11 ms·

What Does the Post Crash VC Market Look Like?

132 points by thm 4y ago

draw_down 4y ago
yuan43 4y ago
> There is a LOT of money still sitting on the sidelines waiting to be deployed. And it WILL be deployed, that’s what investors do. Reminds me of the saying: "Venture Capital starts with too many good ideas chasing too little money, and ends with too much money chasing too few good ideas."
- datalopers 4y ago
  Broad markets will crash and LPs will ask for capital back. The overhang will drop without requiring investment.
  - sroussey 4y ago
    This happened in 2002. Not all LP commitments have the same durability. It’s like leasing a building to a first time restaurant owner or a big public company doing restaurants and getting identical rent. One is more durable (and valuable) than the other. But it gets left out of cash flow. Same with counts of dry powder.
  - azlyrics 4y ago
    checkout the citrix bond situation. unable to raise targeted goal through issuing corporate yields. its really scary we are seeing corporate bond yields spiking and liquidity drying up. if a legitimate large corporation is having trouble raising money, its a huge red flag.
    - fny 4y ago
      Citrix in bond trouble? Time to start buying corporate bonds. Edit: Yup, Apollo and Elliott bought in huge. Wow, debt looks super attractive.
      - djbusby 4y ago
        Can you two (@azlyrics, @fny) expand on this - or point to a topical article? When I first saw this @azlyrics comment was dead and I'm wondering what the fuzz is.
        fny 4y ago
        Citrix was struggling to borrow $4Bn for a leveraged buyout, they issued bonds that effectively yield 10% annually. That's a massive return we haven't seen forever in fixed income.
        azlyrics 4y ago
        The curious part is that even with insane returns, they still struggled to get attention from institutional investors who appear to be a mix of cash and short positions.
        Kiro 4y ago
        How do I buy it?
        dmurray 4y ago
        If you have to ask, probably the better approach is to buy a junk bond ETF like any of the ones on [0]. This will give you a more diversified portfolio than just betting on Citrix. [0] https://www.thebalancemoney.com/list-of-junk-bond-etfs-1214720 https://www.thebalancemoney.com/list-of-junk-bond-etfs-12147...
        disgruntledphd2 4y ago
        Yeah and basically nobody wanted it, which implies that things are gonna get worse.
    - snake_doc 4y ago
      It’s definitely a buyout specific problem; deals that were inked before the Fed’s rate increases have pretty unattractive terms compared to the current market conditions. There’s a supply glut of buyout debt at those terms, underwriting banks are the ones holding the bag.
      - azlyrics 4y ago
        the thing is this corporate bond liquidity issue is not new. first alarms were raised in 2019, then they printed money like crazy in 2020, and now they are tightening and we are seeing bond liquidity meltingdown. theres a very real chance that 10% yield will spike further and downgraded
  - collegeburner 4y ago
    i don't think it's that simple. pretty much every asset class posting shitty returns this year, hell even bonds are in a bear market. so institutionals are gonna look at other managers and see a bunch of red and not necessarily stop alt allocations. it's also relevant that you can't just ask for capital back as an LP. it's committed to a fund. you can not commit to another one but the price of much greater returns in alt assets is much lower liquidity.
    - suoduandao2 4y ago
      Surely 'all asset classes' can only drop relative to some exception, where is everyone taking their money? I know we have significant inflation, are people going into cash despite it?
      - dasudasu 4y ago
        Doesn’t take much volume to affect the spot price and in turn affect the value of everyone’s portfolio.
      - collegeburner 4y ago
