[HN Gopher] State of Private Markets: Q1 2023
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State of Private Markets: Q1 2023
Author : tim_sw
Score : 110 points
Date : 2023-05-03 14:07 UTC (8 hours ago)
(HTM) web link (carta.com)
(TXT) w3m dump (carta.com)
| choppaface wrote:
| > The percentage of employees who exercised their vested options
| before expiration has now declined for five straight quarters,
| with the rate falling from 46% to 28% over that span.
|
| This is key to Carta's business model, as they want to be the
| next SecondMarket / private market that flips employee stock in
| liquidity rounds for a hefty premium. Carta needs high employee
| engagement with stock compensation. It's remarkable that they
| spend so little of this report on the topic.. if engagement stays
| low they'd need VC deal making to 10x to grow themselves.
|
| Why might engagement be low? Well besides the current economic
| environment, the implosion of SVB et al took with it a lot of
| venture debt, which may result in unusual dilution down the road.
| Also, employees are mostly just trying to get their jobs done
| versus VCs who were aware of the unusual bank fragility.
|
| Overall, employee stock-based comp has taken a huge downturn in
| real value (if not paper value). The top start-ups need to
| innovate new compensation packages when the bull market returns.
| ryanSrich wrote:
| It also can't be overstated just how expensive things have
| gotten. I'd wager a large percentage of the exercise decline is
| due to employees having less cash.
| choppaface wrote:
| Yeah I'm trying to allude to that, but the bank failures make
| the probability of "my options round down to zero or less
| than that (via taxes)" significantly higher. In the 2008
| financial crisis the problem was in an adjacent industry, but
| here in the SVB case the banks are failing at basic
| compliance as well as trying to juggle crypto fraud. The
| information disparity between VCs (whose job it is to
| convince banks that the venture asset class is worthwhile)
| and employees is bigger than ever.
|
| Right now, like maybe Stripe is worth taking the risk to
| exercise, and Clubhouse borderline because they have $100m in
| funding. But most other early stage companies, there's much
| bigger risk that the company's projections look ok to the
| employee so they exercise. But then the existing funding
| busts and then the employee ends up paying taxes on something
| that's worthless. And the bankers / VCs likely had the info
| to know it was worthless at the time of exercise.
| cassonmars wrote:
| Seeing the Midwest figures is unsurprising and still
| disappointing. As someone pitching a startup, the number of big
| name investors that have asked where I'm calling from and have
| this look of "why?" or even outright asking it really shows some
| extreme bias. Given the world is moving more towards remote work,
| it's strange that VCs still have this belief that only coastal
| areas can innovate.
| kaesar14 wrote:
| I don't think it's such an unreasonable question when VCs are
| trying to maximize their investment, and being in a hot tech
| market has shown to be an accelerator in finding talent and
| growing a startup
| brazzy wrote:
| How much of that "has shown to be" is just confirmation bias,
| though? Seems to me as likely to be a dampener on "finding
| talent" when you have to compete with FAANG (or MANGA, or
| whatever).
| kaesar14 wrote:
| If you're in a market with 100k high quality devs and 80k
| choose to work at FAANG vs a market with 20k high quality
| devs where 10k choose to work at high paying regional
| companies, you're still winning on the talent pool. And I'm
| guessing the numbers are even more skewed than that.
|
| Additionally, the talent pool skews much younger in hot
| markets who are on average much more likely to be willing
| to take a risk and work really hard to make a startup take
| off.
|
| Obligatory disclaimer that I'm not saying non-hot markets
| are not filled with great devs and that older people cannot
| make a startup take off, just the odds are better in one
| vs. the other.
| esafak wrote:
| Tell 'em you're a remote company, if you are. State it in your
| pitch so they don't ask.
| thomasjb wrote:
| Confusion ensues when you are 'remote first' and also
| manufacturing the latest in vertical lathes in your multi-
| dozen square foot shed
| netman21 wrote:
| During the dotcom boom I called Vinod Kkosla to pitch my
| Michigan based startup. Left a voice message. Got a call back
| to my 313 number from his assistant. Call went like this:
|
| Her: "Hi Mr. Khosla asked me to call to ask where you are
| located." Me: "Michigan" _click_
| smabie wrote:
| So what's the why?
| slap_shot wrote:
| Fascinating.
