The enterprise capital ecosystem is facing a severe liquidity crisis. While the IPO market is showing latest signs of life, startup investors must be looking to mergers and acquisitions this year to inject more capital back into the system.
From here the view Ryan Hinklemanaging director at a New York start-up investment firm Insight partnersone of the most lively investment firms during the boom in private technology corporations in 2021 and the first half of 2022, when the company announced its largest fund to date, price $20 billion.
The current shortage of liquidity in the startup world is due to the lack of market exits. Generally speaking, limited partners investing in enterprise funds profit from the pool of illiquid assets held by the funds in which they have invested.
“People managing money on behalf of others have been struggling with tighter liquidity for many years, and that has ripple effects across all markets as that liquidity becomes tomorrow’s liability in new funds,” Hinkle said.
Until IPOs and M&A deals unlock these funds, it’s hard to imagine the ecosystem returning to a more normal state where startups are funded again after several years of declining enterprise investment.
“A commitment today is a payback in three to five years, it becomes a new commitment in three to five years. And so the cycle continues,” Hinkle said. “That wheel stopped turning, or at least slowed down dramatically.”
Exits are key to unlocking the entire system, but IPOs are still few and far between. In any case, IPOs don’t provide liquidity in the same way as mergers or acquisitions, he noted.
Hinkle joined Insight over 20 years ago and recently spoke with Crunchbase News to share his perspective on startup investing and his approach to liquidity in this market.
He expects increased activity this year with private corporations buying other private corporations, even greater than the increase in public corporations acquiring startups in 2024. This would unencumber capital for LPs.
Since its funding peak in 2021, Insight has slowed its investment pace. However, his investments at the time mean he is still the fifth most lively listed investor on The Crunchbase Unicorn Board in terms of funding in still privately held corporations valued in the billions of dollars. He probably has a very large portfolio of illiquid assets.
Founded 28 years ago, the company had $80 billion under management at the end of 2023, giving it broad scope for software investing.
Some of his biggest exits over time include X (formerly Twitter)which went public in 2013; Delivery hero in 2017; AND Monday.com in 2021, exits from many years ago.
Market distortions
The lack of exit options for venture-backed startups has led to a slower funding environment, layoffs, and ultimately company closures as additional funding sources dry up.
But while IPOs generate a lot of headlines and excitement, they do not really solve the liquidity crisis, Hinkle said.
“IPOs are not liquidity events. This is a completely wrong description,” he said. “IPO is a financial event.”
This is because many investors have not sold their shares in the IPO since the last economic downturn. Hinkle noted that exiting a large position in the stock market will be a challenge.
Investors can later obtain liquidity from secondary offerings, but many IPOs do not offer secondary offerings.
“The path to optimizing value is an IPO,” Hinkle said, but that is just the starting of the journey toward liquidity.
“The fastest way to get dollar liquidity is to sell the company,” he said.
Recent Kauffman members confirmed the report on investment sentiment. Investors surveyed there also said they were considering mergers and acquisitions and, in this tight market, wanted to sell bets on the secondary market this year to provide liquidity.
Uncertainty in IPO markets
It is generally beneficial that corporations have eight quarters of predictable revenues to be eligible to go public.
“If there was ever a time it was hard to be predictable, it’s now,” Hinkle said. We are “one bad geopolitical event away from uncertainty and one bad inflation data point away.”
In this market, many corporations are facing an IPO price lower than the last round, making it difficult for investors to come to terms with investing at higher values.
“When the valuation gets hit, everything gets thrown out the window,” Hinkle said.
In his opinion, going public requires a special company with various entities involved in the IPO process. Insurers focus on value. Management focuses on readiness. Investors focus on the pros and cons, and management focuses on long-term, not short-term, investments.
The current uncertainty makes it difficult for policymakers to pull the trigger.
Beyond the reset
While capital markets do not provide investors with a short-term liquidity path, public markets have imposed forced austerity policies on corporations, he said.
“The lasting legacy and benefit of this reset will be that companies will emerge from this when markets are truly normal, with a different mindset for efficiency that will never go out of fashion,” Hinkle said. “This efficiency mindset will drive better results in the long run.”