And why Instacart did its fellow unicorns a solid by repricing
It’s the first of Y Combinator’s two-day Demo Day event, which means that TC will spend most of our working hours watching startup demos and tracking how many companies from the batch are in particular sectors and geographies. The early-stage startup market is active and — as formerly late-stage-focused funds look to invest earlier — still awarding attractive valuations to nascent technology upstarts.
Later-stage startups aren’t being afforded similar enthusiasm, with investor notes and data indicating that from Series B onward — and perhaps earlier in some cases — valuations are tightening as investors look to falling public markets as an indication that exit prices will be smaller than previously anticipated. A closed IPO market and antitrust vibes from U.S. and European governments potentially limiting big-ticket M&A aren’t helping.
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This means that many unicorns looking to provide liquidity for their employees and other shareholders are using services like Forge, which recently went public, and EquityZen. The Exchange has spoken with EquityZen before, but we wanted to dig into current later-stage startup market dynamics to understand what it would take to assuage concerns and bring later-stage startup dealmaking back into the spotlight.
So we asked EquityZen’s Phil Haslett, co-founder and chief revenue officer, to chat through his perspective on the markets.
We learned two key things: First, there is a sort of trigger, if you will, that could reset pessimism regarding technology company growth rates. And, second, Instacart did other startups a huge solid by retooling how it prices employee equity compensation through what is generally considered to be a reset induced by a new 409a valuation. (If you don’t know what a 409a valuation is, think of it as an externally set valuation for private companies’ fair market value.)
Let’s start with what it would take to Lazarus market sentiment about tech companies — and therefore tech stocks — and examine the door that Instacart just kicked open for its fellow unicorns.
Restoring market confidence in tech companies
It’s tricky to compare mid-2021 market sentiment regarding quickly growing technology companies and today. The startup and public markets each sport myriad technology companies with different growth rates, margin profiles and cost bases. One size does not fit all. But that doesn’t mean we can’t sketch out any generalities.
While every technology company is different, the markets have curtailed the value of technology revenues as other investment opportunities became more attractive. More simply, the value of growth has declined in the public markets, leading to revenue multiple compression among startups that have reached, say, eight-figure ARR.
Happily, what drove the sentiment change could also flip back. Haslett told TC that market concern is being driven by “two big macro uncertainties,” which he identified as “geopolitical risk in Europe, plus inflation.” But if we look out a bit further, he gave us a picture of what good news would look like for tech valuations (quotes have been edited for clarity and length):
What you look for on the horizon is a wave of Top 50 or 100 tech companies having earnings and forecasts that get us back, and right the ship. If DocuSign says, “OK, like, the worst is behind us,” if Zoom says, “The worst is behind us; we’re back up and running,” [then startups can say], “Oh, thank god, now we know we’re in a better spot. Our public comps are gonna look better, we can start [hitting] the ground running.”
