And why Instacart did its fellow unicorns a solid by re-praising
It’s the first of Y Combinator’s two-day Demo Day event, meaning MovieUpdates will spend most of our work hours watching startup demos and tracking how many companies from the batch are in particular industries and regions. The early stage entry-level market is active and – as previously late-stage funds tend to invest earlier – it still awards attractive valuations to emerging technology start-ups.
Late-stage startups don’t get the same enthusiasm, with investor notes and data indicating that from Serie B – and in some cases perhaps sooner – valuations are tightening as investors look to falling public markets as an indication that exit prices will be lower than previously expected. A closed IPO market and antitrust vibes from US and European governments that may restrict M&A in bulk aren’t helping.
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This means that many unicorns looking to provide liquidity to their employees and other shareholders are using services such as Forge, which recently went public, and EquityZen. The Exchange has spoken to EquityZen before, but we wanted to delve deeper into the current dynamics of the startup market at a later stage to understand what it takes to address concerns and close deals for a startup startup. to put it back in the spotlight at a later stage.
So we asked Phil Haslett of EquityZenco-founder and Chief Revenue Officer, to talk about his perspective on the markets.
We’ve learned two important things: First, there’s some sort of trigger, if you will, that could reverse the pessimism about tech company growth rates. And second, Instacart gave other startups a huge solid footing by overhauling the way it prices employee stock compensation through what’s widely considered a reset triggered by a new 409a valuation. (If you don’t know what a 409a valuation is, think of it as an externally determined valuation of the fair market value of private companies.)
Let’s start with what it takes for Lazarus’ market sentiment about tech companies — and therefore tech stocks — and examine the door Instacart just opened for its fellow unicorns.
Restoring market confidence in technology companies
It is difficult to compare the market sentiment of mid-2021 regarding high-growth technology companies with today. The startup and the public markets each have a large number of technology companies with different growth rates, margin profiles and cost bases. One size doesn’t fit all. But that doesn’t mean we can’t sketch each generalities.
While every technology company is different, markets have curtailed the value of technology earnings as other investment opportunities have become more attractive. More simply, the value of growth has declined in the public markets, leading to a multiple compression of revenue at startups that have reached an eight-digit ARR, for example.
Fortunately, the reason for the change in sentiment can also be reversed. Haslett told MovieUpdates that market concerns are driven by “two major macro uncertainties,” which he identified as “geopolitical risk in Europe, plus inflation.” But looking a little further, he gave us a picture of what good news would look like for tech valuations (quotes edited for clarity and length):
What you’re looking for on the horizon is a wave of Top 50 or 100 tech companies that have revenue and forecasts that will get us back, and the right ship. When DocuSign says, “Okay, the worst is behind us,” when Zoom says, “The worst is behind us; we’re back up and running,” [then startups can say]“Oh, thank God, now we know we’re in a better place. Our public compositions are going to look better, let’s get started [hitting] walk the ground.”