It’s taking venture capitalists longer to cash out of startups, causing firms to invest more in their own portfolio companies than in new deals, data shows.
The increased use of so-called inside rounds, in which no new investors join in a private equity funding, not only means less capital for entrepreneurs seeking first-time funding, but also means tech startups are having a harder time determining a current valuation because a company’s valuation is often recalibrated as new investors join an investment round.
Experts say a vicious circle is being created as a result: An accurate valuation is critical in making a merger or acquisition deal happen, but with no new investors, most potential acquirers are taking a harder line on what a potential acquisition is truly worth — and that is slowing M&A deals, industry experts say.