Down-rounds are ahead for tech startups

We've written a lot about venture capital tightening, tied to the stock market correction. Soon it may be time to discuss rapid descent.

Driving the news: Forge Global, which operates a private stock marketplace, reports a record amount of sell-side interest and a significant decline in trading valuations.

Volume: By sub-sector in Q1, the widest discrepancies between new sell-side and buy-side interest were in sales/marketing tech and data intelligence. The only two subsectors where buy-side > sell-side were industrial software and (just barely) blockchain.

• Venture capitalist Jeff Richards last week tweeted: "I get a weekly 'Unicorn List' email of secondary shares available in notable companies (via a broker). On 10/4/21 there were 32 names. Today there were 103 names."

Valuations: Most companies continue to trade at premiums to their last private rounds, per Forge, but the gap shrunk from 58.2% in Q4 2021 to 24.1% in Q1 2022.

• Moreover, it reports that the percentage of buyers seeking private shares at a discount in April rose to 64%, versus 43% in Q1 and just 28% in Q4 21.

What comes next: Down rounds. For the uninitiated (i.e., those who started following VC in 2011 or later), these are new primary funding rounds at a lower pre-money valuation to the company's last post-money valuation. They can be very painful for founders and employees.

• Also, don't be surprised to see deal terms become much friendlier to investors.

• It's worth acknowledging that only around 5% of all Q1 VC funding were down-rounds, per PitchBook, which is lower than historical averages. But don't be surprised to see that number rise fast, particularly given the aforementioned jump in discount requests on the secondary market.

The bottom line: Private markets have a reputation for following public markets, with a lag. Early data on VC secondaries, which live somewhere in between, suggests that the bill will indeed come due.