Last week, I presented an overview of the fundraising market at the Traction Conference in Vancouver. The slides are embedded above and linked here.
My brief narration of the slides follows
The current state of affairs arose as a result of the Global Financial Crisis. Since 2008, the US has experienced a steady 12-year bull market fueled by four waves of money printing that have increased the US money supply by 30% or more. This experiment culminated with Covid. Supply chain shocks combined with many more dollars fueled inflation, which the Fed is combating by raising rates.
Higher rates depress valuations of high-growth companies and reduce corporate spending, slowing the economy. Public technology companies fell 60-70% in valuation.
The founders feel this impact in the public markets and expect a 30% reduction in ARR this year and an uncertain fundraising market. Founders surveyed expected a 10% drop in valuations. If public offsets are applied to private companies, then the market should expect a ~70% reduction in private valuations.
Venture capitalists have continued to invest at similar prices and similar round sizes in the most sought-after companies. But round volumes are down at least 20% and probably much more.
$220 billion in dry powder (dollars that venture capitalists have raised but not yet invested) will drive valuations higher than expected.
In addition, the dynamics of the private market also play a role in making this market more dynamic. Private companies list on the market every 12 to 18 months instead of every day. Similar recessions (1940s, 1970s, 1980s, 1990s) have lasted 14 months on average and the stock market begins its recovery 154 days before the end of the recession. If history rhymes, we should see six months to determine we are in a recession (2 quarters of negative GDP growth), two months of sideways stock trading, then the recovery begins.
Some start-ups can escape a severe price overhaul by virtue of their track jumping from peak to rise, avoiding the trough.
Individual auction winners also strengthen the market. A single player sets the price for an initial round, rather than a collection of buyers and sellers in the public markets. Market prices accelerate faster with single winner auctions.
The audiences have dropped by 70%. Private data suggests a stable market, but it is an illusion. I think the market will settle in the third and fourth quarter with a 40-60% drop until the first quarter of 2022 and the volumes will pick up again in early 2023. Let’s see if any of these predictions come true!