Yep, startup prices are falling


Image Credits: Nigel Sussman (opens in a new window)

The value of later-stage startups is in decline, data indicate.

This particular market movement isn’t a surprise, but the scale of the contraction is worth noting. Forge Global, a secondary market for private-company shares, “said the prices of companies on its platform had fallen 19.9% in February and March compared with the fourth quarter of last year,” the Financial Times reports.

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Other data confirms the general price movement for late-stage unicorns — it’s trending down and to the right.

Secondary data should be viewed as directionally useful for determining market sentiment, not for setting companies’ public market prices. Recall that Coinbase was valued at more than $100 billion on secondary markets before it direct listed last year. Today, according to Yahoo Finance data, the company is worth about $38.6 billion, a sharp discount from the lofty 12 figures it once commanded.

That caveat aside, a decline of a fifth is material and provides more evidence that what Instacart went through earlier this year could prove to be more harbinger of what’s to come than a one-off datapoint.

How big is a 20% haircut?

In March, TechCrunch looked into data from Carta, which helps startups with cap table management and other legal matters regarding ownership. The company has a bevy of data from startups actively fundraising, giving it a fascinating insight into private-market investor sentiment. Its data showed shrinking round sizes and valuations for Series C startups.

In numerical terms, the average deal size at the Series C mark in January and February 2022 was off 23% compared to the last two months of 2021 and valuations fell 47% on average. (We’ll get updated data from Carta this week, if possible, to provide a clearer picture of Q1.)

Series C is perhaps where secondary transactions start being more common in the late-stage market, so it’s reasonable to see private-market trades put up similar declines.

If we expected the secondary markets to see price declines, we have to ask ourselves if the scale of movement is material — a change of expected magnitude in a particular datapoint should be noted, but wouldn’t be worth headlines. But an unexpectedly large change is definitely news.

In this case, a 20% drop in valuation is very material. It’s massive, in fact.

Recall that late-stage valuations peaked somewhere between late Q3 and early Q4, depending on how you want to parse the data. By the year’s end, the market appeared to have entered a correction, but it’s hard to pinpoint the day when things changed. Still, valuations were mostly rich for startups in the final quarter of last year.

Startups that raised in the latter few quarters of last year will find it difficult to raise money at an up-market valuation after a 20% price cut. Why? Because their recent growth is being discounted, and investors are only willing to pay 80% of their Q4 price inclusive of Q1 growth after their revenue multiples have soured.

These startups will have to grow much more than they might have anticipated if they want to raise at a comfortable premium to their last round.

It’s too soon to say that flat rounds are the new up rounds, but we could return to that early-2020 dynamic if things continue as they are.

We noted above that secondary-market trading of startup shares is not always a good indicator of where companies will trade when public. But our example of that point was one in which private markets overvalued unicorns. With discounts being the day’s trading tenor, we don’t know if the new prices are too parsimonious.

That said, whichever way the data eventually sorts out, soft secondary-trading prices are a reasonable data point for startups to consider when they weigh options for raising capital.

I suspect the price declines that we are seeing today are a pretty stern pushback against any attempt to reopen the IPO window. For unicorns wearing rich valuations around their neck — a modern day millstone, perhaps — this means public offerings as a way of raising new funding are likely not a factor; it’s either more venture money or death for most.

That dynamic implies that the startup capital markets will become far less founder friendly this year. Falling secondary prices are a single data point, in other words, but it is one that speaks volumes about how the startup market has changed so far in 2022. And none of the changes are super bullish for the most highly priced startups.

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