The worth of startup shares is changing. The latest PitchBook data concerning the United States, for example, shows that the value of the median seed deal in 2022 through the second quarter was $12.0 million — up from $9.0 million in 2021. At the same time, median valuations set by early- and late-stage startup rounds this year are also ticking higher.
Simultaneously, we’ve seen several well-known private giants trim or slash their valuations to get closer to new market norms. So which is more reflective of the market today: H1 2022 numbers compared to their year-ago comps or the high-impact repricings seen by Instacart, Klarna and others?
Secondary data concerning the private markets helps harmonize somewhat dissonant data and recent news events.
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Per a recent report from Forge, a secondary market for startup shares, equity traded on its platform no longer commands a premium to the price at which startups last raised capital, a change from prior periods.
What can we learn from this fact? That while data from the first half of 2022 might still be appealing to startup founders, second-quarter data is blinking a very different light from what we saw at the start of the year. And that startup investors’ ability to cash out ahead of traditional liquidity events may now come with a discount attached.
What’s changed?
Per Forge, in the fourth quarter of 2021, the value of shares traded on its secondary private market enjoyed a 35% premium to their last venture-set price. In simpler terms, demand for startup shares apart from traditional rounds outstripped supply, leading to investors hoping to snag a small stake in a particular private company being willing to pay more than its most recent backers, at least on a per-share basis.
Notably, Forge records that the price premium held during the first quarter, with secondary startup shares commanding a more modest — if still material — 22% price advantage over their most recently set price.
That all went out the window in the second quarter, a period in which secondary shares traded at a 6% discount to their most recent valuation mark. That means that the supply-demand curve has shifted, leading to sideline investors paying less for shares than their institutional counterparts.
What changed? A lot, but a few possibilities stand out:
- With the IPO market still closed, the time to liquidity for startups is lengthening, making it reasonable to see illiquid startup equity trade at a discount to prices perhaps set when IPOs were common and often successful. (This is the liquidity premium in action.)
- The public markets have also repriced since late 2021, meaning that a prior price set for a startup may be simply out of whack with the new valuation reality.
- And startup employees may be chasing safety in the form of cash sales of their vested and purchased equity instead of holding onto their shares in hopes of future appreciation.
Longer exit horizons, a more conservative market and the potential for startup employees to value cash more than continued upside could lead to more supply of private-market equity than there is demand — thus the downward pricing pressure.
The secondary market for startup shares is fascinating. Forge, which has itself raised ample capital, provides an exchange for private shares. And from that trading activity, data effervesces, telling us about the current state of demand for startup equity. It’s a useful (if imperfect) barometer.
How so? The secondary markets can, at times, show exuberance in a direction that is contrary to where the market is heading. Recall, for example, that Coinbase traded at $343.58 per share on the secondary markets ahead of its direct listing. That listing set a reference price of $250. The company initially traded higher, reaching a 52-week high of $368.90 per share. But everyone was wrong — and secondary investors perhaps even more so. Coinbase closed yesterday worth $52.93.
So the data from Forge and its contemporaries is a good sentiment check, just not a crystal ball. And what the latest data indicates is that demand for startup equity is in decline — just what we would expect given contracting global venture totals.