        Well no. Valuations are based at least in part off discounted future cashflows at a very basic level. If projected cashflows drop enough due to bad economic conditions the value of everything will drop. If you think at a basic level there is less capital to return to shareholders via buybacks or dividends. Also the fed finally stopped propping up valuations with QE, money is leaving the economy (about damn time). FWIW VC/PE/some other private stuff isn't actually down yet at least not on paper. But this is bc they are not marked to market very often at all. The reason activity is still good is bc valuations are way down, like half in a lot of cases.
        suoduandao2 4y ago
        I guess I'm asking "the value of everything will drop as measured by what"?
        4y ago
- vsareto 4y ago
  The saying might just be an observation, but I'm not sure what else people should be saying about VC. VC matches people-with-ideas to money. Have they ever advertised being anything else (while sober)?
  - djbusby 4y ago
    My VC friends use the words Talent when sober but keep repeating (mumbling) Traction and Execution after a few pints. Vino Veritas?
    - waldothedog 4y ago
      I like the combination of ‘pints’ and ‘vino’ here
seibelj 4y ago
So many people working in VC went straight into it after Stanford without ever starting a company, like it’s investment banking or something. Maybe the VC industry will shrink along with the startups, or at least the unhelpful partners.
- greatpostman 4y ago
  Why start a company when you can get rich risk free
- fuzzfactor 4y ago
  Things may trend back to normal and invest more in people who already know how to profit from their activities in addition to having a promising dream. The difference in risk is orders of magnitude. These investments can not have terms that are as one-sided as some have specialized in, plus it becomes less realistic for an entrepreneur who can properly leverage $10 million to be served by capitalists who have to borrow $10 million to do it. The truly success-bound entrepreneur will have a much less limited upside by leveraging the $10 million from someone who is actually worth lots more than $10 million instead. I expect the herd will be thinned considerably. Kind of like the difference between somebody visiting Miami, renting a Lamborghini which is almost out-of-their reach, then being seen having their car parked at South Beach by a valet. As compared to a well-retired resident owning half-a-dozen European performance cars in their garage. They only drive one at at time anyway, just like everybody else. Wasn't it Buffet that said when the tide goes out real quick you see who wasn't wearing anything covering their bottom?
tempsy 4y ago
You have hedge funds like Tiger Global who are now leading/investing in early stage rounds. Anyone with capital can now play “VC”.
- greesil 4y ago
  Ah yes the "dumb money"
- SV_BubbleTime 4y ago
  I like that better than anyone who can take endless free money loans with little concern because of zero or negative interest rates can play “VC”. I can easily name a dozen companies and technologies that massively changed the world from 2000-2010 (not saying for better, but undeniable), what have we really developed that didn’t exist in 2010-2020 in this era of Free Money and “Unlimited Potential”? Hypothetical question. From my view, I’ve seen VCs come in and use capitol to build up people with good intentions or ideas, and immediately get them absorbed into the giants who are also throwing away endless free money even if their business model is awful. I’m not looking forward to hyper inflation. But I am looking forward to a slower tech market that actually has to provide something useful in order to stand out.
- julianeon 4y ago
  That's the natural state of affairs. VC just means venture capital. It's a generic thing. Any capitalist - in our society, anyone - can supply venture capital; they just have to have enough. If anything is unnatural, it's thinking of VC as something gatekept and for the elite, as opposed to a generic function which can be fulfilled by millions.
ohashi 4y ago
