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Software Investments Skid 26% Lower

Venture capitalists slammed the brakes on taking stakes in software companies in the first quarter.

The software pullback came as investments fell across the broader tech landscape and valuation concerns cast a pall across Silicon Valley.

Software investments declined to $1.84 billion from $2.48 billion in the fourth quarter, a 26% drop. That’s also a big slide from the third quarter’s $3.4 billion, which was the highest level on record since the dot-com boom, in 2000, according to industry tracker Dow Jones VentureSource.

A bellwether of broader information technology investments, software companies make up the biggest component.

PHOTO: THE WALL STREET JOURNAL

A frozen tech IPO market weighed heavily on investors. The first quarter saw not a single new tech issue go public. Shortly after the first quarter, IT company SecureWorks Corp staged an IPO. The company priced below its expected price range and continues to trade below its IPO price of $14 per share. Shares closed Friday at $13.33.

Investors and entrepreneurs say there’s still too much uncertainty about IPOs, and no one wants to risk being a flop.

Other concerns loom as well, particularly in the political arena.Apttus Corp. co-founder and Chief Executive Kirk Krappe, whose business software company was valued at $1 billion in September, said he’d expected to take his company public this year. “What we all forgot is that it’s an election year,” he said.

The uncertainty created by the election coupled with a drop in valuations for software-enabled services companies by as much as 50% means Apttus will likely wait it out for an IPO.

The timing of an IPO is more likely the first half of 2017, he said. Apttus is working with Morgan Stanley and was cautioned by a few bankers. “Any uncertainty is just bad,” Mr. Krappe said.

Another issue is price. With the stock market correction in January, valuations of private companies also plunged, according to investment documents and venture capitalists, but entrepreneurs are still adjusting to the idea that their companies are worth less than they were before.

The database company Couchbase Inc., which in March raised a $30 million down round, wiped out its valuation gains from 2015 and 2014 and is now back to 2013 levels.

Companies that are over-valued in this climate may be in for a tough slog as the year progresses if they can’t raise capital, especially if their valuations top $1 billion. The Wall Street Journal’s Billion Dollar Startup Club on Friday had 87 U.S. companies valued at $1 billion or more.

Despite software’s slide, IT investments edged slightly higher in the first quarter to $3.3 billion, up from $3.2 billion in the fourth quarter. Still, that was well below its peak of $4.4 billion in the fourth quarter of 2014.

To be sure, some software startups are having no problem raising capital. Levyx Inc., which makes big data storage and management software, and is less than three years old, raised $5.4 million in Series A funding in just a couple months. The funding closed in mid-March.

“There’s still a lot of interest in big data technology like ours,” said Chief Operating Officer Luis Morales. “We got an excellent group of investors.”

Also, many tech startups loaded up on capital and may just conserve cash to wait it out for better times.

There are those, too, that are quietly growing and running profitably. These companies can weather tough times and will be fine, said Industry Ventures Managing Director Hans Swildens at a WSJ Pro Venture Capital event in San Francisco on April 20.

These companies just don’t talk about it, said Mr. Swildens. “Why should they?”

First appeared at WSJ Venture Capital

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