It’s the first of Y Combinator’s two-day Demo Day event, which means that TechCrunch will spend most of our working hours watching startup demos and tracking how many companies from the batch are in particular sectors and geographies. The early-stage startup market is active and — as formerly late-stage-focused funds look to invest earlier — still awarding attractive valuations to nascent technology upstarts.
Later-stage startups aren’t being afforded similar enthusiasm, with investor notes and data indicating that from Series B onward — and perhaps earlier in some cases — valuations are tightening as investors look to falling public markets as an indication that exit prices will be smaller than previously anticipated. A closed IPO market and antitrust vibes from U.S. and European governments potentially limiting big-ticket M&A aren’t helping.
The Exchange explores startups, markets and money.
Read it every morning on TechCrunch+ or get The Exchange newsletter every Saturday.
This means that many unicorns looking to provide liquidity for their employees and other shareholders are using services like Forge, which recently went public, and EquityZen. The Exchange has spoken with EquityZen before, but we wanted to dig into current later-stage startup market dynamics to understand what it would take to assuage concerns and bring later-stage startup dealmaking back into the spotlight.
So we asked EquityZen’s Phil Haslett, co-founder and chief revenue officer, to chat through his perspective on the markets.
We learned two key things: First, there is a sort of trigger, if you will, that could reset pessimism regarding technology company growth rates. And, second, Instacart did other startups a huge solid by retooling how it prices employee equity compensation through what is generally considered to be a reset induced by a new 409a valuation. (If you don’t know what a 409a valuation is, think of it as an externally set valuation for private companies’ fair market value.)
Let’s start with what it would take to Lazarus market sentiment about tech companies — and therefore tech stocks — and examine the door that Instacart just kicked open for its fellow unicorns.
Restoring market confidence in tech companies
It’s tricky to compare mid-2021 market sentiment regarding quickly growing technology companies and today. The startup and public markets each sport myriad technology companies with different growth rates, margin profiles and cost bases. One size does not fit all. But that doesn’t mean we can’t sketch out any generalities.
While every technology company is different, the markets have curtailed the value of technology revenues as other investment opportunities became more attractive. More simply, the value of growth has declined in the public markets, leading to revenue multiple compression among startups that have reached, say, eight-figure ARR.
Happily, what drove the sentiment change could also flip back. Haslett told TechCrunch that market concern is being driven by “two big macro uncertainties,” which he identified as “geopolitical risk in Europe, plus inflation.” But if we look out a bit further, he gave us a picture of what good news would look like for tech valuations (quotes have been edited for clarity and length):
What you look for on the horizon is a wave of Top 50 or 100 tech companies having earnings and forecasts that get us back, and right the ship. If DocuSign says, “OK, like, the worst is behind us,” if Zoom says, “The worst is behind us; we’re back up and running,” [then startups can say], “Oh, thank god, now we know we’re in a better spot. Our public comps are gonna look better, we can start [hitting] the ground running.”
Who does this really matter for? Not the angel-backed startup, nor the seed-stage startup that is getting its first customers. Instead, Haslett cited companies that raised last year on pricey revenue multiples that the market will no longer digest. Given the sheer number of tech startups that that applies to, it’s a material point.
Notably, the shift that Haslett details could come soon. We’re closing out Q1 as we speak, which means earnings season is yet again around the corner. That means another raft of chances for prior tech darlings on the public markets to reset the narrative. Which, Haslett makes plain, would be a huge boon to a host of startups.
But that potential shot in the arm may not come in the Q1 earnings cycle. It might not even come in the Q2 earnings cycle. Or in Q3’s. Given that uncertainty, it’s rather polite of Instacart to have cleared room for late-stage startups to reprice themselves, somewhat, if they need to.
Instacart’s helping hand
Instacart’s fundraising during the pandemic was nigh-legendary, with rapid growth allowing the grocery delivery unicorn to raise capital hand over fist. It was growing like a weed, so the incoming capital made some sense. However, as we’ve explored, after a torrid 2020, Instacart’s growth slowed in 2021. This led to the company sitting on a valuation that, as the market changed and its growth decelerated, looked increasingly albatross-y.
So, the company repriced itself, allowing it to tie employee equity comp to a valuation that made a bit more sense. This led to a deluge of headlines that the company certainly didn’t enjoy. So why go through the gauntlet? Because Instacart needs to both retain key staff and hire. And it’s hard to do that if workers feel like their equity is mispriced.
Haslett said that it’s “really scary” to do what Instacart did, and we agree. He joked that folks aren’t walking around in the aftermath saying, “Man, isn’t it awesome that Instacart did this for its employees?” Instead, he said, it’s more likely that people are saying something more along the lines of, “Holy shit, this company is down 40%.”
But that doesn’t mean that Instacart made a mistake; Haslett instead described Instacart’s choice as “really gutsy as a first mover.” From his perspective, the company effectively said that it was going to “get out there first” and declare that a new, lower price is best for its workers, allowing Instacart to hold onto talent — and keep building and delivering for its customers.
By going first, Instacart has likely made it more palatable for other unicorns to follow suit if needed.
“It’s opened the door for a bunch of other companies to do it,” Haslett said. “You’ve got to be able to weather the storm and a bunch of headlines,” adding that such an action by Instacart or a company in similar straits is “a long-term prudent move.”
We asked earlier if Instacart was kicking off a trend. Unless Q1 earnings shake up the narrative, the answer could be a resounding yes.