Will Stock Market Swings Impact Startup Valuations?

Stocks traded mostly lower on Friday after two days of record gains, capping off one of the most volatile weeks in stock market history. With concerns over China shaking investor sentiment, some were wondering if prolonged market uncertainty would close the IPO window. 

And late-stage startups, like Uber and Snapchat, which are valued based on their predicted values as public companies, could also be impacted by this turmoil. Tech stocks, which have struggled lately, play a role in how venture capitalists and other investors value the next generation of tech companies.

"Valuations will be tested and not everyone will pass,” said Max Wolff, chief economist at Manhattan Venture Partners. “When it is all said and done we will see some unicorns lose their horns and their magic,” he said, referring to the billion-dollar startups.

With the IPO market rebounding to record levels since the dot com boom, venture capital funding has followed suit.  The health of the stock market is seen as a bellwether, because venture capitalists are expected to provide returns on their investments through “exits,” namely IPOs or M&A.

But some are suggesting that it is only the startups nearing the “finish line” that should be concerned.

“A continued correction in the public markets will have a significant effect on later-stage company valuations, but the impact on early-stage companies will be far less dramatic,” said Ryan Feit, CEO at SeedInvest.

Atish Davda, CEO at EquityZen, predicts that startups will still be able to find funding and that some investors will see this as an opportunity to get access at a more attractive price.

“Capital in private markets won't go away. Savvy investors who have been holding out on seemingly high private valuations will likely find some of the best investment opportunities of the past decade in private tech.”

Manhattan Venture Partners, EquityZen and SeedInvest are all involved in the exchange of shares before companies go public, an investment area that is often more lucrative than the stock market. Cautious startups are waiting to go public and the most significant movements in their share price often happen before they IPO.

“Many public company investors like mutual funds and hedge funds are coming down to invest in private companies” to take advantage of these gains, said Jeff Thomas, president of liquidity solutions at The Nasdaq Private Market. “We definitely see a lot of the value being created while companies are private.”

Thomas reflected that before the dot com bubble, “companies would go earlier, much earlier in their life cycle and all the value would be created in the public markets.” Today, “because they’re waiting longer, a lot of the value is being created in the private markets.”

And if the stock market uncertainty continues, one can only expect these startups to stay private even longer.