Despite the jump in funding, the sell-off in the market irked investors

Major investors have warned in recent weeks about the widening gap between private and public market valuations. Among the doomed are the partners of the world’s most powerful tech investment firms, including Founders Fund, Sequoia Capital and SoftBank Group Corp.

Technology companies that flourished during the pandemic, including DoorDash Inc., Etsy Inc. and Zoom Video Communications Inc., have declined more than 30% since November. For venture capitalists, it is forcing them to reevaluate how eagerly they should pursue deals and at what valuations they are comfortably paying.

“The market has been hot for a while, so I think the adjustment is healthy,” said Amy Wu, head of the cryptocurrency investment arm at FTX. “Private market valuation has not yet adjusted.”

Rising interest rates, inflation and the reopening of economies from Covid-19 restrictions have put a damper on technology stocks as stimulus measures helped send them. Venture capital deals have grown rapidly over the past two years, reaching a record $621 billion globally last year, according to research firm CB Insights.

Major stock indices, including the tech-heavy Nasdaq, rose on Monday. They are well below last year’s highs and are facing the prospect of further improvement.

Even before the record-setting year ended, some VCs were issuing warnings. More began to take notice last week, when Rajiv Mishra, chief executive officer of SoftBank’s Vision Fund, declared private markets “overvalued.” According to research by Crunchbase, SoftBank was the largest major investor in startup deals last year.

Shailendra Singh, managing director of Sequoia Capital in India, said he is “looking forward to the much-needed improvement in the startup funding environment.” Keith Rabois, a general partner at Peter Thiel’s Founders Fund, wrote on Twitter on Monday: “There are times when panic is the appropriate response.”

According to Sarah Guo, a partner at Greylock, there’s a dangerous byproduct: investors investing in startup deals. At the other end of the market, investors in some venture funds have recently reduced their financial commitments over concerns about the rapid pace of deals and high valuations, said Ryan Ness, a managing partner at NextPlay Capital, which runs the venture fund. Invests more directly in startups. Guo and Ness did not identify the investors.

It will take time for the improvement to manifest itself on a market-wide scale. VCs and private equity firms are sitting on piles of cash earmarked for startups, and competition for deals remains high.

Glenn Solomon, a partner at GGV Capital, said entrepreneurs should stockpile cash and reduce wasted resources – advice backed by Benchmark’s Bill Gurley. Solomon used a chilling phrase in his proclamation: RIP Good Times.

This was the name of a 2008 memo written by Sequoia Capital that correctly predicted a startup winter following a global economic crisis. Sequoia issued a similar warning at the start of the coronavirus pandemic in 2020 that was true but only for a short time. The cold of the market unexpectedly gave way to one of the biggest years on record for tech stocks, startups, and Sequoia.

It is not clear where the current slowdown will go. “Venture capitalists have not yet adjusted the valuations offered,” said Jean Tardy-Joubert, a partner at Highland Europe. “It’s taking longer for investors to build up a conviction: It’s becoming a buyer’s market.”

A look at day one of this month’s deals, just in Europe, offers an example of how crazy startup deals have become. On January 11, Bolt, an Estonia-based Uber rival, said it raised 628 million euros ($709 million) from investors including Sequoia Capital, and fintech Konto became France’s most valuable startup, having raised $5 billion in a $552 million round. rated. , only to be beaten by electronics reseller Back Market later that day, reaching a valuation of $5.7 billion.

They were all topped the next day by London-based payments company Checkout.com, which raised $1 billion at a valuation of $40 billion.

One possible indication of investor appetite can be found in the trading of private stocks in the secondary markets. Greg Martin, whose firm Rainmaker Securities works on late-stage secondary transactions, said he declined to be named once in a couple of shares of hot startups. However, the bidding is not real-time and could lag for several weeks, he said.

One possible scenario is that deals will slow down before valuations fall, said Dan Sheinman, an angel investor who backed Zoom in its early days. Andreas Wieskam, partner at Sapphire Ventures, agrees. “There’s probably going to be some sort of slowdown in momentum, I would imagine overall, but people will still want to invest.”

Wieskam said he believes it will take about half a year for the public market turmoil to fully impact venture funding. “There’s still pressure to put a lot of money into the best deals,” he said.

This story has been published without modification in text from a wire agency feed. Only the title has been changed.