There’s a lot of confusion in the private market right now. For one thing, venture capitalists continue to announce new funds daily. They organize catered sushi brunches. On the other, layoffs abound, and the titans of the industry seem worried. JPMorgan’s Jamie Dimon sees an economic hurricane ahead. For his part, Elon Musk reportedly told Tesla executives this week that he had a “super bad feeling” about the economy. He is also laying off 10% of Tesla workers, he told them in a brief email this morning.
One could hardly blame people looking to sell their startup stocks, or those looking to buy them, for not knowing where to meet on price, and that’s exactly what’s happening right now, experts say aftermarket like CEO Kelly Rodriques of Forge Global. In fact, says Rodriques, on Forge, a private equity trading platform that went public earlier this year via a SPAC, “the supply of private equity is currently higher than it is. has ever been in history – by many”.
Rodriques calls it “price imbalance”. There’s a ton of interest from sellers, but the gap between seller and buyer expectations is too wide for there to be many transactions.
He’s not the only one seeing this pattern. Justin Fishner-Wolfson says separately that the most remarkable thing about the secondary market right now is its stagnation. Fishner-Wolfson co-founded and oversees 137 Ventures, a San Francisco-based company that offers loans to founders, executives, early employees and other major shareholders of high-growth private technology companies in exchange for the ability to convert their debt into equity. and notes that valuations in private markets are “slow to change” because “people are waiting to see what things are really worth.”
You can hardly blame them, he suggests; signals all around seem out of whack. “If you look at public markets, you even have very large companies moving 5 to 10 percentage points a day, with no specific news. For example, it is not a profit call that drives the price up. Since “people don’t really know what things are worth on any given day,” he says, “in private markets things mostly slow down while people wait to see if pricing is something or not. . [they] could somehow get closer to today, whether or not it gets worse from here, [or] whether or not it gets better from here.
Some sellers advance at prices they might not like out of necessity. “The only deals you see are the ones people desperately need,” says Fishner-Wolfson. This is true of businesses; this is also true of individuals, he says. “Companies with strong balance sheets are not going to raise funds in this environment; they will try to delay [a new round] as long as they can. He sees the same with founders and leaders. “If your business is doing great, why do you want to take a price that’s not a good price, or at least a reasonable price, if you can wait a few quarters and see how things work out and get a better deal later ? ?”
There’s good news for sellers, Rodriques says. On the one hand, Rodriques says he’s seeing signs that sellers are becoming more “realistic” about their expectations, which should bring more buyers — who want the biggest possible discount — to the table.
He also says that even though prices seem to be falling almost evenly, venture capital-backed companies that have gone public somewhat recently are still trading at premiums to where they were valued in their last funding rounds. private. Specifically, according to Forge, they are trading at around a 24% premium to their pre-IPO valuations.
That’s well down from the fourth quarter, when Forge companies traded at a 58% premium to their last private round, but that cushion keeps buyers and sellers in the market that might otherwise disappear.
Rodriques cites, for example, startup Buy-Now-Pay-Later Affirm, a company that Forge had previously tracked and traded on its platform and which went public through a traditional IPO process in the early part of the year. last year. Currently, Affirm shares are down 56% from their IPO price, but they are up more than 70% from the value Affirm’s private market investors have given them. awarded in the company’s last pre-IPO round, which means its private market investors are still very much in the dark.
What this really means is, of course, a question mark. When asked if he would buy Affirm’s shares himself at their current price, Rodriques speaks at length that Affirm is a “highly sought-after company that has a significant sustainable gross margin profile and growth”.
“You can say, ‘Well, that’s not worth 28 times [revenue].’ And maybe [the shares] don’t go back up to 28 times [revenue], maybe they settle down at 20,” he continues. “But people are still going to pay premiums – cheap or bad – for a company that shows organic growth of 50% to 100% per year and gross margins of 70% to 90% [range].
Asked again: would he buy right away or would he wait, Rodriques says he’s not that different from his own customers. “Am I a buyer of Affirm right now? I’m like everyone else. I wait and watch. But I think it’s a great company, and I would invest in it. I want to see where the market shakes .