A fellow angel asked us the above question. Ning and i discuss this a fair bit as we have both public and startup equity. I actually summarized some initial thoughts back in Jan article on Sea’s stock crash. Unfortunately the trend has not just continued but has deepened.
It should be pretty obvious for investors and founders who watch public markets that there has been a rerating of valuations in the tech space. Both stable profitable tech as expressed in QQQ (Nasdaq100) and loss making growth tech as best expressed by ARKK (Ark Innovation) have dropped 21% and 49% ytd respectively.
I think with interest rates scheduled to rise more to control inflation, it does look like this trend is good for a while until inflation shows clear signs of abating. That may take 6mths- 1 year.
So how does this affect our local and regional startups?
The most obvious hit will be for the late stage ones who are near IPO. SPACs are dead no thanks to dismal stock performance by Grab post SPAC. And don’t get me wrong, for grab mgmt and founders it’s a great timing move to raise the 5-6b at peak of bubble and dilute little. But for all investors who invested above 10b valuation, it’s losses all around. Same thing can be said for Buka and Goto. Interestingly, Goto raised only 1+b as investors can see what’s happening on grab front.
So what the above means is that no more easy Spac near term and IPO will be also be hard to bookbuild.
So if I am a late stage Vc or PE investors, I will be looking at the current public market valuations to value upcoming rounds. Cuz that’s the exit I get at best in near term. So at least 30-50% haircuts all round?
Eg carvana is now trading at 0.8 times revenue. How does that affect carro and carsome valuation who raised at 2-3 times gmv?
Or even profitable tech like tencent, baba, Google and fb are at 10-25 forward profit. So even if our local tech startups turn profitable, are they worth 50-100 times profit if growing at 30% per annum? Probably 30 times is fairer?
A barometer to watch will be if carousell and carsome can do their IPO or SPAC. If they delay or pull, it means public investors have drawn a conclusive recent lesson from Grab and like.
How about earlier stage startups? Those B round and earlier ones?
We don’t see any big impact on seed valuations yet. Though logically it should cascade to this area but maybe need to see the prolonged pain another 6 mths first. If I am a seed founder, I will quickly raise if I can and be more flexible on valuations. If i am an investor, I will continue investing this period as it’s good timing for the upcycle in a few years time. Companies formed during recessions and tough times tend to do well when the upswing comes.
But I will be more discerning and take my time. As a reminder, seed valuations before the rapid rise of last 5 years, used to be 2.5-4m sgd. A rounds used to be 8-12m sgd.
What if I am a startup founder
Of course fund raising is still a sales game, if as a late stage founders, you can sell a great story and convince investors to still pay more vis a vis public markets, kudos to you.
But if can’t convince, then the solution is to turn profitable or at least narrow losses and work with the cash on hand. And if cash not enough, then a down round dilution may be in the cards.
There is also another less obvious fallout. And that’s on the value of stock options across loss making tech industry. I am sure sea and grab employees who did not cash out will be feeling the pain of worthless options. So you may find esop less valuable as a retention tool.
Looking at our portfolio startups, many are focusing on profitable growth instead of revenue at all costs fueled by super cheap investor money. I strongly believe those that do it well, will reap great rewards when this cycle turns.
What does this all mean?
Actually I think this reversion to the mean is normal for markets and good for our ecosystem. It will flush out the excesses of the last few years and expose startups who are swimming naked and have no real sustainable business model. Investors who blindly chase the next hot story will also learn their lesson and be more discerning for the next deal.
And let’s not draw the wrong conclusions. Crashing valuations and stock prices is a reflection of the risk reward investors want. For profitable companies, valuation matters a lot less except in the area of esop and pressure by shareholders. Truth is, they have time on their side and perhaps opportunity too.
From what I can see, all the easy money whether in public or private markets has been made last 4-5 years. I won’t bet on a quick recovery any time soon unless inflation magically disappears.