The sharp sell-off in tech stocks has already had a severe impact on investors’ portfolios, and now it’s also causing considerable ripples in the venture capital market. Valuations of start-ups are reduced and venture capitalists are slowing down their commitments to new transactions. Barring a quick turnaround in market sentiment, conditions on Sand Hill Road are likely to get even tougher from here.
The statistics of public market carnage are sadly familiar by now. The tech-heavy Nasdaq Composite Index is down 27% this year, with many leading stocks…
(DASH): declines of 50% or more.
Meanwhile, the initial public offering market has stalled, SPAC issuers are struggling to find merger partners for their deals, and regulatory scrutiny is making it all but impossible for well-capitalized companies like
(GOOGL) to save start-ups through acquisitions.
The pain is less evident in the world of venture capital, where companies tend to operate out of the public eye. They are not required to communicate their results, nor to disclose the fate of the companies in their portfolio. Many early-stage deals fade from view, acquired for modest returns or simply closed.
While start-ups are shouting out loud about their new company rounds – you should see my email inbox – there’s a lot less shouting when there are down rounds or filings in chapter 11.
But in this market, even secrecy cannot hide the signs of trouble. the
The exchange-traded fund (IPO), a portfolio of IPOs completed over the past two years, is down about 50% in 2022 — and new issuances have largely ceased.
In late March, grocery delivery startup Instacart slashed its reported valuation by around 40%, to $24 billion, reflecting the strong sell-off in shares of its publicly traded peers, like DoorDash and
(UBER). This sale only got worse in the weeks that followed.
Earlier this month,
(SFTBY) revealed that it lost almost $27 billion in its three major venture capital funds: Vision Fund, Vision Fund 2 and a Latin American venture capital fund. This partly reflects the reduced value of holdings that had previously gone public, such as
(HAVE I GOT). But SoftBank has also taken hits on the holdings of private companies. There is no doubt that all venture capital funds suffer from reduced valuations. SoftBank, as a public company, is just one of the few venture capital firms required to disclose bad news.
A new report from research firm CB Insights shows a sharp slowdown in venture capital activity across the board, in particular a drop in funding and a slowdown in exits. The company expects there will be 6,904 total venture capital deals in the quarter, down 12% from a year ago and 22% from the first quarter.
And IPOs, the traditional venture capital exit, have all but dried up. There have been just 34 U.S. market IPOs so far in 2022, down 78% from the same point a year earlier, according to Renaissance Capital.
There are also signs of trouble in the secondary market for private equity.
Forging global holdings
(FRGE), which operates a marketplace that connects buyers and sellers of pre-IPO stocks, reports that the average transaction price fell 8.9% in the March quarter from the fourth quarter. That’s a steep drop, though it still pales in comparison to the 31% decline in the price of the Renaissance IPO ETF over the same period, a sign that prices in the private market remain a little more rigid. It is almost inevitable that the gap will soon begin to close.
Forge Global CEO Kelly Rodriques, whom I recently interviewed for a Barrons Live Event notes that most pre-IPO private equity trades are still occurring at prices above the last completed funding round, but the premium is shrinking. According to Forge, the average secondary trade in the first quarter presented a premium of 24% over the last round, compared to an average premium of 58% in the fourth quarter.
Forge is seeing a record number of sell-side “signs of interest”, coupled with an increasing spread between bid and ask – sellers want out, but buyers are increasingly price-conscious. With IPO exits slowing, the urgency to find ways to gain access to once-hot startups is diminishing.
Maybe it’s a good thing that the IPO markets are pretty much closed. New research from Manhattan Venture Partners, an investment bank focused on the secondary pre-IPO equity market, shows that venture capitalists have spent the last decade making hay from IPOs. Regular investors in the public markets? Not really.
According to Manhattan Venture Partners, companies that went public between 2010 and 2021 have produced annualized returns of around 60% for their early-stage investors. This uses a closing price six months after the IPO. Returns are even better for investors who have bought late-stage private companies. They enjoyed annualized average returns of around 80% in the six-month post-IPO period.
But public market buyers – people who bought stocks at the end of the first day of trading – saw average returns of -1% six months after the IPO.
Manhattan Venture analyst Santosh Rao concludes that buying IPOs in the public market “is a sucker bet.” This is something to keep in mind when IPOs finally make a comeback.
Write to Eric J. Savitz at [email protected]