From Term Sheet (required reading BTW)
Since landing in San Francisco on Wednesday afternoon, I’ve met with an assortment of senior venture capitalists, bankers, entrepreneurs and crossover investors. All of them have, in one way or another, been involved with so-called ‘unicorn’ companies. As in the past, they are nearly unanimous in sentiment. The difference now is that their sentiment is fear.
The past several years of raising too much, too high, too soon has run smack into a much more conservative investor ethos. Later-stage tech startups can still raise growth equity — and still lots of it — but not necessarily at the terms they were receiving just two months ago.
“This shift is only five or six weeks old, so most companies haven’t felt it yet,” a senior tech banker explains. “But I know of many companies who raised money at $1 billion valuations last year that are now being told that, to raise money now, they need to take around $700 million or $800 million. Probably with some serious structure that protects investors, like ratchets, on top of it.”
The reality is that record-high private market valuations have been driven by two things: Wall Street’s lust for growth at all costs, and relatively high tech multiples in the public markets (and, more specifically, applying the former to the latter). But a variety of macro economics factors (China, the inscrutable Fed, etc.) have cut public equity prices and moved the spotlight to unit economics, which means some pretty large biz model disruption for the disruptors.
Read it all.
The thing about bubble valuations and unicorns … neither one will last very long. Pure Storage IPOed this week and they aren’t doing as well in the public markets as their private market valuations might suggest. This is not to say they aren’t a good company, or don’t have a good product. This is saying that the demand for “unicorn” valuations from the buy side is … well … weak. The market values real businesses able to generate operating capital from revenue.
Is this the beginning of a (not so great) unwinding? I dunno.
I do think that this will encourage a) companies to sell, b) others to acquire, and have them all do it at more reasonable valuations.