Waning enthusiasm for tech stocks in the public markets is casting doubt on valuations in the private market, where prices last year hit stratospheric levels.
The public arenas have begun to dial down their fervor for high-growth tech stocks, with investors in particular punishing companies that don’t make money—startups in tech and biotech, blank-check companies and others still finding their feet.
Venture investors, in turn, are rethinking how much they should pay in private deals. Transactions for later-stage private companies can take longer as valuations become a sticking point, investors said.
“Before, it took five Zoom conversations,” Niko Bonatsos, a managing director at General Catalyst, said of the amount of time a “unicorn” in his firm’s portfolio might take to raise capital—and at a much higher valuation. “Now it’ll be harder. The companies need to make more progress, undeniably,” he said.
Founders of later-stage companies are getting pushback on their hoped-for valuations from some growth funds that now use lower public-market metrics to assess them, he added.
“We are in that phase now. It’s happening live,” Mr. Bonatsos said.
Venture investors, especially those in deals for companies nearing a public listing, will often watch the performance of comparable public companies and factor it into their own investment decisions.
“The public market reset is affecting how we think about our private-market entry prices for VC deals,” said Mary D’Onofrio, partner and co-founder of the growth practice at Bessemer Venture Partners.
Venture-backed companies in the U.S.—which last year saw record proceeds in initial public offerings—have recently disappointed after going public. The average venture-backed company that listed in 2021 has returned a negative 45% from the first-day close through Jan. 14, according to research and investment firm Renaissance Capital. Just 15% of the companies traded above their offer price, according to the Renaissance data.
Market conditions have put a brake on public listings by some venture-backed companies. Last week, software company Justworks Inc., decided to delay its IPO, citing an inhospitable market. Fintech startup Acorns Grow Inc., meanwhile, scrapped its plans to merge with a special-purpose acquisition company earlier this week. “Given market conditions, we will be pivoting to a private capital raise at a higher pre-money valuation,” the company said in a statement.
Indexes that track the stock prices of high-growth tech companies are underperforming the rest of the market. The BVP Nasdaq Emerging Cloud Index, which tracks public cloud-software companies and is closely watched by venture investors, slumped 30.8% over the past three months as of Jan. 19, as the S&P 500 rose 0.3%.
For the most part, cloud companies are still showing strong growth, but they aren’t rewarded for it as much as they were previously, Bessemer’s Ms. D’Onofrio said.
A key valuation metric, the revenue multiple, has declined for many public cloud companies in recent months. The revenue multiple is a company’s enterprise value divided by its annualized revenue. The median revenue multiple for companies in the BVP Nasdaq cloud index declined to 10.45 as of Jan. 18, from 18.43 on Sept. 1. In other words, a company with the same revenue saw its total value slashed.
“Our expectations at exit multiples decreased, which decreased our willingness to pay more at the entry,” Ms. D’Onofrio said. And for cloud companies in particular, some of the lift from pandemic-related remote work is also fading, she noted.
Private-company valuations hit record levels in 2021. Early-stage median valuations rose 56% to $28 million, while late-stage median valuations went up 112% to $1.11 billion over the period, according to CB Insights.
An influx of capital to the venture market accounted for that: Venture funds globally raised a record $187.4 billion in 2021, up from $161.4 billion the prior year, according to data provider Preqin. The value of U.S. venture-backed company exits, meanwhile, soared to $774.1 billion in 2021, up from $288.9 billion the year before, according to PitchBook Data.
While the declines on public bourses are putting pressure on private valuations, competition among venture investors is pushing them up.
“We feel that there’s a floor to valuations because of the sheer amount of capital available to fund managers,” said Jared Bochner, senior associate in research insights at Preqin.
Even with the retrenchment in the public market, tech valuations are still stronger than they were a few years ago. Some of the top cloud companies, for example, are commanding very high revenue multiples, Ms. D’Onofrio said. She expects a similar dynamic in the private market this year, where some of the most in-demand companies will continue raising at very high valuations, she said.
“We can’t get there on a lot of growth opportunities. The No. 1 reason we maybe can’t get alignment is on valuation.”
— Will Kohler, Lightspeed Venture Partners
Will Kohler, a partner at Lightspeed Venture Partners, said he’s carefully watching the levels at which new late-stage venture deals close now, which will help inform the next set of deals. The firm is passing on some private-market deals that seem too richly priced, he said.
“We can’t get there on a lot of growth opportunities. The No. 1 reason we maybe can’t get alignment is on valuation,” Mr. Kohler said.
Still, Lightspeed isn’t slowing down, and in some cases will pay a high valuation if it believes a startup can become a much bigger company, Mr. Kohler said.
“We get very comfortable on certain companies to pay even what seem like strong multiples, even compared to public markets,” he said.
The anxiety felt in the later stages of private deals hasn’t affected earlier-stage companies, where valuations continue to soar, said Grace Isford, principal at Canvas Ventures.
“Until the retraction or downturn [in the public market] is more pronounced, I don’t know if VCs are paying as much attention to it as they should be,” she said.
—Marc Vartabedian contributed to this article.