Are Private Companies Overvalued?

Sebastien Callebaut -

Private Valuations Seem Disconnected From Public Ones

Most recently IPOed companies have seen their valuation cut in half in the last months. These include well-known companies like SoFi, Marqeta, Robinhood, Affirm and many other so-called FinTechs or SaaS businesses.

  • However, valuations in the private market do not fluctuate with the market's daily ups and downs. Valuations are formed with each new round of funding, which means that many were established when public markets were significantly more enthusiastic about technology companies
  • Stripe and Klarna, two of the most valuable private technology companies, have reached valuations of $95 billion and $46 billion, respectively
  • It is unclear whether these private companies will be able to fetch the same valuation over time in public markets

Stresses Start To Surface

Still, the private market isn't totally protected by the valuation contraction that has happened in the past months. The New York Post reported:

"Investors in Gopuff — a Philly-based delivery service that’s backed by Softbank — were eyeing a valuation of up to $40 billion in January as the company enlisted Goldman Sachs to help prepare for an IPO. But investors have lately been scrambling to unload their stakes at valuations as low as $15 billion — and have still been unable to find buyers, The Post has learned. [...]

One Gorillas investor who’s currently trying to sell a stake at a valuation of $2 billion isn’t getting bites — even though the company raised money at a $3 billion valuation as recently as December, a source said."

Private Equity On The Lookout

While the stock market hasn't been kind to most technology companies in the last months, private equity firms have been able to take some recently IPOed companies off the public markets.

This is the case of Anaplan, a business planning software company headquartered in San Fransisco. The company IPOed in late 2018 and is now back in private hands as Thoma Bravo took it over at a $ 10.7 billion valuation.

  • As most technology companies, the company's valuation grew sharply throughout the pandemic
  • However, it failed to preserve its valuation and fell back to pre-COVID levels

BENCHMARK'S TAKE

  • The contraction in valuations is starting to impact private markets as investors in fast growing startups are looking to offload their stakes as losses pile up and growth wanes
  • In the longer run, venture capital might still be able to continue attracting vast amounts of cash as investors scramble to find promising investment opportunities in an increasingly crowded private equity field
  • Some focussed private equity firms such as Thoma Bravo might still be able to turn the situation to their advantage as they can take over technology companies which have already IPOed and have fallen out of grace with most investors

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Nik Shuliahin on Unsplash.