|
| Jumping up to public markets, I thought this was an interesting
| insight yesterday from Jamin Ball at Altimeter:
|
| > There's now only 3 cloud software companies trading >10x NTM
| rev. Snowflake at 15.2x, Veeva at 10.8x and Cloudflare at 10.5x
| [0]
|
| :O
|
| [0] https://twitter.com/jaminball/status/1653482586054987776
| claytonjy wrote:
| How does this compare to private companies? I don't see
| anything in the article about revenue multiples, but I was on
| the market recently and anecdotally everyone is trying to
| justify much higher multiples for early stage (pre-C) private
| SaaS right now.
| JumpCrisscross wrote:
| > _everyone is trying to justify much higher multiples for
| early stage (pre-C) private SaaS right now_
|
| Growth adjusting a la PEG [1] might help normalise the data.
| Pre-C businesses should grow faster than public ones. That
| said, these are all heuristics--details like churn, margins
| and customer acquisition cost matter.
|
| [1] https://en.m.wikipedia.org/wiki/PEG_ratio
| claytonjy wrote:
| I checked my notes and 20-30x seems was the target next-
| round multiple for the A's and B's I talked to. I get that
| earlier companies get a higher multiple based on growth,
| but I don't know if 2-3x the multiple for top public co's
| is reasonable or not.
| Retric wrote:
| It's not worth investing in private companies unless
| their long term growth outlook is significantly
| outperforming public ones. PEG on the other hand is by
| necessity a backward looking metric.
|
| That self selection means they really should have a
| higher multiple even if you judge them using the same
| metrics. IE if you have a public company growing by 20%
| per year and a private one growing by 20% per year you
| should only invest in the private one of it's at a
| discount or it's growth will likely continue for longer
| than the public one.
| corry wrote:
| The decline in employee option exercise... is that the canary in
| the mine? If the team itself is saying less and less that their
| company's equity is worth taking a risk on -- and they are in a
| good position to be optimistic, rightly or wrong -- then that's a
| pretty bearish signal.
|
| Of course there are other pressures on peoples' personal finances
| that makes money dearer... but still.
|
| Or perhaps with layoffs there is just a lot of people who could
| be exercising vested options, but won't because (1) they no
| longer work there and won't be able to contribute or have an
| insider advantage, and/or (2) they now don't have a job so won't
| risk the capital in buying out their options.
| cj wrote:
| Are 409a valuations coming down for companies who raised at
| crazy valuations? Are startups repricing their employee stock
| option strike prices (highly unlikely?)
|
| I think the most obvious explanation is a lot of people were
| hired during a time of inflated valuations and those employees
| received stock option grants with incredibly high strike
| prices.
|
| Now valuations have tanked over 50%. If this happened in the
| public markets, you would simply let the options expire rather
| than acquire the stock at a 100% premium (for example). For
| similar reasons, it's probably not advisable to exercise
| options granted in the last couple of years in most cases, but
| that's because valuations are likely down below the strike
| price for a lot of people.
| stanleydrew wrote:
| In my experience 409a valuations for common stock are
| effectively set based on a discount to preferred and some
| handwavy math related to "comparable" public market
| valuations. So I would expect them to come down, but they
| will lag 1-ish years behind private preferred round prices.
|
| I do think it's somewhat likely that a company would offer to
| rewrite options at a new lower strike price if employees ask.
| Of course you'd start all the capital gains clocks again, by
| probably worth it if the price difference is substantial.
| [deleted]
| adoxyz wrote:
| It doesn't necessarily signal that the company's equity is in a
| bad position. I'd venture to think a lot of people would rather
| keep cash on hand in these times than locked up in a private
| company.
| persedes wrote:
| plus for a lot of companies an IPO might be not in the near
| future due to the stock market being what it is (even though
| who knows anymore...). So why buy options if you don't know
| when you'll get to sell it.
| MuffinFlavored wrote:
| > The transformation of the venture capital industry over the
| past year has been stark. Total venture capital raised by
| startups plunged 80% from Q1 2022 to Q1 2023. Venture deal count
| fell 45% over the same span. Overall, Q1 was the slowest quarter
| for both capital raised and deal count since 2017.
|
| Does this come to a shock to anybody given the sequence of
| events:
|
| 1. Pandemic economic relief to offset otherwise lost wages due to
| restrictions is roughly equivalent to "injected money/liquidity
| from the sky"
|
| 2. Subsequent inflation
|
| 3. Subsequent federal reserve monetary policy in response said
| inflation in an attempt to stop it from spiraling
|
| How is venture capital expected to perform well in these
| conditions? Is the point of this article "venture capital was
| expected to do worse off given the change in underlying economic
| conditions, but not this drastically of a difference"?
