Tech start-ups: valuations are even lower than data suggests

The technology-heavy Nasdaq Composite index may be up a fifth this year but the private sector is still getting mauled. Year on year median valuations of late-stage start-ups fell 17 per cent in the first quarter, according to PitchBook data. There is no reason to expect a recovery this year.

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

Fundraising has plummeted. Last week, Japan’s SoftBank reported that its vast, tech-focused Vision Funds (which invest in public and private companies) invested just over $3bn in the fiscal year ending March 31, down from more than $44bn the previous year.

This means the true scale of value destruction remains obscured. Start-ups able to conserve money are avoiding raising capital, rightly worried that funding will mean lower valuations. Down rounds accounted for close to 20 per cent of all funding rounds in the first quarter of the year, according to data from local fintech company Carta. The previous year they made up just 5 per cent of the total.

This figure is likely to rocket. More than 90 per cent of VC-backed start-ups are not profitable and burn through cash, living on money raised when valuations were high. They cannot hang on forever. Carta logged 906 VC investments in the first quarter, down more than a third on the previous quarter. As more companies are forced to fundraise, valuations will drop.

The largest private companies offer some indication of what might happen next. Payments company Stripe’s valuation has dropped from $95bn to $50bn since 2021. Food delivery company Instacart lowered its fair market valuation from $39bn to $10bn last year. Forced to raise funds or make equity offers to employees, they have accepted sharp downgrades. As cash runways grow shorter, other start-ups will do the same. The rest of 2023 will come with a choice: cut more costs, try to raise debt or accept that the days of record valuations are over.