Jan 21, 2022 - Economy

Calling the startup valuation peak

Illustration: Annelise Capossela/Axios

Anyone who's called a private market peak over the last decade, or even suggested that air was leaking out of the balloon, has been swiftly humbled. "Nothing matters" has consistently proven to be the only thing that matters.

Our thought bubble: The go-go era is history, even if the economy and new company formations remain strong.

  • This isn't forward looking, tied to factors like interest rate hikes or China's corporate crackdown. Or an old-head argument that NFTs are the new pet rocks. Those things are important, just as COVID, trade wars and other macro moves have been important.
  • This is backward looking. We know we're on the other side of the valuation hill because when we turn around, we're looking up.

What's happening: VCs, and growth equity investors in particular, for years have been rewarded for their price insensitivity. Just win the deal, because someone else will pay more down the road. But...

  • IPOs, most of which comes from VC-backed companies, have significantly underperformed the S&P 500 for the past year (see Final Numbers below). Same for companies that got taken out by SPACs.
  • ROI via M&A exits are a bit tougher to gauge, particularly if sold to private equity. Most of this boom's grandest slams, however, have come via public liquidity events.
  • The result is that second and third-tier companies are having a much tougher time dictating non-dilutive terms, particularly for pre-IPO rounds, where new investors have regained lost leverage. And second and third-tier companies make up most of the market.

"If you look at multiples of SaaS companies in the U.S. today, valuations have gone from 20x forward revenues down to 12X," SoftBank Vision Fund CEO Rajeev Misra told me yesterday during the Axios Pro kickoff event. "In the private markets they're still at 20x or higher... I believe that gap is going to tighten over the next six months."

Be smart: None of this is to say that VC returns are turning negative or that there won't still be a lot of big winners. This is about relative median performance, not a crash, and curbing some lavish spending habits.

The bottom line: I believe the words I just wrote. And they already haunt me.

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