For the past several years, the most in-demand technology start-ups have been raising investment at eye-watering levels. Huge investors such as Softbank’s Vision Fund upped the stakes by often insisting the companies it invested in took several times the cash they were initially looking for from investors. That both helped them secure deals ahead of other would-be investors and give their investees huge war chests for further R&D or the ability to come to market at scale and pace. But it has also had a trickle-down effect, pushing up tech start-up valuations across the board.
However, there are now signs that the gravy train is ending for tech start-ups with investors becoming more demanding on valuations. Especially in the case of companies that have previously raised at huge valuations but are now running out of cash again and returning to the market for new raises. The latest example is BenevolentAI, the London-based machine learning company whose algorithms are designed to help discover new pharmaceuticals.
Despite recently signing a significant partnership with FTSE 100 pharma giant AstraZenica, it is being reported that BenevolentAI’s next investment raise could see it’s valuation drop to less than half of the $2 billion it achieved when it last raised funds – $115 million in April 2018. Companies House records indicate that BenevolentAI has racked up accumulated losses of £80.6 million since it was founded in 2013. That’s against revenues of just £16.6 million to the end of the last financial year.
Now Benevolent needs a new cash injection and is said to be speaking to investors including Temasek, the Singaporean sovereign wealth fund, as well as other major Asia-based parties. But it is expected that the new investors will only be willing to stump up the cash at a significantly lower valuation that the company’s previous $2 billion. Reports suggest the final valuation could be as much as less than half that and could rob BenevolentAI of its ‘unicorn’ status – a tag given to tech companies that achieve a valuation of at least $1 billion.
Embattled Neil Woodford, the fund manager recently forced to suspend his flagship Woodford Equity Income fund would, as one of Benevolent’s biggest earlier investors, would be particularly hard hit by such a drop in valuation. The fund has suffered from several of its biggest investments dropping in value and has been accused of buying into illiquid private tech start-up stocks at inflated prices.
The number of ‘down rounds’ involving promising tech start-ups has been gradually increasing over the past year and many market analysts expect the trend to accelerate. Investors in the USA, Europe and Asia are all becoming more cautious in their valuations, with numerous tech companies burning through hundreds of millions of dollars in investment without moving into profit. Many do so without even getting close to a realistic breakeven point. The argument has always been that gaining market share and traction are the more pressing priorities for tech-start-ups. While there is some merit to that position, it does now look as though investors are starting to become stricter in their demand for concrete milestones to be met along the way to justify frothy valuations.