Can’t Rise From the Ashes While Denying the Fire
The world is a fundamentally different place than it was in 2001. The digital world has changed more, faster, and more completely since 2001. Thus, we agree that our recent boom, 2010-2015 is very different than previous booms – certainly very different from 1996-2001. So much of our lives, from the mundane to the thrilling has migrated online and into the cloud. There is no doubt that tech and web occupy a larger share of our day, night, economy and future than nearly all would have guessed. Start-up culture, goods, products are everywhere and are woven deep into the fabric of our business and our lives. No business or investment cycle is likely to meaningfully change this in the foreseeable future.
All this said, we are going to see lower multiples and some pressure on pre-IPO tech valuations. We are going to see more of a struggle for more well spaced-out and smaller sized funding rounds. This will be truer for later stage firms and less true for earlier stage firms. This is not to say we are poised to repeat 2001, but we are also not poised for a repeat of 2012-2015. At least this is how the world looks to us these days.
Many folks invest in early stage company in hopes of being a part of transformation and modernization. Of course individuals and institutions want to be well rewarded with future gains from M&A and IPO liquidity events. As firms expand and grow, the most successful start-ups become pre-IPO unicorns and near unicorns. These firms increasingly generate great interest and significant volumes of primary and secondary share sale activity. These later investors are motivated by desires to get exposure to fast growing companies before prices are marked up and quantities severely rationed to major institutional players in an IPO process. Of course in the four-times more likely M&A scenario those who wait for public market access will never get access.
We sketch these bases to illustrate our case about where we see our market now. Public multiples and earnings numbers are likely much, but not all the way, through a downward reset. This will arrive more slowly and unevenly in its impact on our private pre-IPO names. However, it is coming. Pre-IPO investments are about returns from M&A and IPOs. For larger firms, like the unicorns, this means going public or being bought by public companies. Public company and M&A multiples are resetting lower. It is natural and not cataclysmic. It will make our market more attractive and robust when the process ends.
In short the best and most heady days are on pause. The worse days are not coming back.