There is a lot of confusion in the private market right now. On the one hand, venture firms are still announcing new funds every day. They host catered sushi brunches. On the other hand, layoffs are rife and industry titans sound concerned. JPMorgan’s Jamie Dimon sees an economic hurricane ahead. For his part, Elon Musk reportedly told Tesla executives this week that he has a “super bad feeling” about the economy. He’s also laying off 10% of Tesla’s employees, he told them in a brief email this morning.
It’s hard to blame people looking to sell or buy their startup stock for being unsure where to meet on the price, and that’s exactly what’s happening, says aftermarket experts like Forge Global CEO Kelly Rodriques. In fact, Rodriques says, on Forge, a trading platform for private company stocks that went public via a SPAC earlier this year, “the supply of private stocks is currently at an all-time high — by multiples.”
Rodriques calls it “price imbalance”. There is a lot of seller interest, but the spread between seller and buyer expectations is too wide for much trading.”
He’s not the only one seeing this pattern. Justin Fishner-Wolfson says separately the most remarkable thing about the secondary market right now is how flat it is. Fishner-Wolfson co-founded and ran 137 Ventures, a San Francisco-based firm that offers loans to founders, executives, early adopters and other major shareholders of private high-growth technology companies in exchange for an option to convert their debt into equity, and he provides notes that valuations in private markets are “slow to change” because “people are waiting to see what things are actually worth.”
You can hardly blame them, he suggests; the signals all around are haywire. “If you look at the public markets, even very large companies are moving 5 to 10 percentage points a day with no concrete news. This isn’t an earnings call that drives the price, for example.” Given that “people don’t really know what things are worth on any given day,” he says, “most of the time things just slow down in the private markets, while people wait and see if the pricing is something or not [they] could roughly estimate today whether it will get worse from here or not, [or] whether it gets better from here or not.”
Some sellers are forced to rush at prices they may not like. “The only transactions you see are the ones that people absolutely need to make,” says Fishner-Wolfson. This applies to companies; it also applies to individuals, he says. “Companies with strong balance sheets will not raise money in this environment; They will try to put it off [a new round] as long as they can.” He sees the same for founders and executives. “If your business is doing really well, why would you want to take a price that isn’t a great price, or at least a reasonable price, when you can wait a few quarters, see things settle down, and get a better deal later.” ?”
There’s good news for sellers, says Rodriques. For one, Rodriques says he’s seeing signs that sellers are making their expectations “more realistic,” which should bring more buyers — who want the biggest discount possible — to the table.
He also says that although prices appear to be falling almost steadily, venture capital-backed companies that have only recently gone public are still trading at premiums, valued in their most recent private funding rounds. Notably, they’re trading at a premium of about 24% to their pre-IPO valuations, according to Forge.
That’s far less than the fourth quarter, when companies on Forge traded at a 58% premium compared to their last private round, but this cushion keeps buyers and sellers in the market that might otherwise disappear.
For example, Rodriques points to buy-now-pay-later startup Affirm, a company that Forge previously tracked and traded on its platform, which went public through a traditional IPO process early last year. Currently, Affirm’s shares are down 56% from their IPO price, but they’re more than 70% higher than what Affirm’s private markets investors assigned them to during the company’s most recent pre-IPO round, meaning that its private market investors are still very good a lot in the black.
How much that really means is of course a question mark. When asked if he would personally buy Affirm stock at its current price, Rodriques goes on to say that Affirm is a “very desirable company with a significant sustainable gross margin profile and growth rate.”
“You can say, ‘Well, that’s not worth it 28 times [revenue].’ And maybe [the shares] Don’t go back up to 28 times [revenue], maybe they settle in by 20,” he continues. “But people still pay a premium — good market or bad market — for a company that achieves organic growth of 50% to 100% per year and gross margins of 70% to 90%. [range].
Asked again: would he Buy it now or would he wait, Rodriques says he’s not that dissimilar to his own customers. “Am I currently a buyer of Affirm? I am like everyone else. I wait and watch. But I think it’s a great company and I would invest in it. I want to see where the market is moving.”