TechCrunch noted a week ago that private markets appeared strongly bullish on future startup value creation, while public markets were drifting lower, repricing possible exit values for today’s upstart companies. The was, it seemed, a rising gap between the level of bullishness in the private and public markets.
That dissonance has only increased in volume in the intervening days. New data from China’s private market, sharper central banking forecasts, sliding tech shares and rampantly bullish funding rounds make today’s startup cocktail even more confusing than what we saw a week ago.
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In broad terms, the era of cheap money is coming to a close as startups continue to raise record sums, creating a possible collision course between private-market enthusiasm and a tightening stock market. And the discrepancy is only getting bigger.
Let’s talk about it.
What’s changed?
This morning, Goldman Sachs updated its expectation regarding how quickly the U.S. Federal Reserve will tighten monetary policy. Three hikes to the key overnight rate were anticipated this year; that figure has risen to four. The financial giant also expects the Fed to start to shrink its balance sheet in July. This is a full-on reversion of today’s policy that has kept rates at effectively zero and bond-buying afoot.
The macro environment is going to change mightily this year, meaning that we’ll close 2022 in a very different state than we began it. You might not know that, looking at the market today.
A few data points for flavor concerning startup fundraising:
- Preqin data indicates that Chinese venture capital funding reached a record high last year. That means that despite China’s regulatory crackdown that has severely impacted the value of its leading tech companies, private-market investors were more than willing to place larger bets than ever.
- Indian startups also had a record year, as did Africa’s. Other data points are still coming in, but it doesn’t appear that Q4 2021 was a slowdown of any real consequence for startup fundraising.
- Two venture capital funds announced $12 billion in capital between them in recent weeks, with a16z detailing $9 billion in new capital, and Norwest disclosing $3 billion of dry powder for its coffers.
And from the public-market perspective, a few pieces of contrary information:
- We’re seeing the value of many recently public unicorns erode. Oscar Health is a mess and Paytm is trading poorly, to pick on a few names you know. Even more, tech stocks are set to fall by over 1% today. In pre-market trading, software stocks are even lower.
- Those declines come after the value of software stocks has fallen sharply in recent weeks, with a key index deep into bear-market territory.
- And the SPAC boom continues to notch victims, with Dave.com, a recent fintech combination, seeing its value shrink after its debut. The company shed around a third of its value on Friday, and around a fifth more this morning.
I would add that new, more aggressive expectations from the Federal Reserve indicate that we could see more public-market declines in the coming quarters for high-growth, high-multiple tech stocks.
The public and private markets have traded the Most Bullish baton back and forth in recent years, but today’s situation feels riskier than ever: Startup valuations are at or near all-time records, while the values underpinning them on the stock market are set to change.
This leads to a host of pressing questions: How many unicorns will manage to exit before their window closes? What happens to those companies if they miss their chance to debut?
And what about the startups we discussed last week, the companies that are raising capital today at simply stratospheric revenue multiples? Will they get stuck in the middle of their growth curve, weighed down with a valuation that they cannot grow into?
These concerns have cropped up over the years amid startup boom-times. But now we’re on the cusp of actual changes to monetary policy, removing some of the support for exuberant private-market investment. Will the private numbers change in time to catch up to where the public markets are headed?