For investors, these mark-downs indicate the current market situation, including public markets, and are not genuine losses; rather, they are paper losses that reflect a reduced mark-to-market on their portfolio.
Revaluing private equity stock in unlisted companies is being done by prominent investors as a necessary fiduciary and regulatory process similar to marking to market publicly traded listed securities. This is hardly a sign of the end, but rather it illustrates how dynamic the investing landscape is.
The Valuation Myth Dispelled
The media hysteria surrounding these value changes is generally unjustified for a number of reasons. At their essence, these assessments are purely theoretical. At these reduced prices, there are no sales or purchases taking place, therefore they are just numbers on a piece of paper. An investor’s valuation is always going to be their opinion. It is possible for two investors in the same company who made their investments at the same price two years ago to today record dramatically different valuations in their books. Depending on their unique insights, they might stick with the original assessment or reduce it. The company’s activities are unaffected by these adjustments. At greater valuations, companies have previously received finance.
The current environment may cause future money to be valued at a lower level, but that is a different story.
For investors, these mark-downs signify paper losses rather than real ones and the current market situation, which includes public markets, in a way similar to how their portfolio for public markets would show a lower mark-to-market.
Even if the valuation revisions are essentially accounting changes, the startup environment is in fact facing real difficulties. The volume and pace of startup investment have significantly decreased. Investors are moving more slowly, closing deals more slowly, offering lower valuations, and increasing dilutions. The industry yearns for the ecstatic days of rapid Zoom call agreements and speedy fund transfers to come back. Businesses who have already received capital are in a good position.
For the upcoming 18 to 24 months, they won’t need to go for new investment if they restructure, pivot, cut expenses, work on profitability-centered models, and extend their financial runway.
Businesses that keep their burn rate low, have favourable unit economics, and don’t rely on aggressive promotions to develop are also in a good position. Even if it comes with a lower valuation, they have the possibility of obtaining bridge financing from current investors. The companies most affected are those with high growth rates that are actively increasing their market share and planning to seek financing in 2023 using growth criteria. Their strategy of raising the next round at a greater valuation and deploying risk money for growth has been upset. By eliminating unproductive verticals, consolidating their operations, and limiting their geographic reach, these organisations must significantly lower their burn rate. It is essential to show improved unit economics, a carefully thought-out expansion strategy, and a road to profitability.
Getting Around Down Rounds
It’s common for people to exaggerate their concern of lower valuations or downward rounds. The weighted average anti-dilution strategy, which rewards investors who made investments at greater valuations, frequently counteracts the reset of prices. From their 52-week highs, some prominent public market stocks have experienced large declines: Pinterest fell by 78.1 percent, Netflix by 74.9 percent, Zoom by 84.4 percent, and Peloton by 91.1 percent. Therefore, why should startups be treated differently?
A Strategy For Founders
Founders are naturally tough businesspeople who can withstand any adversity. The following are some tactical ideas:
– Recognise the predicament. Both optimism and a clear grasp of reality are essential. It is your responsibility as a leader to move quickly and decisively. Avoid the temptation to use shortcuts to preserve previous looks or boom-time valuations. Large firms have been known to use elaborate, structured arrangements to raise money at earlier valuations; this is a risky course that is motivated by ego. Reset the valuation, use the weighted average anti-dilution mechanism, embrace simpler, cleaner terms, and issue additional shares. Place more emphasis on business development than financial manoeuvring.
– Keep the faith. This too shall pass, as with all cycles. Focus on the health of your business in the interim, tune out the media clamour, and avoid critics who take delight in other people’s misfortunes.
– Realise the extraordinary bravery required to be an entrepreneur. The untrodden path was chosen above the security of work. The genuine character of an entrepreneur is put to the test during these trying times.
It’s important to keep in mind that turbulence frequently comes before tranquilly as we navigate these turbulent times. As you guide your startup through this storm and towards the hope of better days to come, the entire globe is pulling for you.
