Startup valuations — especially at the later stages — have come down drastically over the last year and a half of the ongoing market correction. Companies that once boasted sky-high valuations like Klarna and Getir have seen their valuations slashed in their latest funding rounds.
Outside of Klarna and Getir, though, very few late-stage companies have raised new primary rounds since the booming 2021 market. This means secondary data is one of the few sources where the market can turn to get a feeling of what investors think these companies are really worth today. Spoiler: Nobody thinks they are still worth their 2021 price tag.
For example, neobank Chime, a 2021 IPO hopeful, was valued at $6.5 billion in a secondary deal that closed on Monday, according to data from Caplight. This is a noticeable haircut from the $25 billion valuation it garnered in 2021. Crypto exchange Kraken was valued at $1.4 billion in a recent secondary sale, well below its last primary round valuation of $10 billion.
That got me wondering: Are late-stage valuations as low as they are going to go? Market signals would imply that may be the case; the IPO window seems to be on track to open back up in 2024, and the public markets are starting to regain ground.
A recent survey of venture secondaries investors found that for those who focus on the industry, many think prices may still have room to drop.
Michael Szalontay thinks if we aren’t at the lowest point yet, we are at least close. The co-founder of Flashpoint Venture Capital points to the current conversations around interest rates. “If you believe that interest rates are at their highest in this cycle, then we are close to the bottom of the market,” he added.
Kelly Ford Buckley, general partner and COO at Edison Partners, said that she doesn’t expect prices to continue to go down further, but she doesn’t expect much movement in either direction anytime soon.
“We’ve seen anywhere from 10%–30% discounts on secondaries over the last 12 months or so,” Ford Buckley said. “For the capital-efficient, growth-stage companies we are selling or investing/buying, I don’t see this changing.”
Other investors, like Mike Bego, managing partner at Kline Hill Partners, think we will continue to see valuations decline until at least the summer of 2024 on both venture funds and companies. He also thinks we’ll likely see some companies implode next year, which could put a further damper on pricing in some sectors.
This will be key next year. Many are predicting that 2024 could be a bloodbath for these late-stage “zombie” startups. Though this wouldn’t necessarily turn an investor off from an entire category, it would likely affect what they are willing to pay for a company’s shares. On the flip side, if a category sees a successful IPO, that may help raise other valuations in the sector, too.
Some secondaries investors think there are still entire sectors that are overvalued, including space, defense and AI. These are the same categories that are seeing elevated secondaries activity lately, according to Caplight data, but that bump is likely due to current primary investors increasing their stake as opposed to actual secondaries investors.
And some current sectors, specifically AI, might just be too hot right now, according to John Zic, the founding partner at EQUIAM. Many of those companies aren’t worth their current valuation, he said, and recent primary transactions in this space are pricing companies at 50x to 100x their revenue, which is too close to 2021’s fever for him.
Defense tech is also too pricey, he said. “In order to be fairly valued against public peers, private defense tech firms would need to consistently grow revenues at nearly 500% annually over the next several years,” Zic said. “These valuations assume an upward trend of global instability over the intermediate to long-term.”
While there are signs of hope for exits and the late-stage market next year, it will be interesting to see which companies and categories will be able to take advantage of it. While some will see positive signaling in 2024, others will remain on the sidelines faced with another valuation cut.