The chart of how much money is still left waiting to be invested in crazy. Looks roughly that 2021 and 2022 have as much money waiting to be invested as 2012 did total. Each year has added that much. So valuations need to come down dramatically is the argument, but the amount of capital trying to get spent is going up astronomically. How does that mismatch resolve in an actual marketplace? Do we assume there are suddenly 4x as many good investments to make from 10 years?
- eastbound 4y ago
  Even valuations of 2-4 years ago included inflation: It’s worth putting 10x the yearly revenue if it’s probable that every company will increase prices by 50% in 3 years.
newaccount2021 4y ago
It doesn't look like YC (CRUD apps, IT-related, SV-related) It looks like battery tech, energy tech, commercial space, housing 2.0, water tech SV is done, but had an awesome run
- suoduandao2 4y ago
  What sort of water tech do you predict we'll see, cheaper desalination? I thought sanitation was a pretty mature technology.
  - harambae 4y ago
    Not GP, but atmospheric water generators that are cheaper and more efficient.
  - newaccount2021 4y ago
    Anything that lets a city run on much less water than it currently does...for example, better leak detection tech
    - suoduandao2 4y ago
      I see. BTW, it looks like whatever caused your old account to be deleted carried over to this one, I'm only seeing your comments because I have my showdead on.
time_to_smile 4y ago
"Post" crash? If you think what we've seen is the crash you have no idea what's coming.
- syntaxing 4y ago
  Genuinely curious what you think crash means. 2021 definitely inflated our stock market way too much but we're definitely within reasonable corrected zone IMO. What should we expect as a crash? Even with the Great recession, we're looking at a 27% drawdown so we're about halfway there?
  - phpthrowaway99 4y ago
    In the previous crash, even viable companies that were growing and made sense were brought close to crisis. Currently Nikola motors is worth a few billion. In a crash they'd be dead.
    - syntaxing 4y ago
      That just means the market is illogical though, does not mean a crash must mean all of sudden all investors are logical? As quoted by the famous Keynes, “The market can remain irrational longer than you can remain solvent.” It’s like meme stocks like AMC/APE and GME. Does any of it make sense to me? Nope. Are people making and losing a ton of money? Sure. Is it a good indication of US economy health or dare I say, US stock market health? Really hard to say.
      - phpthrowaway99 4y ago
        I guess I would say that a crash is when the market shifts to being illogical towards the negative side, where even seemingly good companies are struggling. I wouldn't call it a crash if there is positive irrationality.
        enos_feedler 4y ago
        Nobody will want to even mention metaverse if there is a crash
encryptluks2 4y ago
Probably less gullible than before
version_five 4y ago
The recent (since the 80s) history of financial ups and downs has been - savings and loan - junk bond - dot com / financial engineering (Enron) - mortgage backed securities - VC Basically, money chases outsized returns, some new thing emerges to satisfy the demand, it becomes effectively a ponzi / house of cards, it falls apart, we shift to the next thing. It's impossible to predict when and what will happen of course, it will be interesting to read retrospectively about what's happening with VC as we have with the rest: Barbarians at the gate / Den of Thieves Smartest Guys in the Room The Big Short (Bad Blood is partway there but Theranos wasnt a turning point like the others)
- Apocryphon 4y ago
  Margin Call takes place in 2008, but its depiction of how the investors respond to a crisis is evergreen.
  - devoutsalsa 4y ago
    I love that movie. It’s my favorite financial drama. I have sympathy & contempt for nearly everyone in that movie.
    - hef19898 4y ago
