“Look out below” is the new mantra for tech valuations. So let’s peek at how that’s playing in the deals universe, as investors try to determine the sharpness of those falling knives:
Private equity: This is widely being viewed as a buying opportunity, with PE pros kicking tires on tech companies they previously viewed as overvalued.
No one is calling a bottom, but PE doesn’t need to buy there. It just needs a defensible price. Particularly at diversified firms that have largely avoided large tech deals over the past year or two.
- The caveat is that most prospective sellers have not yet accepted lower valuations as the new normal. As one software-focused investor told me: “For a lot of companies it’s going to take another month or two of seasoning before they get serious about doing deals.”
Late-stage VC: Everyone’s talking a good game about price discipline, but we’re still seeing plenty of massive up-rounds.
See today’s announcement that employee onboarding company Rippling raised at $ 11.25 billion, versus $ 6.5 billion last fall. Or the raise by remote hiring firm Deel at a $ 12 billion valuation, compared to its $ 5.5 billion mark in October.
- In short, it’s not about rounds getting done at lower prices. It’s about rounds getting done or not. Plenty of companies are finding themselves in that latter bucket, but stalled fundraises don’t get press releases.
Early-stage VC: This is where investors want to play in this sort of market, given the relatively low valuations and long runways. Sources say that there’s starting to be a bit of price pullback, more at Series A than at seed, so as not to hamstring startups when it comes time to raise a Series B.
- Yes, it’s a self-serving argument that gives VC funds greater ownership stakes. That doesn’t make it wrong.
Crypto: Web3 startups seemed immune as of just a few weeks back. But there’s only so long that investors can ignore the crypto correction (eg, Bitcoin down 48% year-to-date).
- Perhaps the most worrisome is the stock slump for Coinbase, which many VCs use as a proxy for crypto company cohort health.
- Yesterday’s earnings report caused Coinbase shares to open this morning down around 25%, for an all-time low. Plus, the company felt compelled to detail what would happen to user assets if the company were to go bankrupt.
Everyone seems to agree that a lot of the drop is tied to the Fed rate hikes, similar to what happened in 2000. The disagreement is if a recession is around the corner, as followed in 2001. And, if so, how severe it might be.
The bottom line: Private equity and venture capital are long-term asset classes. Investment decisions, however, must be made in the present tense.