Startup investors slash valuations amid tech stock rout and dismal IPOs

Investors say several big startup backers are cutting their investments, curtailing a flow that has sprayed full steam ahead for most of the pandemic, especially for older, more mature startups. And venture capitalists say they are advising their companies to prepare to conserve cash in a tougher funding environment.

Tiger Global Management, one of the most prolific startup investors of the past two years, in recent weeks renegotiated investments that had been under discussion for many companies, slashing valuations, people familiar with the deals said. Venture capitalists say other investors are doing the same.

Dbt Labs Inc., a fast-growing enterprise software company, recently scaled back its fundraising plans. He has reached an agreement with investors for a funding round that values ​​the Philadelphia-based company at around $4 billion, up from more than $6 billion initially negotiated, according to people familiar with the deal.

Jared Carmel, managing partner of Manhattan Venture Partners, a start-up investor and advisor to venture-backed companies and their shareholders, said he’s seen the prices of some stock purchases of some private companies down 10% in the past month.

“It’s harder to lift today than it was six months ago,” said Peter Fishman, a longtime Silicon Valley tech professional and chief executive of data automation startup Mozart Data Inc. ., which he founded during the pandemic. “It’s a pop of irrational exuberance.”

The pessimism is fueled by the particularly acute rout in shares of recently listed tech companies – a common weathervane for startup valuations – in recent months, as concerns over inflation and expectations of higher interest rates were going up.

Companies listed on stock exchanges last year fell an average of 32.6% from their listing to January 28, according to an analysis of IPOs, direct stock listings and acquisition company listings at special purposes by Jay Ritter, a professor at the University of Florida who studies public registration data.

Less proven companies fared worse: Those with less than $10 million in revenue when they went public were down 40.8%, compared to a 28.4% drop for those with more of $10 million in revenue, he said.

Even many popular Silicon Valley startups with established businesses and loyal customers have fared poorly since their recent debut. DoorDash Inc.

HYPHEN 1.00%

is down 40% from its December 2020 listing, and health insurance company Oscar Health Inc.

RASB 1.19%

is down 81% since its market debut last March. UiPath Automation Software Company Inc.,

PATH 1.42%

which went public in April, has seen its valuation drop about half from its all-time high in the private market a year ago.

By comparison, the Nasdaq Composite Index through Monday is down about 12% from its 2021 peak in November, though it is still well above where it was a year ago.

Such declines in newly listed tech stocks typically deter some startups from pursuing IPOs for fear that their valuations could suffer. Some venture capitalists said they advised startups that had planned IPOs in the coming months to reconsider their timing.

Investors and founders are hoping the recent rout in tech stocks could turn the tide, as has happened with other crises in recent years. Even if that’s not the case, early-stage investors have amassed record sums for future investment: some $900 billion of unspent cash as of December in funds that invest in private companies.

But startups and their backers are also preparing for the prospect that conditions could worsen.

“If inflation persists beyond one or two rate hikes, we will see a bigger correction,” said Keith Rabois, Founders Fund partner and early investor in DoorDash and Airbnb. Inc.

The startup market has been an increasingly powerful magnet for money over the past decade. Low interest rates have been a major draw, as investors tend to seek returns in riskier assets like fast-growing startups when safer investments like bonds offer meager returns.

The boom accelerated during the Covid-19 pandemic. US startups raised a record $329.6 billion last year, nearly double the amount in 2020 and nearly four times the amount in 2016, according to PitchBook Data Inc. of $1 billion, more triple the previous year.

Median IPO price-to-sales ratios for tech companies, a key measure of valuation, hit their highest level since the dot-com boom of the late 1990s. Companies were valued more than 15 times their revenue in 2021, up from around five times for much of the 2010s, according to Ritter’s data.

Businesses with little or no revenue received some fanfare. Shortly after going public, three new electric vehicle companies in the past year and a half were trading at valuations above Ford Motor Co.

F 0.65%

despite only two months of small-scale production. The third had not started selling vehicles.

“People were desperate to get into tech and would pay anything,” said Sebastian Mallaby, author of “The Power Law: Venture Capital and the Making of the New Future.” He said public companies generally have more rational pricing that provides a safeguard for startup valuations, but that has disappeared during the pandemic.

U.S. startups were worth a combined $4.5 trillion at the end of 2021, nearly double the pre-pandemic valuation, according to data from PitchBook.

Early-stage investors raised new, larger funds and closed deals faster, with less time spent on background checks. Top founders got more control from their investors, sold more shares before listing and received giant compensation packages as venture capitalists competed for the chance to give them money.

“The game had to run as fast as possible,” said Homan Yuen, partner at venture capital firm Fusion Fund. “Founders and investors know this game and know that it’s best to take advantage of these prime conditions before the windows tighten, as they inevitably always do.”

Recent market swings have caused a sea change in some investors.

During the boom, Tiger Global’s investment pace increased as the company bet on companies such as financial services provider Brex Inc. and chat startup Discord Inc. In the recent pullback, Tiger cut valuations more than 20% for investments that were being discussed in two companies, said a person familiar with the matter. The information site Information reported earlier Movement of the tiger.

Pat Grady, partner at venture capital giant Sequoia Capital, said the reset was expected at some point, although the timing was surprising. “You don’t just maintain record high interest rates in perpetuity,” he said.

Still, Mr. Grady said, “people tend to over-turn” in response to macroeconomic swings, and strong, fast-growing companies are always good long-term bets.

Shailesh Sachdeva, managing director of the family office practice at Silicon Valley Bank, said that since the tech stock rout, more and more family offices are passing on investment opportunities in startups they would have jumped on before.

“It’s slowing down,” Mr. Sachdeva said. “This bull run will end at some point. It’s just unavoidable.

Write to Eliot Brown at [email protected] and Heather Somerville at [email protected]