      Honestly, those traders kept around until the dirty work was done got the best deal. Million dollar bonus for a couple of days of work and a clear way out, I would have taken that deal in a second. Side note: Regardless of the borderline sociopathic ruthlessbes of Jeremy Irons character, I'd propably work for him as well. At least for a while. Heck, he was flown to a crisis meeting, listened to the people on the ground, understood the problem, met a decision and implemented a plan. All that in one night! Most senior managers I know would have needed a month to understand the why the underlying mathematical model had any significance.
      - nickpinkston 4y ago
        Agree 100%! Having been CEO through similar crisis situations, I really related to his character and situation in that movie. People who criticize his actions don't understand that hard decisions are always between two shitty options. There wasn't a warm-n--fuzzy way to get out of there. You can criticize their risk management strategy, and honestly we should more criticize the USG / SEC for allowing such risk to build up.
kypro 4y ago
Hm. Thing is as profitable big tech companies get larger and the TAM of tech sectors grow it makes some sense that early stage valuations would increase. This is both because there is more opportunity for a company to scale, but also because when you have several trillion dollar tech companies out there happy to acquire innovative tech companies then multi billion dollar exits become much more feasible. Companies like Microsoft are making close to $100b a year today and they have to put that money to work somewhere. Google's digital ad business was big relative to the size of the internet in 2010, but it was absolutely tiny in comparison to today. And it's not just the size of the digital ads market, but everything - digital audio/video content, ecommerce, hosting, social, productivity tools, etc. All companies operating in tech sectors today have far more potential than they did in 2010 if they execute well. So no, in my opinion 20x EV/sales isn't that crazy for a good SaaS company. Profitable tech companies at scale with high gross margins typically trade at 5-10x sales because if you can achieve operating margins of say 30-40% (which isn't uncommon for SaaS companies) then you're basically trading at a 20-30x projected earnings multiple. Which yes is high compared to the historical market average (15-20), but if you're also growing at 50% YoY and have steady recurring revenue streams then that's not a hard multiple to grow into at all. Perhaps what was stupid about 2020-2021 valuations was that a lot of investors assumed that the extremely low interest rates and accommodative monetary policy was going to persist. Some companies did trade at valuations very hard to justify without the low interest rates and pandemic-era tech growth rates (Zoom, Shopify, Peloton, etc). I'm sharing because I seem to have a fairly controversial take on this and I don't know why. It seems to me everyone has just forgotten that companies like FB traded at sales multiples in the mid-teens for years after they went public and they haven't been bad investment at all. It depends on the company obviously, but a company growing at 50% YoY with 80% gross margins would be ridiculously cheap at a valuation any less than 10x sales based conservative earning projections. In my opinion most of the reason for this crash is just macro headwinds. Tech companies saw a huge growth boom in 2020-2021 which has now reversed. Interest rate risks have also been dragging on public valuations and this caused a drop in sentiment for tech investments generally. My guess is that in a couple of years once we're through this period tech valuations will trend back to 2018-2019 levels. But I guess we'll see. Finally this current crash is hardly isolated to tech. Companies like Fedex, Starbucks and Nike have all seen ~50% valuation declines from their peaks this year.
alasdair_ 4y ago
Summary: people who buy things write article about how those things should be cheaper.
- beambot 4y ago
  More like: Public multiples are down, and that will percolate down into private markets too -- just delayed.

