State of Private Markets: Q1 2023 | Hacker News Reader

State of Private Markets: Q1 2023

carta.com

151 pointstim_sw72 comments

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]

[0] https://twitter.com/jaminball/status/1653482586054987776

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.

> everyone is trying to justify much higher multiples for early stage (pre-C) private SaaS right now

Growth adjusting à 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

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.

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 significant discount or it’s growth will likely continue for significantly longer than the public one.

You forgot the one exception: or you expect the private company to go public after your investment.

That reduces but doesn’t eliminate this preference. A private company going public in 1 months is still one month where you have less liquidity than investing in a public company for that month. Everything else being equal liquidity makes public companies more attractive.

Well, most people would be betting that by investing pre-IPO they can cash out upon or shortly after IPO with nice gains. Of course none of that is guaranteed.

You still need to find someone to take the other side of that investment.

Taking a company public is generally profitable because of people’s liquidity preference. Companies will sell shares to an investment bank directly before an IPO as both a form of payment and a hedge. It’s a very nuanced transaction that might otherwise seem dumb on the surface.

Thanks for the additional info. I feel like I need to read up on this some more to make more sense of all the conflicting bits I have accumulated.

how high?

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.

Acquisitions are not really happening.

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.

Yeah $10m for a lot of startups is equivalent to shutting down. Essentially asset/fire sales.

I think a lot of people who entered the industry post 2004 are about to learn how unreal the last 20-ish years were.

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.

Massive shortage of software where?

(excluding AI, which has no problem getting funding)

There's a massive shortage of software but most of it is low value. Not a lot of money to be made there and the era of "I'll fill this hole with a low-feature SaaS" is kind of over for the time being.

There is very little risk the US will fall behind on software. Once you get outside of CA the SW talent is pretty mediocre and once you're outside the US it's dire. I work with teams all over the world and while many of the individuals are great the gems are few and far between.

Last 20. Try last 3. if it were not for Covid a lot of recent unicorn IPO millionaires would never of had an exit.

Layers of unreal. Going into Covid the SWE job market was insane and had been so for years.

A couple years back, I worked for one that got "acquired" for a couple hundred K. This was literally pennies on the dollar.

Sure they are, JPMC just recently acquired a small startup.

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.

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.

Tell 'em you're a remote company, if you are. State it in your pitch so they don't ask.

Confusion ensues when you are 'remote first' and also manufacturing the latest in vertical lathes in your multi-dozen square foot shed

So what's the why?

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

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).

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.

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

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.

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.

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.

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.

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.

Good point, if your options are underwater you probably aren't exercising... although would be sad to watch them expire.

> 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.

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.

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.

> the implosion of SVB et al took with it a lot of venture debt, which may result in unusual dilution down the road

Can you explain what this means? Does it mean (1) SVB used to a major holder of venture debt (2) Now that they don't exist, no one is likely to buy venture debt (3) therefore, companies have to issue more equity, leading to dilution

I’m not aware of banks as friendly today towards venture debt (really small business loans) as SVB et al were. There was probably a bubble in lending there in part due to crypto fraud. (VCs of course want this marketed as the Fed disrupting their house of cards through raising rates).

Will start-ups just issue more equity? It could be more likely they simply fail to raise anything.

> Why might engagement be low?

Easy. The whole point of owning stock is to (a) have the right to vote in elections for the Board, (b) have a share of dividends, (c) potentially sell for a profit in the case of an acquisition or IPO.

If the company is private, with no exit in sight: (a) isn't true in your case, as your right to vote is taken away from you, (b) is a pipedream, because the company is either not profitable or because profits are being re-invested into growth.

In a bad economy, where you're trying to build up savings because you have no real idea if you or your partner or someone in your family is going to be laid off in the near future, where exercising options requires both a large cash expenditure on the part of the employee and a huge leap of faith that, in the span of years, there will be some kind of a return...

Stock-based compensation means very different things in VC-controlled and non-VC-controlled companies. Stock-based compensation is "real" in non-VC-controlled companies (be they bootstrapped businesses or large public enterprises) because there's actually a legitimate chance at a dividend issue and/or a real (if small) voice in Board elections. But the value of stock compensation in VC-controlled firms entirely depends on whether the firm is going to be a VC-style success. If it's not a portfolio winner, then the employees don't win either. And employees have a front-row perspective on whether the company is a portfolio winner.

