Adobe’s record-breaking $20bn purchase of design software company Figma is the biggest acquisition of a venture capital-backed US company in history. Profit-less, fast-growing, start-up deals agreed at high-altitude revenue multiples are common in the tech sector. What is unusual is that this one comes in the wake of a sweeping downgrade in tech stock valuations.
The tech-heavy Nasdaq index is down 29 per cent from a record high in November. Yet the reset in valuations has not fully fed through to the private sector. The most valuable listed tech companies all trade below last year’s highs. Yet some private companies are negotiating higher valuations. Elon Musk’s rocket company SpaceX, for example, raised money at a $127bn valuation in May, up from $100bn last year. VCs have put millions of dollars behind ousted WeWork co-founder Adam Neumann’s latest venture.
Venture funds are sitting on billions of dollars of funds. There is appetite for disruptive technology. Companies that have reached late-stage funding rounds in particular are able to negotiate follow-up deals.
But there are also signs of change. Over 580 VC-backed private companies hit billion-dollar valuations for the first time last year, making them unicorns. This year the figure is 265, according to research firm PitchBook.
San Francisco-based Forge Global, a private marketplace where investors can buy and sell shares in private companies, says the average price of companies trading on the platform last month was 29 per cent below the last funding round. Forge’s own share price has fallen from $32 in May to less than $3.
Private sector valuations are driven by expected investor exits. With the initial public offering market dry, these should fall. High start-up valuations may simply be out of date. To avoid facing a lower valuation, many start-ups are opting not to raise funds. Down rounds are stigmatised for start-ups that expect to only see their value rise. They dilute existing shareholders. Swedish payments company Klarna had to accept an 85 per cent drop in its valuation in order to raise capital. Figma is not an indication of a healthy private market, it is the exception.