VCs Face Dilemma Due To Persistence Of Market Slump

Swedish buy now pay later (BNPL) lender Klarna stood at a valuation of $45.6 billion last year in the summer, but there has been a massive change since then. This possibly explains why and to a large extent in which the valuations of private companies could go downhill, at a time when the interest rates are high. 

Klarna, which is recognized as the most valuable private firm all across Europe has been raising a new round of funding, this time at a valuation of $6.5 billion, which is actually a drop of more than 85%.

The buy now pay later companies are the ones that have been the most affected during this time. The market situations also indicate that those startups, which were once great, including the late-stage ones, are likely to have a rough time raising money at the valuations they used to get previously. 

VCs share that in the current market, valuations are just “stale” and “inconsistent”. This, of course, gets the VCs to wonder if they should do anything about it. They can perhaps begin by analyzing the valuations of their portfolio companies at the present moment. 

Most firms in the US require VCs to review their valuations every quarter – this is popularly known as market-to-market, however, the process differs from firm to firm. In most cases, VCs value startups depending on the most recent financing round. The other way is to stick to the valuation at the last price which was being paid by the VC firm, and lastly, there are some VC organizations that prefer choosing to mark down their assets, hoping that something in the market could change. 

In this scenario and depending on the current situation, it is likely that all VC firms might stick opt for the last approach. Most VCs will perhaps be open to write down later-stage startups as their revenue multiples can now be compared to equivalents that are publicly traded. And of course, the revenues of Series A and seed startups are too meagre at this point in time. 

This also explains why various seed and Series A deals have been valuing startups at 50% less than they were being valued last year. 

Experts and market observers hold the view that it is now that companies must keep up the momentum, as it is unlikely that the economic conditions should return, as now private companies can still be worth as much as they were in 2021. 

They also share that as a Venture Capitalist (VC), they should not shy away from marking down the values of startups. Sometimes, it is the lower valuations that help in driving more capital into a VC firm. It is not too difficult to believe that fluctuations in the market are quite a common affair, and there have been many a times when the markets have been shaky, however in every challenge lies an opportunity, and for sure the VC firms are smart enough to identify that.