> And employees have a front-row perspective on whether the company is a portfolio winner.

This is often false, especially for ICs. The C-levels in early stage companies hide a lot of key info (intentionally or not). The most material info like the cap table and the relationship with investors (especially record of “no” answers received) is never shared.

> 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"?

> 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."

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.

> 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?"

> 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.

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.

> 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....

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.

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.

> 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-...

> 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.

Can you link to a few examples of substantive 'weakening' of the 'rule of law and corporate oversight in the US'?

Net neutrality rules come to mind

Which parts specifically?

It is interesting to me to ponder why you carried on an alternate thread instead of the original one which you wished to challenge.

Almost anyone on HN can see through this type of low effort passive-aggressive commenting. So this makes it even less likely me, or anyone else, well provide a substantive response.

The only low effort passive aggressive posting in this thread is from you - posting gotcha questions that aren’t gotchas and then tucking tail when sources come thru.

You already were clearly at 0% probability of a substantive reply. Nice attempt at deflection tho - I see you’re learning from the republicans whose boots you love to lick

> The only low effort passive aggressive posting in this thread is from you - posting gotcha questions that aren’t gotchas and then tucking tail when sources come thru. You already were clearly at 0% probability of a substantive reply. Nice attempt at deflection tho - I see you’re learning from the republicans whose boots you love to lick

This does not increase your credibility, especially when hiding behind a pseudonym account made in 2020 replying to someone using their real name since 2014 on HN.

So it seems like a losing proposition to continue digging a hole.

But it's no skin off my back.

Let's see if I have this straight.

I post: corporate power is growing.

You post: prove it.

I prove it.

You stop responding about this idea.

Then, given an opening when I called you out on it, you have tried to imply:

* I am at fault for your lack of "substantive reply"

* I am at fault for using a pseudonym

* Because you use your "real name", you have street cred

I would like you to explain to me why you even bothered asking me to prove the regulatory environment was weakened in the states by Trump, that is obvious. It really makes no sense why you've come in and introduced such a bad faith chain of arguments on a topic you have made absolutely 0 points about.

You mean the thing that people claimed if it were repealed, the internet as we know it would end? Then the thing did get repealed, and nothing really changed?

Sure.

[0]: Trump tax cut 35% -> 21%, purely a gift to corporations. They now have more wealth and power. Couple this with the fact Trump continued to reduce IRS funding - and Republicans push back against Biden growing it - corporations gain more power to evade tax, and gain more wealth and power. I could find you a long list of things to this vein, but I would first suggest your head is in the sand if this is new to you.

[1]: His daughter and Kushner made hundreds of millions during their time in the Trump administration. Corruption at the top level of the administraton emboldens and enables corruption at other levels of the administration, which leads to corporations having more pressure points to continue their assault on regulatory bodies and powers.

[2]: He elected a Supreme Court that is blatantly partisan, undoes prior art despite a complete vacuum of new legislation on those matters, and is undermining the power of all kinds of regulatory agencies. For instance, take the EPA no longer being able to issue environmental regulations.

[X]: Some reading you might do well by.

[0]: https://www.theguardian.com/us-news/2019/apr/30/trump-tax-cu...

[1]: https://www.citizensforethics.org/reports-investigations/cre...

[2]: https://www.npr.org/2022/06/30/1103595898/supreme-court-epa-...

[X]: https://civilrights.org/trump-rollbacks/

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.

>Citizen's tax dollars being paid back to them when you can't leave your home is not a driver of inflation

The pandemic relief wasn't funded by "Citizen's tax dollars". It was funded by borrowing. Lending/printing this much money in such short amount of time is going to cause inflation because demand (caused by dollars cojured out of nowhere) is chasing limited supply.

So then, we agree that because PPP loans were a larger amount of money produced in the exact same fashion, it follows that PPP loans should be assigned a larger share of the blame than stimulus cheques to citizens, and accordingly any mentioning of one without the other is a disingenuous attempt at implying governments should not spend money on their citizens livelihood.

Understood.

The biggest joke is ppp loans had tons of fraud or non necessities. This was tax free gains pushed into housing and assets that the wealthy own. Those wealthy then speculated more leading to a lot of the inflation

>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

I'd suggest that ~5% is monetarily neutral and roughly the correct rate for pricing time/risk, it only seems high compared to the zero rates we've had recently. It may have to go (much?) higher for a (long?) period to fix the current inflation situation.

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