OWhen it comes to IPO valuations of innovation companies, public markets aren’t buying what late-stage venture capitalists and investment bankers are selling. Nearly a third companies that have gone public through IPOs in the past four years are trading below their previous private valuations as of March 2022. In ARK Invest’s weekly newsletter “ARK Disrupt”, analyst Maximilian Friedrich suggests that this means that “public market investors reject the late-stage and IPO valuations set by venture capitalists and investment bankers.
Citing WeWork as an example, before its failed IPO in late 2019, investment bankers valued the startup at $104 billion, more than double the $46 billion in its private funding round in January 2019. In 2021, WeWork went public through a SPAC at a $9 billion valuation. That valuation has since been halved to $4.5 billion as of March 17, according to Bloomberg.
Since late-stage venture capitalists protect themselves from stock losses with liquidation preferences, employees understood “they will feel the brunt of declines in private markets and declining equity prices.” stock prices on public stock exchanges,” writes Friedrich.
Since the debacle with WeWork, ARK has noticed that over the past year, sky-high valuations of public innovation start-ups with steep valuation compression have hurt the ability of private companies to attract and retain talent. Last week, Jason Warner, managing director of venture capital firm Redpoint Ventures, tweeted that a “really good recruiter friend” at a large executive search firm “can’t place executives or engineers at multi-billion appraisal firms with an ARR disconnected from appraisal”. Warner added: “It’s been a long time coming, but it will now be harder to recruit for fundamental mismatches.” Pauline Yang, partner of Altimeter Capital wrote on Twitter: “Experienced recruits ask what their equity means given sky-high valuations” and “candidates turn down job offers from big companies because they see less upside.”
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