Why It Could Take Years for Startup Valuations to Stop Plunging
- The plunge in startup valuations could last years, say VCs at the firm Redpoint Ventures.
- The situation is similar to the dot-com bust after the 1999’s tech boom, they say.
- But one big difference from two decades ago is the record piles of cash VCs are sitting on now.
Venture capitalists were partying like it was 1999 over the past couple of years with their lavish funding of startups.
But in 2022, startups are now seeing such investor enthusiasm fade. Two investors at the VC firm Redpoint Ventures, Logan Bartlett and Adele Li, shared their analysis of the current situation, and in their view, the prospects could be quite bleak.
The market downturn could usher in a crash in startup valuations that recalls the dot-com bust of the early 2000s — and the plunge could last two-and-a-half years, according to Bartlett and Li.
Right now, rising inflation and a plunge in some public tech stocks isn’t completely dragging down the private markets. But as in past market pullbacks, they are bound to do so eventually, Redpoint’s VCs say.
And today’s dropoff of public stocks is much starker than it has been in recent years, including near the start of the global pandemic two years ago. In early 2021, software companies were trading at 20.8 times their expected annual revenue. Now they’re being valued at only 8.8 times that amount, the VCs find, based on an analysis of PitchBook’s data.
As startup valuations often mirror the public market, that means such valuations could fall by more than half.
Based on past downturns, such a slide will likely be spread out over the course of several years, Redpoint’s VCs say. It took 10 quarters for valuations to bottom out during the dot-com bust and nine quarters for them to stop skidding in the wake of the Great
Recession
in 2008.
Though the dot-com bust may seem like ancient history — and today’s startups are in much better financial shape than the Pets.coms of old — what happened then is becoming increasingly relevant, according to Bartlett and Li.
“This sounded a little hyperbolic a few weeks ago, but increasingly it’s possible that insights can be gleaned from 1999,” the speaker’s notes from their presentation say.
For instance, VC funding jumped 98% in 2021 over 2020 — a sharp run-up that hadn’t been seen since the dot-com boom, when funding climbed 97% between 1999 and 2000.
What may make the difference this time around, Redpoint’s VCs say, is the unprecedented amount of funding investors themselves have raised. As multibillion funds become increasingly common, VCs have a lot of cash on hand to weather some storms and keep up funding into promising startups.
A lot will depend upon the appetites of hedge funds and other nontraditional venture investors, such as Tiger Global, which have contributed greatly to the startup funding frenzy of recent years. Their activity made up 77% of venture funding last year, as Redpoint’s presentation points out, up from 56% in 2011.
If those investors decide to pare back their private investments, as they have reportedly done for later-stage startup deals, they could chill the venture market significantly.
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