7/17/2023: Secondary Market Valuations Revert to Second-Most-Recent Primary Round

Private valuations going back to pre-pandemic levels

Forge Global published their latest private market update last week and there was a lot of good information. The tl;dr version of it is that the secondary transactions are trading at valuations at their second-most-recent primary round. In other words, let’s forget about the post pandemic bubbly valuations and the revenue increase during that period and get to basics. Another interesting data point that caught my eyes is that the valuation step-up of the primary round has decreased. 25+% of the companies are raising new rounds at flat or lower valuations. Basically, there’s a big reset of valuations. Companies that are doing well can still raise money without a big step-up on valuations. What is not being said is that companies that are not doing well won’t be able to raise money and many of them will be out of business in the next few quarters.

AFAIK, it has been a pretty quiet summer for early stage investing. I was on vacation for three weeks and sick for two weeks. I am finally back and the pre-seed/seed deals I was looking at are still slowly progressing. Apparently, I didn’t miss much of the action. Two years ago, these deals would have been done in a week at 2X of the valuations. The pendulum has swung and this is healthy for the seed investing in the long run. Mathematically, pre-product and pre-customer deals that are done at $30M valuations just wouldn’t work. Let’s say a fund invests in 40 deals at such valuations and let’s assume the fund is lucky enough to have a unicorn in the portfolio. Depending on the dilution from the subsequent rounds, that unicorn company will probably return 20X - 30X of the original investment, which will not be enough to return the whole fund. On the other hand, if the pre-seed deals are done at $6M valuation, we will be looking at 100X-150X of the original investment, which will return the whole fund plus some more and that is basically the business model for early stage funds. I made an angel investment in Iterable back in 2014 at a $5M post money valuation which generated a staggering multiple even though the secondaries are trading at a deep discount of the primary round valuation. If I had invested at a $30M valuation, my angel portfolio would have severely underperformed most public stock indices. Sure, people are making angel investments for various reasons and investment performance is not necessarily the top priority. I am happy to support great founders on their journey without making a lot of money. But institutional investors have to be accountable to their LPs in addition to the founders.  The seed funds must make a decent return on their portfolio. I am glad the $30M silly deals are gone. But I think the pre-seed/seed deals need to go back to sub-$10M valuations on average to make sense for the asset class. I don’t think we are there yet.