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Why one venture capitalist is ‘cringing’ at recent tech IPOs

Canaan’s Maha Ibrahim says some companies that have recently gone public will never make money.

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A stuffed and smiling ghost — the symbol for Snapchat — sits on a railing with the New York Stock Exchange in the background. Peter Kafka / Recode

Maha Ibrahim has been an investor since March of 2000, joining Canaan Partners just before the dot-com crash — and she’s worried about the people who weren’t around in those days.

“When I joined the industry, there were years of slogging through a really poor exit environment,” Ibrahim said on the latest episode of Recode Decode, hosted by Kara Swisher. “That lasted until 2005 or 2006; we’d say, ‘That’s a company that exited for $200 million? Woohoo!’”

“We’re now looking at the last nine years of ‘up and to the right,’” she added. “And we’re also looking at a cast of characters in the venture industry, a lot of them have only seen ‘up and to the right.’ And so they do look at their jobs as selling money.”

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Ibrahim stressed that that she does not see her job that way. To return money to Canaan’s backers, preferably in multiples, she said the firm has decided to be more deliberate than its peers in where it bets LPs’ cash.

“I can’t control the industry,” she said. “At Canaan, we’ve got to maintain discipline, we’ve got to be intentional about how we invest.”

She said a lot of recent tech IPOs, fueled by a “rush for alpha” in the venture world, are concerning because she believes “many of them will never make money.”

“What has been sent out into the market ... ugh,” Ibrahim said. “I’ve read those S1s and I’m just cringing [at] the lack of profitability and the lack of convergence to profitability. And I’m not just talking about Blue Apron. If you look at the last couple of years, IPOs both on the consumer side and the enterprise side, these companies have been burning tremendous amounts of capital.”

And that puts the ball back in the court of the venture capitalists that are ushering startups to scale. Canaan, which recently closed an $800 million fund (its largest ever) is asking itself how much it should value a company’s growth compared to other metrics.

“As we look at that [fund], we’re saying, ‘Have we been taking enough risk?’” Ibrahim said. “Are we not pushing our companies to grow fast enough? Yet we’re having to push it against our own notions of building a real business and being long-term investors and doing this intentionally and deliberately.”

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