Thursday, October 6, 2022

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VC funds wrestle with tech startup valuations

For many years, enterprise capital has been pretty constant and conservative relating to valuing present portfolios. Depend on the newest funding spherical, both solely or as a main enter for the choice pricing methodology.

State of play: Business requirements in 2022 are scattered to the winds.

  • Some VC fund managers have aggressively marked down portfolio firms, utilizing public market comps as justification. And that development might speed up, given that almost all VC fund marks are nonetheless lagging again in Q1; the Nasdaq fell 9.1% throughout that quarter, however since has misplaced one other 22%.
  • Different VC fund managers have taken nearly indiscernible haircuts, or just caught with the “final cash in” methodology.

Why it issues: This it creating added complexity to the roles of restricted companions who already are inundated with a ceaseless stream of recent fund PPMs. In brief, the apples-to-apples comparisons have rotted.

  • Refined LPs are asking extra questions, with some telling Axios that they’re specializing in money runway to find out valuation legitimacy. In addition they are focusing extra on qualitative measures than quantitative ones, because the lengthy bull market helped make everybody a winner.
  • Plus, bigger LPs are prone to have the identical asset held by a number of managers.
  • Much less subtle LPs … properly, they’re getting what they at all times get. Simply bamboozled, or satisfied that the reporting lag and choice stacks make revaluations irrelevant.

Reminder: That is extra of a difficulty for VC funds than buyout funds, because the latter have lengthy marked to (public) market. It is also extra related at the moment than throughout previous public pullbacks, due to mutual fund involvement in progress fairness offers (i.e., Constancy, T. Rowe, and so on. are marking down).

Related:  Salesforce (CRM) earnings Q2 2023

The underside line: Objectivity has been changed by subjectivity relating to VC-backed firm valuations, even when none of those belongings has ever actually had a true worth.

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