party in Silicon Valley may be winding down.

As The Wall Street Journal reports in a page-one story, investors are starting to question lofty private-company valuations against the backdrop of a chilly market for initial public offerings. Bill Gurley, a partner with Benchmark, told the Journal: “We’re seeing financing rounds where founders are coming back and lowering the price over and over again,” he says.

Indeed, companies including local-services website Thumbtack Inc. and used-car seller Beepi Inc. and e-commerce startup Inc. have all had to scale back their ambitious valuation expectations lately.

Some investors say the trade winds are beginning to shift after a summer that saw an average of more than 10 companies per month announce funding at valuations of $1 billion or more.

Marco Zappacosta, co-founder and chief executive of Thumbtack, walks the grounds

a morning session during the Allen & Co. conference in July.

Bloomberg News

“The public market has adjusted down its valuation for high-growth companies, and we’re starting to see the private market catch up to that,” said Brad Slingerlend, portfolio manager for the $2 billion-plus Global Technology strategy funds at Janus Capital Group Inc., which has invested in private companies.

Marco Zappacosta, the co-founder and CEO of Thumbtack, experienced the scrutiny first hand when he and other executives met with venture capitalists this summer.

Slowing growth figures prompted investors to ask tough questions, according to one investor who met with the company, as local-business search, Thumbtack’s specialty, has proven difficult for other companies like Angie’s List Inc. and Yelp Inc. to crack.

Even as Thumbtack was holding investor meetings, the San Francisco company was caught violating Google Inc.’s rules meant to prevent companies from manipulating search results. Google penalized Thumbtack in its search rankings, which spooked investors further, Mr. Zappacosta said in an interview. Thumbtack quickly addressed the problem and Google, whose venture-capital arm funds Thumbtack, lifted the penalty.

Ultimately, Thumbtack secured a valuation of $1.3 billion in September, short of the $2 billion-plus that one investor said the company hoped to achieve. Leading the funding round wasn’t a top Silicon Valley investor but Baillie Gifford, a Scotland-based money manager that only recently jumped into private-tech company financings.

Mr. Zappacosta said the number of customer requests for professional services on Thumbtack’s site is growing at twice the rate it was a year ago, though the number of service providers to handle those requests has increased more slowly, constraining revenue growth.

As for valuation, he said Thumbtack had a valuation range in mind for its most recent funding round, both higher and lower than where it settled.

“The biggest thing is public comps,” Mr. Zappacosta said, pointing to the poor stock market performance of tech companies lately. “[Investors’] views on these companies has changed significantly. That has ripple effects on the private markets.”

Beepi, whose site aims to make it easy to buy and sell a car, faced doubts of its own after it embarked on a fundraising effort this year. Co-founder and Chief Executive Ale Resnik told the Journal in May he expected to raise more than $300 million “monster round” of financing at a valuation over $2 billion.

But Beepi has sold very few cars – state records in California, the company’s first and biggest market, show the company sold only an average of 153 cars each of the past three months. By contrast, the largest used car seller in California, Carmax Inc., sold an average of 8,500 cars during that period. Though Beepi sells a tiny fraction as many cars, it had sought a valuation one-sixth of Carmax’s $11.5 billion market value.

Facing resistance from investors, Beepi settled for $70 million in funding in August at a valuation of about $500 million, according to a person familiar with the matter.

A Beepi spokeswoman said its funding round was “not fully closed” and that it now operates in 13 markets in nine states.

Marc Lore, CEO e-commerce site
Getty Images

Meanwhile, Jet, which is taking on , kicked off fundraising in the past two weeks at a lower valuation than previously projected. The company has told investors it aims to raise a $500 million round that would value the company at about $2 billion, according to people familiar with the matter. While still ambitious for a startup whose website only launched in July, the valuation is 33% less than the $3 billion the company said over the summer it would be seeking, say these people.

Two weeks ago, Jet said it would do away with its plan to charge a $50 membership fee to access discounted goods on its site, a fee designed to be its main source of profits.

Jet’s sales, while growing, also appear to be falling short of previous targets. Jet earlier projected it would be on pace to sell $3 billion worth of merchandise next year, according to a person familiar with the matter. A Jet spokesman said the company is currently targeting $2.3 billion in gross merchandise value for 2016. Monthly GMV in September was $20.2 million, the spokesman said, and the company expects to reach $33 million in October.

The Jet spokesman added, “We don’t comment on financing and have never discussed valuation publicly.”