Watch: A conversation on the state of the market for private companies

On Wednesday, June 8th, Axios technology and business reporter Kia Kokalitcheva and business editor Dan Primack led conversations examining the trends and issues impacting the current market for private companies and why they may be choosing to stay private for longer. Guests included Sequoia Capital partner Pat Grady and former SEC Chairman Harvey Pitt.

Pat Grady explained how his latest warning about impending market volatility differs from his previous predictions and how inflation and public market forces are impacting founders, their companies and their valuations.

• On how today’s market volatility differs from previous economic crises: “This is distinctly different in that the most powerful economic machine on the planet, which is the Fed, is now on the opposite side of the table from us…in 2020 when COVID hit, the Fed wanted to stimulate our way out of impending recession. The Fed is now trying to rein in inflation. So what is very different this time versus last time is the stance of the Fed, and that’s something that in general is going to be working against a lot of the companies in the tech industry.”
• On his message to founders adapting to the current investing environment: “When we talk about things like, for example, the internet bubble burst, that sounds like a moment in time where all of a sudden overnight something burst, but it actually plays out over a couple of years. So the ripple effects of what’s happening at the moment probably have not yet been fully felt. Our overall message to founders is not one of red alert, it is one of disciplined growth, and as we head into this new environment, you probably want to hear the word discipline a little bit more than you hear the word growth.”

Harvey Pitt expressed concern that the economy is in the early stages of a recession, his belief that current regulatory approaches are driving the slowdown in companies going public and his thoughts on the SEC’s proposed changes to SPAC transaction requirements.

• On companies’ current reluctance to go public: “Given some of the activities, including at the SEC, its proposed regulation of so-called private funds that are catering solely to highly sophisticated investors and its rulemaking on SPAC transactions, there is a great deal of current reluctance for companies to go public. That means that private venture capitalism is working, at least when they see a good opportunity, but that the marketplace itself is shutting down too many of these startup companies.”
• On the proposed changes to SPAC transaction rules: “I think the SEC has correctly identified a problem in that many of the SPAC transactions we’ve seen included overinflated projections and were misleading to the people who invested in them. I think that’s a serious concern and the SEC was right to act. The problem we have is what the SEC has now done is to say that it will treat SPAC transactions as if they were IPOs and bring all of the requirements of an IPO to a SPAC transaction. There has to be a middle ground, and I’m fairly concerned that the SEC may not have found it.”

In the View from the Top segment, Cooley partner and head of San Francisco corporate practice Rachel Proffitt described the changes she has noticed in investor mindset in the current market.

• “We are absolutely noticing the tone and tenor of conversations in the boardroom really focusing on operational efficiency, really focusing on when we really need to raise capital…we are also noticing when folks do in fact need to go into the markets to raise capital, that the investor conversations are a little different. The uber-friendly terms from a founders’ perspective may not be as present, and investors are absolutely focusing more on sort of downstream economic protections in a way that they may not have been in historical years.”

Thank you Cooley for sponsoring this event.