The pullback in tech shares on Wall Street is sending shock waves through the startup ecosystem, putting valuations under pressure and making fundraising more difficult.
“I think the conversations are getting started. Most in the sector are probably shell-shocked by the valuation downward pressure,” said venture capitalist Ryan Gilbert, founder of Oakland-based Launchpad Capital, which focuses on early-stage startups in fintech, insurance and real estate. “The reality, of course, is that the millionaires and billionaires that were minted [by IPOs] in the third quarter and fourth quarter of last year are not at that rate anymore. They’ve lost a lot of paper.”
Those stock drops cause pain that goes well beyond the founders of those publicly traded companies. They also hurt the entrepreneurs still building VC-backed companies that one day want to go public, by making them worth less to investors.
“I do think valuations will soften, particularly when you’re seeking to find public comps,” Gilbert told me. “With the public comps trading down to the extent they have, I’m sure a lot of the bigger check-writers are starting to re-evaluate valuations.”
As if to underscore that point, prolific startup investor Tiger Global Management in recent weeks has been renegotiating investments that had been under discussion for numerous companies, seeking to lower the valuations, the Wall Street Journal reported Tuesday, citing people familiar with the deals. The trims could be severe. The newspaper reported that business-software maker Dbt Labs recently struck a deal with investors that valued the company at $4 billion, down from more than $6 billion it initially negotiated.
To be certain, venture firms have billions of dollars in dry powder that they can use to support their existing portfolio companies and look for new opportunities. But those investments could be made at lower valuations and for smaller checks. Some are already whispering predictions of dreaded “down rounds,” in which investments in a VC-backed company are made at a lower valuation than a previous round.
Those expectations follow a plunge in value for tech companies. Overall, the Nasdaq composite is down more than 10% from its November peak. While tech giants like Alphabet and Apple have largely weathered the storm (Facebook parent Meta saw a big drop Feb. 3) many smaller publicly quoted tech companies have lost half or more of their value. For example, Oakland fintech Marqeta closed Tuesday at $12.43, down about 67% from its high of $37.90 since going public last June. Block, formerly Square, finished trading Tuesday at $127.61, off about 55% from its 52-week high of $289.23. Opendoor closed at $10.71, down almost 73% from its 52-week high of $39.24.
“It takes about three to six months for public market valuations to trickle into the private markets,” Mamoon Hamid, a partner at Kleiner Perkins, told me, adding that sensitivity to stock-market valuations is greater for later-stage growth companies that presumably are closer to going public. For companies with more immediate ambitions of going public, those plans are likely on hold.
“Anyone who was thinking they would have an IPO in the next six months is no doubt rethinking those plans, potentially going to late-stage investors to think about another round of financing,” Gilbert said.
“Deep-pocketed M&A acquirers are going to be very acquisitive — banks particularly,” Gilbert said. “I’m personally waiting to see what JPMorgan Chase does. I think they’re going to make some bold moves.”
Those not wanting, or unable, to wait for a more hospitable IPO market could decide it’s best to be acquired.
“One fallout of the fact that there will be ‘have nots’ is that M&A is going to pick up,” said Steve McLaughlin, managing partner of FT Partners, a San Francisco investment bank focused on fintech. “You’ve already seen it with Rocket buying Truebill, Walmart buying Even and Visa buying CurrencyCloud — and more is coming.
“I do believe timelines will slip and it will take longer to find a partner, so we are advising issuers to get going much earlier than on prior rounds,” McLaughlin said. “Investors will be more diligent and take more time and be more picky.
“But that doesn’t mean valuations must go down,” McLaughlin added. “Great companies will always get great valuations in the private markets.”
But some sectors, such as proptech, are facing multiple challenges in the public markets.
“Public proptech companies are currently experiencing two headwinds: broader multiple compression for public growth stocks and concerns around the impact of rising interest rates on the demand for housing,” said Nima Wedlake, a principal at San Francisco-based Thomvest Ventures, which invests in fintechs and proptechs. “Fundamentally, we believe the broader set of proptechs will continue to capture market share from incumbents, so we are very optimistic.
“In the short term, I expect the public market pullback may have an impact on private valuations as investors recalibrate their valuation models and determine the impact of rising rates on these businesses," Wedlake said.
The casualties go wider than the entrepreneurs, given how much stock-related compensation is involved in Bay Area pay packages.
“Employees who joined high-flying startups in the past two years did so on the basis of prices and valuations going up and stock options being worth something,” Gilbert said. “I wonder how those same employees are feeling today, when the public stocks that they were given restricted grants on or stock options have been declining by as much as 50 to 75%.
“That could be a massive earthquake, within the financial services technology space particularly, and across tech,” Gilbert added.
Robinhood (Nasdaq: HOOD) recently issued additional stock grants to new employees to meet original compensation offers, according to Blind, citing what verified Robinhood employees are telling the Berkeley-based professional social network. Based on what employees of other tech companies are telling Blind, the company said similar moves may occur at Block, Pinterest and Snap.
“Cash is going to be highly valued, highly prized,” Gilbert said. "I’m sure we’re going to see long-term cash-based retention packages put in place.”