132 points by thm 4y ago

> There is a LOT of money still sitting on the sidelines waiting to be deployed. And it WILL be deployed, that’s what investors do. Reminds me of the saying: "Venture Capital starts with too many good ideas chasing too little money, and ends with too much money chasing too few good ideas."

datalopers 4y ago
Broad markets will crash and LPs will ask for capital back. The overhang will drop without requiring investment.
- sroussey 4y ago
  This happened in 2002. Not all LP commitments have the same durability. It’s like leasing a building to a first time restaurant owner or a big public company doing restaurants and getting identical rent. One is more durable (and valuable) than the other. But it gets left out of cash flow. Same with counts of dry powder.
- azlyrics 4y ago
  checkout the citrix bond situation. unable to raise targeted goal through issuing corporate yields. its really scary we are seeing corporate bond yields spiking and liquidity drying up. if a legitimate large corporation is having trouble raising money, its a huge red flag.
  - fny 4y ago
    Citrix in bond trouble? Time to start buying corporate bonds. Edit: Yup, Apollo and Elliott bought in huge. Wow, debt looks super attractive.
    - djbusby 4y ago
      Can you two (@azlyrics, @fny) expand on this - or point to a topical article? When I first saw this @azlyrics comment was dead and I'm wondering what the fuzz is.
      - fny 4y ago
        Citrix was struggling to borrow $4Bn for a leveraged buyout, they issued bonds that effectively yield 10% annually. That's a massive return we haven't seen forever in fixed income.
        azlyrics 4y ago
        The curious part is that even with insane returns, they still struggled to get attention from institutional investors who appear to be a mix of cash and short positions.
        Kiro 4y ago
        How do I buy it?
        dmurray 4y ago
        If you have to ask, probably the better approach is to buy a junk bond ETF like any of the ones on [0]. This will give you a more diversified portfolio than just betting on Citrix. [0] https://www.thebalancemoney.com/list-of-junk-bond-etfs-1214720 https://www.thebalancemoney.com/list-of-junk-bond-etfs-12147...
        disgruntledphd2 4y ago
        Yeah and basically nobody wanted it, which implies that things are gonna get worse.
  - snake_doc 4y ago
    It’s definitely a buyout specific problem; deals that were inked before the Fed’s rate increases have pretty unattractive terms compared to the current market conditions. There’s a supply glut of buyout debt at those terms, underwriting banks are the ones holding the bag.
    - azlyrics 4y ago
      the thing is this corporate bond liquidity issue is not new. first alarms were raised in 2019, then they printed money like crazy in 2020, and now they are tightening and we are seeing bond liquidity meltingdown. theres a very real chance that 10% yield will spike further and downgraded
- collegeburner 4y ago
  i don't think it's that simple. pretty much every asset class posting shitty returns this year, hell even bonds are in a bear market. so institutionals are gonna look at other managers and see a bunch of red and not necessarily stop alt allocations. it's also relevant that you can't just ask for capital back as an LP. it's committed to a fund. you can not commit to another one but the price of much greater returns in alt assets is much lower liquidity.
  - suoduandao2 4y ago
    Surely 'all asset classes' can only drop relative to some exception, where is everyone taking their money? I know we have significant inflation, are people going into cash despite it?
    - dasudasu 4y ago
      Doesn’t take much volume to affect the spot price and in turn affect the value of everyone’s portfolio.
    - collegeburner 4y ago
      Well no. Valuations are based at least in part off discounted future cashflows at a very basic level. If projected cashflows drop enough due to bad economic conditions the value of everything will drop. If you think at a basic level there is less capital to return to shareholders via buybacks or dividends. Also the fed finally stopped propping up valuations with QE, money is leaving the economy (about damn time). FWIW VC/PE/some other private stuff isn't actually down yet at least not on paper. But this is bc they are not marked to market very often at all. The reason activity is still good is bc valuations are way down, like half in a lot of cases.
      - suoduandao2 4y ago
        I guess I'm asking "the value of everything will drop as measured by what"?
        4y ago
vsareto 4y ago
The saying might just be an observation, but I'm not sure what else people should be saying about VC. VC matches people-with-ideas to money. Have they ever advertised being anything else (while sober)?
- djbusby 4y ago
  My VC friends use the words Talent when sober but keep repeating (mumbling) Traction and Execution after a few pints. Vino Veritas?
  - waldothedog 4y ago
    I like the combination of ‘pints’ and ‘vino’ here

seibelj 4y ago

So many people working in VC went straight into it after Stanford without ever starting a company, like it’s investment banking or something. Maybe the VC industry will shrink along with the startups, or at least the unhelpful partners.

greatpostman 4y ago
Why start a company when you can get rich risk free
fuzzfactor 4y ago
Things may trend back to normal and invest more in people who already know how to profit from their activities in addition to having a promising dream. The difference in risk is orders of magnitude. These investments can not have terms that are as one-sided as some have specialized in, plus it becomes less realistic for an entrepreneur who can properly leverage $10 million to be served by capitalists who have to borrow $10 million to do it. The truly success-bound entrepreneur will have a much less limited upside by leveraging the $10 million from someone who is actually worth lots more than $10 million instead. I expect the herd will be thinned considerably. Kind of like the difference between somebody visiting Miami, renting a Lamborghini which is almost out-of-their reach, then being seen having their car parked at South Beach by a valet. As compared to a well-retired resident owning half-a-dozen European performance cars in their garage. They only drive one at at time anyway, just like everybody else. Wasn't it Buffet that said when the tide goes out real quick you see who wasn't wearing anything covering their bottom?

tempsy 4y ago

You have hedge funds like Tiger Global who are now leading/investing in early stage rounds. Anyone with capital can now play “VC”.

