There is a lot of confusion in the private market right now. On the one hand, venture companies are still announcing new funds on a daily basis. They host catered sushi brunches. On the other hand, there have been many layoffs and the industry titans sound concerned. JPMorgan’s Jamie Dimon sees an economic hurricane ahead. For his part, Elon Musk is said to have told Tesla executives this week that he has a “super bad feeling” about the economy. He’s also firing 10% of Tesla’s salaried employees, he told them in a short email this morning.
It’s hard to blame people who want to sell their startup shares, or those who want to buy them, for not being sure where to meet by price, and that’s exactly what’s happening right now, say secondary market experts like CEO Kelly Rodriques of Forge Global. In fact, Rodriques says that on Forge, a trading platform for shares of private companies that went public through a SPAC earlier this year, “the supply of private stocks right now is higher than at any time in history — by many.”
Rodriques calls it “price imbalance. There is a lot of interest from sellers, but the difference between the expectations of the seller and the buyer is too great for much trading to take place. †
He is not alone in seeing this pattern. Justin Fishner-Wolfson separately says that the most remarkable thing about the secondary market right now is how stagnant it is. Fishner-Wolfson co-founded and oversees 137 Ventures, a San Francisco-based company that provides loans to founders, executives, early employees and other major shareholders of privately-held, high-growth technology companies in exchange for the option to convert their debt into stocks, noting that private market valuations are “moving slowly” because “people are waiting to see what things are really worth.”
You can hardly blame them, he suggests; the signals all around seem confused. “If you look at the public markets, you even have very large companies moving 5 to 10 percentage points per day, with no specific news. For example, this isn’t a profit call that drives up the price.” Given that “people don’t really know what things are worth on any given day,” he says, “things usually just slow down in the private markets while people wait to see whether pricing is a thing or not [they] could guess a little bit today whether it gets worse from here or not, [or] if it gets better from here.”
Some sellers plow forward at prices they may not like out of necessity. “The only transactions you see are the ones that people desperately need,” says Fishner-Wolfson. It applies to companies; it also applies to individuals, he says. “Companies with strong balance sheets are not going to raise money in this environment; they are going to try to postpone [a new round] as long as they can.” He sees the same with founders and directors. “If your business is doing really well, why would you want a price that isn’t a great price, or at least a reasonable price, when you can wait a few quarters, see how it plays out and get a better deal later? †
There is good news for sellers, says Rodriques. For starters, Rodriques says he sees signs that sellers are becoming “more realistic” about their expectations, which should bring more buyers — who want the biggest discount possible — to the table.
He also says that while prices seem to be falling almost evenly, venture-backed companies that have recently gone public still trade at premiums up to where they were valued in their latest private financing rounds. Specifically, according to Forge, they trade at a premium of around 24% to their pre-IPO valuations.
That’s much lower than in the fourth quarter, when companies traded on Forge at a 58% premium over their last private round, but that cushion keeps buyers and sellers in the market who might otherwise disappear.
For example, Rodriques points to the buy-now-pay-later startup Affirm, a company that Forge had previously tracked and traded on its platform and that went public through a traditional IPO process early last year. Currently, Affirm’s shares are down 56% from their IPO price, but they are up more than 70% from the value Affirm’s private market investors assigned them during the outfit’s latest, pre-IPO round, meaning that the private market investors are still very much in the black.
How much that really means is, of course, a question mark. When asked whether he himself would buy Affirm’s stock at the current price, Rodriques elaborates on Affirm as “highly sought-after companies with a significant sustainable gross margin profile and a growth rate.”
“You can say, ‘Well, it’s not worth 28 times’ [revenue]† And maybe [the shares] don’t go back until 28 times [revenue]maybe they settle at 20,” he continues. “But people are still going to pay premiums — good market or bad market — for a company that has organic growth of 50 to 100% per year and gross margins in the 70 to 90 percent [range]†
Asked again: would he buy it now or would he wait, Rodriques says he’s not that different from his own customers. “Am I an Affirm buyer now? I’m like everyone. I wait and watch. But I think it’s a great company, and I’d invest in it. I want to see where the market shakes out.”
This post Lots of sellers, fewer buyers, in startup stock markets – TechCrunch was original published at “https://techcrunch.com/2022/06/04/lots-of-sellers-fewer-buyers-in-markets-for-startup-shares/”