Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
All around, this has been a tough week. The coronavirus is spreading and worry is running high as infections mount. In economic terms, global markets were repeated declines last night (domestic results here), and the U.S. indices are off again this morning.
There’s been plenty of bad news to read, even in our private market, startup-focused world. Yesterday the impact of COVID-19 on earnings became more apparent, bringing what has, for months, been an external concern to domestic technology companies. The problems are now. The past week’s market collapse into correction territory hasn’t helped,.
But the story so far has largely been public-market focused and with good reason: You can see the public markets contract in real-time. It’s far harder to see into the shifting dynamics of the private market. Today, however, we are going to try, all the same, by digging into some preliminary venture capital data.
I realize that the last few days have been awful. So, at the end of this piece, I’ve excerpted a quote from a recent interview I held with the CEO of Smartsheet, Mark Mader, about tech cycles, downturns, and getting through tough times. It’s perhaps useful today as the downward trend appears to continue.
Let’s start with a brief reminder of how elevated stock prices remain and what that means for tech multiples, and then look at early February VC results from the U.S., China and Europe. With that, in Sanskrit: अभिमुखी करोति.
Multiples, Markets
Before we dig into the venture capital data, a reminder that, even with recent declines, we’re still in warm waters as far as tech valuations go.
Don’t believe me? Here are some headline stats: Two of the tech Big 5 are still worth over $1 trillion today, and two more are worth $900 billion or more. Also, SaaS and cloud stocks have declined, sure, all the way back to their summer 2019 levels. This means that things are about as good as they were last summer for the key cohort of tech companies (public SaaS firms are critical drivers of many private software startups’ valuations), with the Bessemer group posting revenue multiples (calculated using enterprise value) of 11.9x as of this morning.
So the pullback has been not good, certainly, but tech shops are still richly valued. Hell, we’ve even seen some out-of-favor players bring it back in recent quarters, posting better-than-expected growth to the surprise and delight of their shareholders.
And that’s where the good news stops, and the bad news begins.
Falling IPO activity, falling VC totals
The 2020 IPO market has been weak so far. Casper and One Medical put up some points, but with just Asana and DoorDash promising to go public eventually, we could wind up done with Q1 2020 with just two venture-backed, non-biotech IPOs. That’s far under the pace that unicorns need to clear enough of their inventory to create material investor liquidity.
Perhaps in reaction to that issue, or perhaps for a host of others, venture activity looks weak. (Looking at recent venture capital totals is tricky, given the inherent lag in venture data; deals are often reported long after they are closed.)
Here’s the following February totals via the Crunchbase dataset:
- US, equity only recorded private investments, February 2019: 999
- US, equity only recorded private investments, February 2020: 461
The story is similar in China:
- China, equity only recorded private investments, February 2019: 189
- China, equity only recorded private investments, February 2020: 32
Those figures are staggering. Keep in mind that China’s 2019 totals were depressed already from earlier years. What we can see in the February data is that Chinese venture capital activity has all but stopped during the outbreak. (We wrote about China earlier if you’d like more.)
How about Europe?
- Europe, equity-only recorded private investments, February 2019: 631
- Europe, equity-only recorded private investments, February 2020: 349
That’s the least bad decline, notably, in percentage terms. The 2020 results will improve as more data comes in, but I’d bet you a full lunch that we see material, double-digit percentage declines in venture activity in February.
What we can say is that it appears that the private markets are tracking the public markets: the public downturn is a private correction. We will naturally keep tabs on this during March as well and run our own dives into Q1 data when it shakes out. Consider this an early and preliminary look at the venture market in 2020.
Good news?
How about some encouragement to close? I could use some, I think. You too.
This Monday, as the market’s terrible, horrible, no-good, very bad week got underway, I chatted with Smartsheet’s CEO Mark Mader. Smartsheet, a member of the 2018 IPO class, is a big SaaS company worth a bit more than $5 billion. Here’s a snippet from our conversation that I’ve only modestly cleaned up to preserve tone:
TechCrunch: The market is falling apart today, as I’m sure we’re all aware, due to a lot of kind of little fears, and I think Smartsheet’s down like six points. I am kind of curious how you approach that as a CEO? Do you just not think about short-term fluctuations that are driven by macro events in the value of your company? Or do you actually tell people internally like, “Hey, guys, you know, chin up, this is going to be okay. It’s nothing to do with us. We’re just caught up in this broader market chop?”
Mark Mader: Yeah, I think it’s a delicate balance. You can’t be oblivious to it. But I think I answer the question of how you’re doing very differently these days, Alex. If you asked me three years ago, I would have said, “Hey, Alex, this amazing deal just came in. It’s really cool and here’s what it means to our company,” or, if it was a really shitty day, I would say, “Alex, you know, I didn’t get that candidate I really wanted.” I never answer that question that way anymore. I always say, on a net basis, Alex, life’s great. It’s great. And it’s the true SaaS answer. And in the sense that we’re judged on a net basis, we’re not judged on “did you get a win yesterday or today [or a] loss yesterday or today?”
So I would say, in this case, you know, having lived through 2000 at a software company; having lived through ’07, ’08 when we just released a new version of our software, when the financial markets collapsed, to what’s going on today, I’ve been around the block couple hundred times over 25 years, and you realize that you will shorten your life considerably, I think, if you overreact to these types of days.
The reason you should be aware and you should be sensitive is because not everyone maybe takes that approach, right? So if your customer is nervous, or an employee who just started with you is like, “Oh my gosh, what’s happening today? I thought everything was perfectly stable in the world,” you need to have a listening ear. But in terms of how you drive your company and make investments and decisions, I think you have to have a long term view. You have to.
Onward
So 2008 this is not. At least not yet. And tech and venture and the private markets got through that. This too shall pass, even if we don’t know yet how bad things will get.