There are a number of high-flying startups that are being brought down to earth due to the recent carnage in global equity markets and lackluster demand for new listings. They need to raise funds at a substantial discount to their sky-high valuations.
As private investors look at funding startups, many of which could be years away from turning a profit, easy money from venture capital dealmaking is fast evaporating in an inflation-induced high interest rate environment.
In the venture capital firms, Stripe, Swedish buy-now-pay-later firm Klarna and delivery startup Instacart have seen their valuations drop by a peg or two this year.
In the United States alone, 81 U.S. companies had to take a hair cut to their valuation, according to data from PitchBook.
Companies that are looking for early-stage funding or seed money are seeing their valuations questioned.
Without an open IPO market, and a much lower late-stage capital availability now than during the past year, this opens up the possibility of these companies taking down rounds, said Kyle Stanford, senior venture capital analyst at PitchBook.
After a stellar run marked by record multi-billion dollar listings, the U.S.IPO market has slowed, with only eight companies managing successful floatations this year, which has lead to a 13 year low, according to reports from PitchBook and the National Venture Capital Association NVCA.
Instacart has cut its valuation by 40 per cent, due to market turbulence due to red-hot inflation and fears of a looming recession.
A drop of 67 per cent and 28 per cent in their valuations has been reported by BlockFi and payments giant Stripe.
In July, Klarna raised capital in a down round that cut its valuation by over 80 per cent to $6.7 billion, a far cry from the $46 billion price tag the fintech attracted last year.
It will be very difficult for startups to maintain their high-valuations in the current market, and a down round may be better to level-set with founders and investors the reality of the situation, said Miguel Fernandez, co-founder and CEO of Capchase, a New York-based investor.
Even if the IPO market is stabilising in 2023, startups, especially those that are struggling to break even or are known for massive cash burn, may have to face tough investor scrutiny on profits and valuations.
Matthew Kennedy, senior strategist at Renaissance Capital said, "We expect to see a wave of IPO down rounds when they come to market."