Start-up valuations reset: Navigating the changing tides

Investors adapting private equity valuations in startups amid market shifts is reflection of industry dynamics, not impending crisis.

Prominent investors are adjusting private equity stock valuations in unlisted companies, aligning with fiduciary and regulatory practices like marking public listed stocks to market. Rather than signalling doom, this underscores the dynamic nature of the investment landscape.

The valuation myth

The media hype surrounding valuation revisions is largely unwarranted. These valuations are theoretical and lack real transactions. They are subjective and vary between investors. The revisions do not impact company operations as they have already secured funding at higher valuations. Potential future funding at lower valuations is a separate issue. These markdowns represent paper losses, reflecting the market environment, like adjustments made in public market portfolios.

Steering through the funding freeze

While valuation revisions are essentially accounting adjustments, the startup ecosystem is indeed facing tangible challenges. Startup funding has noticeably slowed down in terms of both pace and volume. Investors are proceeding cautiously, taking more time to finalize deals, offering lower valuations, and resulting in higher dilutions. The industry yearns for a return to the enthusiastic days of swift Zoom call deals and rapid fund transfers. However, companies that have already secured funding find themselves in a favorable position. They can adapt by restructuring, pivoting, cutting costs, focusing on profitability, and extending their financial runway, reducing the immediate need for additional funding for the next 18 to 24 months.

Companies with low burn rates and positive unit economics are well-positioned. They can raise bridge funding from existing investors, even at a reduced valuation. High-growth companies relying on aggressive expansion and planned capital raises in 2023 face challenges. They must reduce burn rates, focus on profitable areas, and demonstrate improved unit economics and a clear path to profitability.

Managing the challenges of down rounds

Lower valuations or down rounds in startups are often blown out of proportion. The weighted average anti-dilution method balances the impact for investors who entered at higher valuations. Major public market stocks have also experienced significant drops. Startups should not be judged differently in this context.