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When Reddit lists on the New York Stock Exchange next week, the social media platform is expected to be worth up to $6.4 billion – significantly less than the $10 billion it was worth in 2021 . It will be the first high-profile tech startup on the list since Instacart, which was valued at $10 billion when it went public in September, just a quarter of the eye-popping valuation it received from investors in 2021.
Despite the total write-off of nearly $35 billion in alleged shareholder value, these “down-round” IPOs are not met with ridicule in Silicon Valley. Rather, they are a signal that rationality is slowly returning to venture capital.
Down-round IPOs “are not only becoming common, they are becoming the standard for the class of 2021,” says Venky Ganesan, partner at Menlo Ventures. He refers to a group of late-stage companies whose valuations soared this year as investors drunk on low interest rates raised astronomical sums. U.S. venture investments reached a record $345 billion in 2021, more than double the previous year.
Now startups are running out of money and venture capital funds need to return some money to their investors. “I encourage all of our companies that have the financial resources to support an IPO,” Ganesan added. “Bottom is the new top.”
It's a sentiment that has spread across Silicon Valley with increasing confidence in recent weeks as technology stocks rally, in part on the booming prospects for artificial intelligence. “People who were hiding in their caves are now wandering around outside and feeling comfortable, and it's noticeable,” a co-founder of a large venture capital firm told me.
Successful new investments in AI could offset a number of recent misjudgments. And there's a growing consensus that it's finally time for founders to swallow their pride, take a massive valuation discount, and help create a new floor for their stocks to grow again to take on any companies that come up behind them. to encourage doing the same.
Not everyone will join. Stripe co-founder John Collinson told the Financial Times this week that he is in “no rush” to take the $65 billion payments group public. But a few more solid companies coming to market at new prices could help destigmatize the long-standing psychological resistance to downward financing that is ingrained in Silicon Valley culture. Reddit's investors may have had to realize that the IPO isn't a $10 billion company, but if the company does well, the lower valuation could become a floor for the stock price.
However, if full-scale listings happen, there will be some extremely painful consequences for late-stage investors who fueled the startup bubble in 2021. There are hundreds of companies that were funded in a low interest rate environment that should have been closed or sold but managed to just delay the inevitable reckoning. A reduction in valuation may not be the worst outcome for many.
The looming crisis also highlights the cost of the herd mentality in the venture capital industry, which has become accustomed to moving largely en masse and in the same direction. Haste undermines discipline.
In 2021, financially strong investment funds competed to gain entry into overpriced young companies. In many cases, they have abandoned key protections, including those that allowed them to veto an IPO below a certain price.
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Unlike a sale of a company or a liquidation, a public listing converts all of the preferred shares held by a company's venture investors into the same common shares held by employees and management, thereby extinguishing the various rights held by the backers in the company secured as part of private capital raising rounds. The valuation decline combined with the lack of protections means late-stage investors have little ability to prevent decisions that are likely to result in punishing losses.
Sequoia Capital, which invested $300 million in Instacart during its private company existence, made a paper profit of more than $1 billion when it went public — but at one point that investment was worth as much as $5 billion . Companies like Sequoia, T Rowe Price, Fidelity and Andreessen Horowitz, which invested a combined $265 million in Instacart in 2021, saw those investments fall by 75 percent.
“It is becoming increasingly clear that what was insured is no longer the case,” said a venture capitalist at a firm that controls billions of dollars. If Silicon Valley goes through the stages of grief, from denial and anger to acceptance, it could be a healthy thing in the long run.
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