Tech Startups: Valuations are still lower than the data suggest

The tech-heavy Nasdaq Composite may have risen by a fifth this year, but the private sector continues to be mauled. The median year-over-year valuations of late-stage startups fell 17% in the first quarter, according to data from PitchBook. There is no reason to expect a recovery this year.

Unless it involves buzzy artificial intelligence, investor risk appetite has declined since late 2021. A barely breathing initial public offering market means no quick exits. Higher interest rates mean that pension funds and asset managers who went into start-ups when rates were low can find easier pickings elsewhere.

Fundraising collapsed. Last week, Japan’s SoftBank reported that it is broad, technology-focused vision funds (which invest in public and private companies) invested just over $3 billion in the fiscal year ended March 31, down from more than $44 billion a year earlier.

This means that the true extent of the destruction of value remains obscured. Startups that can save money are avoiding raising capital, rightly concerned that funding means lower valuations. Downrounds accounted for nearly 20% of all funding rounds in the first quarter of the year, according to data from local fintech firm Carta. The previous year they constituted just 5 percent of the total.

This number is set to skyrocket. More than 90% of VC-backed startups are unprofitable and burn through cash, living off cash raised when valuations were high. They can’t hold on forever. Carta made 906 venture capital investments in the first quarter, down more than a third from the previous quarter. As more companies are forced to raise funds, valuations will drop.

The largest private companies offer some indication of what might happen next. Payments firm Stripe’s valuation has dropped from $95 billion to $50 billion since 2021. Food delivery company Instacart lowered its fair-market valuation from $39 billion to $10 billion last year. Forced to raise funds or make stock offerings to employees, they accepted steep downgrades. As liquidity footbridges shorten, other startups will do the same. The remainder of 2023 will come with a choice: cut more costs, look to increase debt, or accept that the days of record valuations are over.