First Stage Investor

Market Volatility Could Bring Cheaper Startup Deals

Market Volatility Could Bring Cheaper Startup Deals
By Andy Gordon
Date January 28, 2019

The longest government shutdown in U.S. history ended Friday. Government workers are going back to work… at least until February 15.

The SEC had been operating on a skeletal staff since December 22, so startups have taken a hit. So has crypto. Before we get to the next potential government shutdown, I think it’s important for you to understand how this shutdown affected both spaces – and could benefit you as an investor.

Let’s start with crypto. Two big crypto initiatives have been delayed. The VanEck SolidX Bitcoin ETF proposal to the SEC was withdrawn and will be refiled now that the shutdown has ended. But exactly when is unclear at this point.

The launch of Bakkt’s bitcoin futures market has also been delayed. Bakkt is waiting for approval from the Commodity Futures Exchange Commission, which was also temporarily shut down. Bakkt wanted to launch on January 24. A new launch date hasn’t yet been announced.

As far as non-crypto startups go, the shutdown affected initial public offerings (IPOs) – a major event for startups that requires substantial SEC involvement.

If you’re not familiar with the IPO process, let me give you a quick tutorial…

A company kicks off the IPO process by filing a registration statement with the SEC. It then seeks the SEC’s (informal) feedback to make sure the statement contains all the necessary information. The company then makes its registration statement public, sets a price range and declares the amount of shares it intends to sell. Once all of that is done, the company goes on a road show to convince institutional investors to buy its stock. On the day the company goes public, the SEC declares the registration “effective,” (in other words, legal) and allows the stock to trade.

So if a startup was in informal talks with the SEC when the shutdown happened, its timeline is now a month or more behind schedule.

The good news is the interlude between now and February 15 should allow the SEC to catch up on its work. So right now, I’m assuming that companies waiting for feedback from the SEC will get it. Maybe not right away, but before the February deadline.

And while it’s true that these companies have been set back by a few weeks, it’s not as bad as you may think. No IPO process goes smoothly. They’re rife with delays and challenges. So for these companies, the impact of the shutdown has been minor… just another bump in the road.

For companies that have begun their road shows, the impact has been negligible. They won’t need the SEC’s involvement until IPO day, which would still be weeks (or months, depending on where they are in the process) away.

Companies that had scheduled their IPOs during this time had bigger problems because they couldn’t get SEC approval. But at least one of them figured out a way around the problem. Last week, biopharmaceutical firm Gossamer Bio launched its IPO. And it did it without the SEC’s approval.

The work-around? Under the Securities Act of 1933, a registration statement filed with the SEC can become automatically effective (without the SEC’s input) 20 calendar days after the filing. That’s the path to a public stock listing that Gossamer chose. It’s scheduled to go public on February 12.

If the SEC is too busy catching up on its backlog in the next few days, other startups anxious to IPO may do the same.

Another shutdown could make things worse for late-stage startups. Because as bad as a nonfunctioning SEC is, the market volatility that shutdown would trigger would be even worse.

If the market enters another down period, it could very well discourage dozens of startups from launching their IPOs. Fortunately, for seed-stage companies (where we do most of our deal discovery), the news is better for investors than founders.

Some startups may delay their fundraising campaigns and try to wait things out. But I think a more likely scenario is that startups will simply lower their valuations to attract investors.

I have no problem recommending startups at lower price points. It’s a better deal for investors. And though the ongoing funding negotiations in Washington, D.C., are taking a toll on the markets and investor confidence, remember: By the time our early-stage company recommendations go public, this will be ancient history. Their liquidity-event valuations will be completely unaffected.

Startup investing is where you can escape market turmoil. Yet another reason to invest early and act on our recommendations.

Invest early and well,

Andy Gordon
Co-Founder, First Stage Investor

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