greesil 4y ago
Ah yes the "dumb money"
SV_BubbleTime 4y ago
I like that better than anyone who can take endless free money loans with little concern because of zero or negative interest rates can play “VC”. I can easily name a dozen companies and technologies that massively changed the world from 2000-2010 (not saying for better, but undeniable), what have we really developed that didn’t exist in 2010-2020 in this era of Free Money and “Unlimited Potential”? Hypothetical question. From my view, I’ve seen VCs come in and use capitol to build up people with good intentions or ideas, and immediately get them absorbed into the giants who are also throwing away endless free money even if their business model is awful. I’m not looking forward to hyper inflation. But I am looking forward to a slower tech market that actually has to provide something useful in order to stand out.
julianeon 4y ago
That's the natural state of affairs. VC just means venture capital. It's a generic thing. Any capitalist - in our society, anyone - can supply venture capital; they just have to have enough. If anything is unnatural, it's thinking of VC as something gatekept and for the elite, as opposed to a generic function which can be fulfilled by millions.

ohashi 4y ago

The chart of how much money is still left waiting to be invested in crazy. Looks roughly that 2021 and 2022 have as much money waiting to be invested as 2012 did total. Each year has added that much. So valuations need to come down dramatically is the argument, but the amount of capital trying to get spent is going up astronomically. How does that mismatch resolve in an actual marketplace? Do we assume there are suddenly 4x as many good investments to make from 10 years?

eastbound 4y ago
Even valuations of 2-4 years ago included inflation: It’s worth putting 10x the yearly revenue if it’s probable that every company will increase prices by 50% in 3 years.

newaccount2021 4y ago

It doesn't look like YC (CRUD apps, IT-related, SV-related) It looks like battery tech, energy tech, commercial space, housing 2.0, water tech SV is done, but had an awesome run

suoduandao2 4y ago
What sort of water tech do you predict we'll see, cheaper desalination? I thought sanitation was a pretty mature technology.
- harambae 4y ago
  Not GP, but atmospheric water generators that are cheaper and more efficient.
- newaccount2021 4y ago
  Anything that lets a city run on much less water than it currently does...for example, better leak detection tech
  - suoduandao2 4y ago
    I see. BTW, it looks like whatever caused your old account to be deleted carried over to this one, I'm only seeing your comments because I have my showdead on.

time_to_smile 4y ago

"Post" crash? If you think what we've seen is the crash you have no idea what's coming.

syntaxing 4y ago
Genuinely curious what you think crash means. 2021 definitely inflated our stock market way too much but we're definitely within reasonable corrected zone IMO. What should we expect as a crash? Even with the Great recession, we're looking at a 27% drawdown so we're about halfway there?
- phpthrowaway99 4y ago
  In the previous crash, even viable companies that were growing and made sense were brought close to crisis. Currently Nikola motors is worth a few billion. In a crash they'd be dead.
  - syntaxing 4y ago
    That just means the market is illogical though, does not mean a crash must mean all of sudden all investors are logical? As quoted by the famous Keynes, “The market can remain irrational longer than you can remain solvent.” It’s like meme stocks like AMC/APE and GME. Does any of it make sense to me? Nope. Are people making and losing a ton of money? Sure. Is it a good indication of US economy health or dare I say, US stock market health? Really hard to say.
    - phpthrowaway99 4y ago
      I guess I would say that a crash is when the market shifts to being illogical towards the negative side, where even seemingly good companies are struggling. I wouldn't call it a crash if there is positive irrationality.
      - enos_feedler 4y ago
        Nobody will want to even mention metaverse if there is a crash

encryptluks2 4y ago

Probably less gullible than before

version_five 4y ago

The recent (since the 80s) history of financial ups and downs has been - savings and loan - junk bond - dot com / financial engineering (Enron) - mortgage backed securities - VC Basically, money chases outsized returns, some new thing emerges to satisfy the demand, it becomes effectively a ponzi / house of cards, it falls apart, we shift to the next thing. It's impossible to predict when and what will happen of course, it will be interesting to read retrospectively about what's happening with VC as we have with the rest: Barbarians at the gate / Den of Thieves Smartest Guys in the Room The Big Short (Bad Blood is partway there but Theranos wasnt a turning point like the others)

