Stuck in a Downturn, Startups Ghost Investors

Startups typically depend on serial infusions of funding from backers to get through their early years, and a so-called down round—raising money at a lower implied valuation than before—is a big black eye. So lately, companies have gotten increasingly creative at trying to avoid being considered less valuable, particularly when investors seek to unload their stakes, either out of disenchantment or because they need the cash for something else.

This has sparked a sort of tug of war between investors and founders over the information needed to decide how much a company is worth. At least one venture capital outfit says it has stopped buying startup stakes on the secondary market because lack of access to financials makes it too hard for auditors to determine the fair value of the firm’s portfolio. “A lot of businesses are facing do-or-die time,” says Sunaina Sinha Haldea, global head of private capital advisory at investment bank Raymond James Financial Inc. “The big issue is that investors don’t know the true market value of a business.”