In one analysis of the market, Justin Kahl and David George of Andreessen Horowitz present data on how public companies see their revenue multiples drop by an average of 60%, with wide variation in the sector.
They use this central data point to recommend how startups should navigate the downturn, with the primary goal of returning to their previous valuation. But are valuations really falling? For all startups? If so, why, and what can we expect in the short and medium term?
What connects the stock market contraction to the valuation of startups?
Startup valuation is only loosely connected to the stock market. In early-stage companies, the risk of operating on a small number of customers has little correlation to the bigger picture. However, there is still a link, and it is well worth analyzing.
Valuation, or should be, reflects risk and return. These parameters are only slightly affected by the erratic and unpredictable behavior of the stock market. The main factors affecting the sell-side (startups) during a market downturn are the greater difficulty in closing corporate customers and the greater possibility of exit when selling the company.
But when we look at the bulls, things are more dramatic, which explains why lower stock prices are a more pressing concern for investors than startups.
Startup valuation is only loosely connected to the stock market.
On the buy side, companies that invest in VC funds often have their shares traded on exchanges either as pension funds or mutual funds, which see the value of their shares fall significantly. due to lower stock prices.
This is the most important effect of a recession: Venture capital funds will have a harder time raising money to invest, resulting in founders having less capital.
However, it will take many months (maybe up to a year) to see the impact this has on the startup market.
Of course, knowing this, VCs will adjust their portfolios and try to invest less per ticket in the hopes of profiting from being the only ones with available capital when things go wrong. should be stressful.
Let’s take a moment and look closely at these two sides, starting with the bulls.
Corporate venture capital
The first money that disappears when the stock price drops is the company’s venture capital investment. Already under pressure from shareholders, public companies will retain long-term bets on the startup sector.