Apocryphon 4y ago
Margin Call takes place in 2008, but its depiction of how the investors respond to a crisis is evergreen.
- devoutsalsa 4y ago
  I love that movie. It’s my favorite financial drama. I have sympathy & contempt for nearly everyone in that movie.
  - hef19898 4y ago
    Honestly, those traders kept around until the dirty work was done got the best deal. Million dollar bonus for a couple of days of work and a clear way out, I would have taken that deal in a second. Side note: Regardless of the borderline sociopathic ruthlessbes of Jeremy Irons character, I'd propably work for him as well. At least for a while. Heck, he was flown to a crisis meeting, listened to the people on the ground, understood the problem, met a decision and implemented a plan. All that in one night! Most senior managers I know would have needed a month to understand the why the underlying mathematical model had any significance.
    - nickpinkston 4y ago
      Agree 100%! Having been CEO through similar crisis situations, I really related to his character and situation in that movie. People who criticize his actions don't understand that hard decisions are always between two shitty options. There wasn't a warm-n--fuzzy way to get out of there. You can criticize their risk management strategy, and honestly we should more criticize the USG / SEC for allowing such risk to build up.

kypro 4y ago

Hm. Thing is as profitable big tech companies get larger and the TAM of tech sectors grow it makes some sense that early stage valuations would increase. This is both because there is more opportunity for a company to scale, but also because when you have several trillion dollar tech companies out there happy to acquire innovative tech companies then multi billion dollar exits become much more feasible. Companies like Microsoft are making close to $100b a year today and they have to put that money to work somewhere. Google's digital ad business was big relative to the size of the internet in 2010, but it was absolutely tiny in comparison to today. And it's not just the size of the digital ads market, but everything - digital audio/video content, ecommerce, hosting, social, productivity tools, etc. All companies operating in tech sectors today have far more potential than they did in 2010 if they execute well. So no, in my opinion 20x EV/sales isn't that crazy for a good SaaS company. Profitable tech companies at scale with high gross margins typically trade at 5-10x sales because if you can achieve operating margins of say 30-40% (which isn't uncommon for SaaS companies) then you're basically trading at a 20-30x projected earnings multiple. Which yes is high compared to the historical market average (15-20), but if you're also growing at 50% YoY and have steady recurring revenue streams then that's not a hard multiple to grow into at all. Perhaps what was stupid about 2020-2021 valuations was that a lot of investors assumed that the extremely low interest rates and accommodative monetary policy was going to persist. Some companies did trade at valuations very hard to justify without the low interest rates and pandemic-era tech growth rates (Zoom, Shopify, Peloton, etc). I'm sharing because I seem to have a fairly controversial take on this and I don't know why. It seems to me everyone has just forgotten that companies like FB traded at sales multiples in the mid-teens for years after they went public and they haven't been bad investment at all. It depends on the company obviously, but a company growing at 50% YoY with 80% gross margins would be ridiculously cheap at a valuation any less than 10x sales based conservative earning projections. In my opinion most of the reason for this crash is just macro headwinds. Tech companies saw a huge growth boom in 2020-2021 which has now reversed. Interest rate risks have also been dragging on public valuations and this caused a drop in sentiment for tech investments generally. My guess is that in a couple of years once we're through this period tech valuations will trend back to 2018-2019 levels. But I guess we'll see. Finally this current crash is hardly isolated to tech. Companies like Fedex, Starbucks and Nike have all seen ~50% valuation declines from their peaks this year.

alasdair_ 4y ago

Summary: people who buy things write article about how those things should be cheaper.

beambot 4y ago
More like: Public multiples are down, and that will percolate down into private markets too -- just delayed.