Mergers & Money: Public Market Tumult Likely Will Make Its Way To Venture—But It May Take A While

Editor’s note: Mergers & Money is a monthly column by Senior Reporter Chris Metinko that covers dealmaking and the flow of venture capital in the enterprise tech space.

The news of tech stocks tumbling and crypto declines has been hard to avoid.

This week has added to what has become a bad start to 2022 for many public tech companies. The decline—brought about by rising inflation and global tension—has affected the share prices of everything ranging from tech stalwarts like Microsoft and Google, to much younger, sexier names like Zoom, Tesla and Peloton. Thus far this year, the Dow Jones Industrial Average is down about 5 percent and the Nasdaq Composite, a good indicator of tech prices, is down more than 12 percent.

After seeing plummeting share prices in the public market, it can be hard to rationalize the billion-dollar-plus—or $10 billion-plus—valuations we continue to see seemingly everyday in the private market. However, while it’s likely the recalibration we are now seeing in the public market will eventually hit Silicon Valley and other venture hubs, its effects—and intensity—may take some time.

“There is a very good chance the private market will see some of that hurt come down to them,” said Ryan Bloomer, founder and managing partner at K50 Ventures, told Crunchbase News. “But there is a lot of money right now firms have to put to work.”

Dry powder

That money currently sitting in venture funds is one reason no one should expect the venture capital firehose—which broke records last year—to run completely dry any time soon.

Large firms have been extremely successful through the past few years raising more and more money from limited partners, endowments and others to create bigger and bigger funds. That money was invested into those funds with the idea of generating even more money—not sitting idle and doing nothing—so VCs need to do something with it.

The growth of funds is one reason valuations keep rising and nearly 600 unicorns were minted last year alone.

“Funds are getting bigger,” said Bradley Tusk, CEO and co-founder of Tusk Venture Partners. “So these valuations go up because you have to write bigger checks.”

Coming back down to Earth?

However, Tusk is one of many VCs who believe there is a significant disconnect between private market valuations and public market valuations.

On Monday, Keith Rabois, a general partner at Founders Fund, tweeted, “Laws of physics are back,” after the stock markets took a sharp downward turn before rallying to finish the day.

Other VCs also believe the market is pointing to a correction as price-to-earning ratios in the public market—a key indicator that helps investors figure out market value of a stock as compared to the company’s earnings—have started to come back down to Earth, although still above the traditional 15x to 20x earnings investors like.

Despite those numbers and the market downturn, venture deals announced this year have not seemingly been significantly affected so far.

According to Crunchbase numbers, venture money to U.S.-based startups actually slightly increased through the first 25 days of the year compared to last—although deal flow is down, with about 500 fewer rounds being announced thus far compared to 2021.

There are, however, two things to keep in mind when reading into those numbers. First, deal flow may be down because valuations are up—meaning more money is going into those individual funding rounds.

Secondly—and on the other side of the spectrum—it is also important to remember most of these deals announced in 2022 were actually closed in late 2021, well before the public market got wobbly and folks may have started thinking about investing differently.

What to do?

Not surprisingly, some VCs are recommending founders and entrepreneurs tread carefully during this time.

“Founders just need to be prudent with their capital and make sure they are hitting their numbers right now,” Bloomer said.

However, the venture market has proven robust over the last several years and technology has proven key to our modern lifestyles, so a significant decrease in venture funding even as the public market sways is far from a certainty.

“There may be a bit of a pullback, but also there is a ton of room for disruption in certain sectors and that brings great investment opportunities,” Bloomer added.

Illustration: Dom Guzman

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