![]() ![]() ![]() To put the valuations in the private markets in perspective, let’s look at how tech IPOs since 2020 have fared.Īs of this week, the combined market cap of the 50 largest tech IPOs since 2020 is down 59% vs. In some cases, it also helped companies avoid (or perhaps delay) layoffs or even failure because of an inability to raise equity capital. It’s feasible that companies with momentum and metrics were the ones raising in the more challenging climate of the past year, and so they might still have been able to command premium valuations.īut companies that didn’t have the metrics were availing themselves of debt to avoid “pressured valuations,” as SVB noted.ĭebt helped companies delay taking the medicine of a lower valuation, dilution, and tough conversations with the team. Source: CB Insights’ Tech Valuations 2022 Report Valuations for Series D+ deals were up 30% vs. In fact, as highlighted below, tech valuations in Q4’22 for Series C deals were actually up 20% over full-year 2020 levels. While there was a bit more deal structure in later-stage financings (as we note here on page 3 ), valuations were still elevated and had more room to fall given how dramatically the situation on the ground had changed. Implication 1: Valuations have much further to fall and down rounds will become more commonįirst, let’s cover what has been going on in private and public market valuations.īy Q4’22, private tech valuations across most stages had fallen modestly from 2021’s heights, but were still up compared to 2020, per CB Insights’ valuation data. Now, let’s get back to how startups have leaned on debt to avoid pressured valuations - and the implications of this on financing and valuations moving forward. Warrants for small equity stakes serve as a sort of “schmuck insurance” for any bad deals, as the bits of equity in the winners more than makes up for the losers. The ability to take warrants in the company to minimize overall losses.This is the likelihood that the company will raise another round down the line. You can see its technology investment syndicate here and its healthcare investment syndicate here. To inform this, SVB built an extensive network of top-tier VCs. ![]() The quality of the VC investors doing the deal.Unlike traditional business loans, which might be backed by cash flows or assets, venture debt lenders underwrite deals to fledgling (and often money-losing) companies using 3 criteria: equity to highlight why debt is less dilutive than equity - and hence attractive to founders and teams. SVB also provides this illustration of venture debt vs. Venture debt-to-valuation, a common metric for evaluating debt worthiness, is usually around 6-8% of the company’s latest post-money valuation.Venture debt is typically set at 20-35% of the latest equity round, though other factors like company growth rates, investors, industry, and customer base may also be taken into account.It is used to extend the runway until the next fundraising round. Venture debt is a loan that enables fast-growing and investor-backed startups to access capital with less dilution, typically soon after an equity round.SVB describes venture debt on its website very well, so we’ll use its description: Phone number First, what is venture debt? If you’re already familiar, skip this part and jump to the implications here. To start, it’s worth understanding venture debt. It also sheds light on what is about to happen in the private markets, given there will be less venture debt to go around. This sentence from the SVB presentation helps explain what was going on. This provides some clarity on a perplexing question: Why have private market valuations still held up despite the sharp declines in public market valuations for tech companies? We will detail each of these implications below.īut first, let’s go back to SVB’s comment.ĭebt was being used to avoid pressured valuations. “Clients continue to opt for debt over raising equity at pressured valuations.”Īnd its impacts will be significant, including: In Silicon Valley Bank‘s (SVB) Q1’23 mid-quarter update issued last week, the following commentary sticks out: The implications on startups, investors, and the private markets will be profound. The tenuous state of Silicon Valley Bank will change the accessibility of venture debt. ![]()
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