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When Reddit lists on the New York Stock Exchange next week, the social media platform is expected to carry a valuation of up to $6.4 billion — far below the $10 billion it was valued in 2021. This will be the first high-profile tech startup to list since Instacart. , which was valued at $10 billion in its initial public offering in September, a quarter of the eye-popping valuation investors placed on it in 2021.
Despite the write-off of a supposed shareholder value of about $35 billion, these “bottom round” IPOs are not met with derision in Silicon Valley. Instead, it is a sign that rationality is slowly returning to venture capital.
IPOs “will not only become common, they will become the standard for the class of 2021,” says Venky Ganesan, partner at Menlo Ventures. He points to a group of late-stage companies whose valuations soared that year as investors, drunk on low interest rates, poured in astronomical sums. Investment in US projects in 2021 reached a record $345 billion, more than double the previous year.
Now startups are running out of money and venture capital funds need to return some money to their investors. “I encourage all our companies that have the financial capabilities to support going public,” Ganesan adds. “Down is the new up.”
That's a sentiment that's been spreading throughout Silicon Valley as confidence has grown in recent weeks as technology stocks rise, in part because of the booming prospects for artificial intelligence. “People who were hiding in their caves are now walking around outside and feeling great, that much is clear,” one founder of a large venture firm told me.
Successful new investments in artificial intelligence could compensate for a large number of misjudgments in the recent past. There is a growing consensus that it is time for founders to swallow their pride, accept a significant write-down and help create a new floor for their shares to start growing again, helping to encourage all companies that come behind them to do so. The same.
Not everyone will fall in line. John Collinson, co-founder of Stripe, told the Financial Times this week that he was “in no rush” for an IPO for the $65 billion payments group. But a few strong companies coming to market at reset prices may help destigmatize the long-standing psychological opposition to inclusive finance that has become embedded in Silicon Valley culture. Reddit investors probably should have come to grips with the fact that it's not a $10 billion company at its IPO, but if the company does well, the low valuation could become a floor for its stock price.
However, when the listings take effect, there will be some very painful consequences for later-stage investors who fueled the startup bubble in 2021. There are hundreds of companies that were funded in a low interest rate environment and should have been closed or sold, but did not. You can only delay the inevitable calculation. A devaluation may not be the worst outcome for many.
The looming crisis also highlights the cost of herd mentality in the venture capital industry, which has become comfortably accustomed to moving en masse and in the same direction. Impulsiveness erodes discipline.
In 2021, deep-pocketed investment funds competed for ways to acquire overpriced startups. In many cases, they signed up to basic protections, including one that allowed them to object to an IPO below a certain price.
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Unlike a company sale or liquidation, a stock market listing converts all preferred stock held by investors in a business into the same common stock held by employees and management, eliminating various rights secured by backers during private fundraising rounds. The decline in valuation combined with the lack of protection means that late-stage investors have few resources to prevent decisions that are likely to result in huge losses.
Sequoia Capital, which invested $300 million in Instacart over its life as a private company, had paper gains of more than $1 billion when it went public — but at one point that investment was worth as much as $5 billion. Companies including Sequoia, T Rowe Price, Fidelity, and Andreessen Horowitz, which collectively invested $265 million in Instacart in 2021, saw the investment collapse by 75 percent.
“It is becoming increasingly clear that everything that was once underwritten is no longer so,” said one venture capitalist at a firm that controls billions of dollars. If Silicon Valley moves through the stages of grief from denial and anger to acceptance, this could be healthy in the long run.
tabby.kinder@ft.com
