This week’s newsletter bears that out. The title page shows the collapse in the value of Ark’s innovation ETF. It represents a basket of high-growth tech companies and is clearly witnessing the consequences of the sell-off of the underlying assets.
Fred Wilson wrote a blog post called The Selloff
. He said:
Even at these new “discount” prices, none of these stocks look cheap to me. Most are still trading well in excess of 10x revenues which has always been my baseline for a subscription-based software business. I don’t know where they will bottom out, but it certainly could be lower. Or the sector could have already bottomed out in this first week of 2022 blowout sale. One never knows where the bottom is until you are well on your way back up.
Combining a belief that these stocks are over-valued with an honest appraisal of what will happen next that amounts to “I don’t know”. I agree with the appraisal, I don’t know either.
What I do know is that public markets are very disconnected from private markets. I also suspect that this will not stop. Most growth in value is now happening during the private phase of a company.
Crunchbase did a stellar job of documenting 2021’s growth in private company investing.
Venture funding in 2021 broke records across the board, Crunchbase data shows, with investment last year up more than 10x what it was a decade earlier.
Global venture investment last year totaled $643 billion, compared to $335 billion for 2020—marking 92 percent growth year over year.
The figures underscore a dramatic change in the startup funding environment in the past year. Consider that at the end of 2020, almost a year into the pandemic, global venture investment had grown around 4 percent year over year
Alongside this growth in overall funding, the Crunchbase Unicorn Board
reached 1,000 concurrent private companies for the first time in 2021, then shot past that number. There are currently 1,148 companies on the Unicorn Board, which also added around $1.8 trillion in value in 2021 compared to its value toward the end of 2020
New unicorns joined our board at a dizzying pace, with 586 new entrants—averaging more than 10 new unicorn startups per week. For comparison, 2020 minted 167 new unicorn companies, averaging three per week.
These unicorn companies have now raised a total of $682 billion over time, and are collectively valued at $3.8 trillion—an all-time high for the Crunchbase Unicorn Board.
The disconnect between private and public markets is best understood by looking at the multiples of revenue paid to buy the stocks of those companies and by the returns those stock purchases produce. We have previously published work by Tomasz Tunguz showing how private valuations can get as high as 400x annual run rate for the best (fastest-growing) private companies with large addressable markets. Yet Fred Wilson says he thinks 10x revenue is a normal multiple for a public company.
Private valuations reflect the demand for growth in value. And the demand for value growth is predicated on real-world growth in revenues. The fact that private companies can grow by hundreds of % a year, and can do so quickly, is what drives capital to them. This possibility of rapid and scalable growth is not likely to decline. And capital on the sidelines is not likely to ignore the opportunity to ride those growth waves. So it is likely that private companies that successfully move from a seed round to a Series A round, and on through future rounds of financing will continue to deliver the best returns for investors. As that happens money will continue to flow into early-stage investing and growth venture investing. Institutional allocators, focused on public markets, will increasingly need to find pathways into the best private companies, and there will be more capital than the supply of opportunities. This will continue to drive private valuations. Public markets will not be able to compete in the growth game but will remain key to liquidity. In that sense, public offerings will continue to happen at a rapid rate.
So while I agree that public markets are shrinking the price paid for revenue for the best tech companies, I do not see that as any kind of signal to the private investment space. The two are disconnected and the gap may widen in the short term. There is no real Tech Crunch.
More in this week’s video.