Tremendous

At $3.3 trillion, NVIDIA is the most valuable company on earth. The Magnificent 7 now make up 35% of the S&P 500.

Meanwhile, the average SaaS company trades at a 5.9x revenue multiple. This is the lowest since 2016 and below long term averages.

I’ve never seen markets this top-heavy in my life. And it’s a rough environment for late stage startups.

IPO Window Painted Shut

We’ve seen very few IPO’s since 2021. A few like Klaviyo and Instacart have come out and performed decently, but those winners are few and far between.

I agree with Bill Gurley that you can go public in any market. And I’d like to see more companies in the $100-250 million range do so.

But the reality is, companies just aren’t doing it.

The Late Stage Funding Crunch

So we’re staying private. How about raising another funding round?

Well, about that…

Late stage venture funding is down 75% from the the 2021 peak. Those $100 million pre-IPO rounds that fell from the sky three years ago are now hard to find.

It’s hard to raise in the public markets, and it’s hard to raise in the private markets. If you’re a late stage startup, that’s a tough row to hoe.

Abandoning Late Stage Startups

The folks who did those $100 million rounds in 2021 often weren’t normal VC’s. They were giant hedge funds like Tiger Global and Coatue.

These guys invest in both public and private companies. And increasingly, they’re saying sayonara to privates.

Crossover funds were doing 700 deals a quarter during ZIRP. Now, they’re down to about 150.

Where did they go? Probably back into the public markets…

That 5.9x SaaS multiple looks pretty yummy compared to what they’d pay in privates. If you’re a fund with the flexibility to do both, moving more cash into publics makes a lot of sense right now.
That leaves less money for the late-stage private startups.

Wrap-Up

So, where does all this leave late stage startups?

As ever, profitability is the trump card. If you don’t need to raise money, you control your destiny.

And for early stage investors like me, here’s the point to remember: the market we invest in isn’t the market we exit in.

If I make an investment today, it won’t IPO for 10-12 years. By then, public markets could be drooling over tech startups.

We’ll get our beaks wet. We just have to be patient.

What are you seeing in the market?

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Sources:

S&P market cap: https://www.slickcharts.com/sp500/marketcap

NVDA most valuable company: https://www.bloomberg.com/news/articles/2024-06-18/nvidia-s-591-078-rally-to-most-valuable-stock-came-in-waves?srnd=homepage-americas

Magnificent 7 market cap: https://companiesmarketcap.com/

SaaS multiples: https://www.saas-capital.com/the-saas-capital-index/

Fall in late stage funding: https://news.crunchbase.com/venture/startup-funding-q1-2024-charts/

Crossover investors retreating: https://files.pitchbook.com/website/files/pdf/Q1_2024_PitchBook-NVCA_Venture_Monitor.pdf