|
| Federal Funds Rate is about to be 5.25%
|
| 30 year fixed mortgages are ~7%
|
| Financing a new car for 60 months is 7%
|
| I'm less interested in "how bad is the state of venture
| capitalism" right now and more interested in "when is it roughly
| expected to get better/be less bad again"?
| slap_shot wrote:
| > How is venture capital expected to perform well in these
| conditions?
|
| I'm not sure that this author or Carta as a whole is trying to
| suggest private markets should be performing better right now.
| We're all painfully aware of why this is happening. These
| reports are usually just presenting the raw data.
|
| > I'm less interested in "how bad is the state of venture
| capitalism" right now and more interested in "when is it
| roughly expected to get better/be less bad again"?
|
| An analyst's report for any asset class (real estate, public
| equities, etc) has to start with the cut and dry numbers. But
| they do sprinkle in a bit of guidance using the data:
|
| "There are signs of a venture spring. Valuations from seed to
| Series C ticked up from recent lows. Median round sizes mostly
| stabilized. But these green shoots were overwhelmed by the
| decline in total rounds across all stages."
| sbierwagen wrote:
| >I'm less interested in "how bad is the state of venture
| capitalism" right now and more interested in "when is it
| roughly expected to get better/be less bad again"?
|
| This rounds up to "how long do recessions usually last" and the
| answer is an unsatisfying "it depends"
| https://cdn.statcdn.com/Infographic/images/normal/25364.jpeg
| nawgz wrote:
| > 1. Pandemic economic relief to offset otherwise lost wages
| due to restrictions is roughly equivalent to "injected
| money/liquidity from the sky"
|
| > 2. Subsequent inflation
|
| I dislike this representation a LOT because I have the feeling
| more money was distributed to business owners under the
| incredibly corrupt PPP loans, and then... it turns out
| corporate profiteering is the real driver of inflation.
|
| People keep peddling this "giving people money in a pandemic
| caused all our problems" line, but it's just not true, it's not
| grounded in reality, and if it was a contributing factor, let's
| look at the other things that costed more...
|
| Citizen's tax dollars being paid back to them when you can't
| leave your home is not a driver of inflation
|
| Citizen's tax dollars being gifted to business owners who also
| proceeded to jack up their profit margins due to shocking price
| elasticity due to a complete lack of antitrust enforcement for
| 40 years is THE driver of inflation
|
| It's amazing how on an article about VC you've both managed to
| argue that no one should write articles about VC and then
| blamed citizens for corporate-driven inflation.
| seizethecheese wrote:
| The mainstream economics consensus is that inflation was
| kicked off due to excess savings and limited supply of goods
| (first) then services (second).
|
| The idea that business profits are driving inflation is a
| partisan talking point, not at all consensus.
| nawgz wrote:
| > The mainstream economics consensus
|
| Should be linkable from multiple sources. Care to provide
| some, then?
|
| > was kicked off due to excess savings
|
| That's a partisan talking point if I've ever heard one, and
| has largely died out in popularity in my view, since we've
| seen the endless lists of all-time-high corporate profits
| and margins
|
| > The idea that business profits are driving inflation
|
| Couldn't be more obvious. If everything costs more, and
| corporations are making record profit and revenue across
| the board, there's probably no limitation of goods or
| services.
|
| For instance, [0] argues my claim directly, [1] shows some
| details of that relationship, and there's an internet full
| of it.
|
| Everything supporting this "excess savings" bit is either
| from Republicans or 2021, care to link me something a bit
| more definitive?
|
| [0]: https://www.kansascityfed.org/research/economic-
| review/how-m....
| HDThoreaun wrote:
| https://www.kentclarkcenter.org/surveys/inflation-market-
| pow...
|
| Economists reject the assertion that corporate greed is
| the cause of inflation because corporations have always
| been greedy and there was no inflation in the 2 decades
| before covid.
| nawgz wrote:
| Notably from January 11, 2022
|
| Also, the argument makes no sense
|
| > corporations have always been greedy and there was no
| inflation in the 2 decades before covid
|
| Corporations have clearly achieved deregulation at a
| greater scale than ever before, both thru devices like
| regulatory capture to weaken regulatory instruments, and
| by achieving wealth and therefore power at scales
| comparable to first world nations.
|
| The past did indeed happen in the past, but our past -
| unlike the authors of that article - includes knowledge
| of a full year of ludicrous financials and outsized
| margins being published by corp after corp.
|
| What does any writing not from 2021 say? I already
| addressed that point quite nicely for the audience, I
| thought.
| JumpCrisscross wrote:
| > _ludicrous financials and outsized margins being
| published by corp after corp_
|
| If you translate those financials into real terms,
| they're less ludicrous. Sometimes negative. Margin
| expansion _absolutely_ contributed to inflation [1]. (On
| par with labor.) But this happened through wage
| suppression.
|
| > _Corporations have clearly achieved deregulation at a
| greater scale than ever before, both thru devices like
| regulatory capture to weaken regulatory instruments_
|
| What changed between 2021 and 2023 that gave them this
| power?
|
| There are solid cases made for care investments, to boost
| labour participation, and a variable corporate tax rate
| that kicks in when inflation is high. But they have to be
| based on sane, empirical arguments.
|
| [1] https://www.epi.org/blog/corporate-profits-have-
| contributed-...
| nawgz wrote:
| > What changed between 2021 and 2023 that gave them this
| power?
|
| I think it's fairly evident that the rule of law and
| corporate oversight in the US was greatly weakened from
| 2016-2020, and at the start of 2021 an event some argue
| was essentially a failed coup occurred, yet the only
| punishments were issued to commoners and none of the
| instigators or would-be beneficiaries. Why would
| corporations not be emboldened at such a sight?
|
| I agree otherwise with what you've said, and indeed I am
| not nearly qualified enough to propose the vehicles to
| change economic outcomes - but it's clear that the
| narratives denying corporate profiteering's role in
| inflation are outdated.
| MichaelZuo wrote:
| Can you link to a few examples of substantive 'weakening'
| of the 'rule of law and corporate oversight in the US'?
| meh8881 wrote:
| Net neutrality rules come to mind
| [deleted]
| icedchai wrote:
| My uncle's business got a $600K+ PPP loan. They had at least
| 10 million in cash and did not need the money. Why did they
| get it? Because they could. To be fair, they did pass it all
| out as employee bonuses.
| tpankaj wrote:
| I don't think it's fair to complain that you're not interested
| in reading about the state of venture capitalism on an article
| titled "The State of Private Markets". The article delivered
| exactly what it promised in the title.
| MuffinFlavored wrote:
| > I don't think it's fair to complain that you're not
| interested in reading about the state of venture capitalism
|
| Apologies, I should've tried to sound less whiny. I guess
| what I was trying to say is "things are bad, what did you
| expect?"
| monero-xmr wrote:
| Most post-seed rounds happening now are existing investors
| doubling down on their winners. Losers will get acquired or shut
| down. Revenue is king, promises and future growth and TAM hand-
| waving is in the graveyard. If you need VC money to survive
| within the next 12 months and aren't already trying to raise it
| you are probably dead.
| sroussey wrote:
| Acquisitions are not really happening.
| foobiekr wrote:
| Without commenting on my current employer, all of my previous
| large employers are busy buying more companies this year than
| the last three years combined.
| nuclearnice1 wrote:
| The article disagrees. But my sense is you are right in
| relative terms. Much more failing than acquiring.
|
| Article:
|
| > Startup M&A bounced back: The number of venture-backed
| companies that were acquired or merged with another company
| increased by 20% in Q1 compared to Q4 2022, with 57% of those
| M&A deals valued at $10 million or less.
| ryanSrich wrote:
| Yeah $10m for a lot of startups is equivalent to shutting
| down. Essentially asset/fire sales.
| icedchai wrote:
| A couple years back, I worked for one that got "acquired"
| for a couple hundred K. This was literally pennies on the
| dollar.
| foobiekr wrote:
| I think a lot of people who entered the industry post
| 2004 are about to learn how unreal the last 20-ish years
| were.
| ryanSrich wrote:
| It'll be interesting. I'm not entirely sure what to make
| of it to be honest. We have a massive shortage of
| software. Even with the low cost of software development
| compared to manufacturing you still need operating
| capital. Especially for hard problems. Without high risk
| VC dumping billions into the private market I could see
| the US drastically falling behind other countries. The
| entire reason why the US has been so far ahead in the
| tech sector is because of how much high risk capital
| we're willing to invest.
| MichaelZuo wrote:
| Massive shortage of software where?
|
| (excluding AI, which has no problem getting funding)
| hcazz wrote:
| Sure they are, JPMC just recently acquired a small startup.
| [deleted]
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