The decline has been especially sharp in the late-stage segment. As my colleague Matt Witheiler puts it, companies have been going through the stages of grief, starting with “denial,” progressing to “bargaining,” and finally reaching “acceptance” of the new valuation reality. Some have held on to the hope that the valuation multiples of 2021 will return, but I think that’s unlikely in the near future. The path to 2021’s valuations was paved by extremely low interest rates, pandemic-accelerated trends, and other macro factors that we believe are unlikely to resurface in the years ahead. In our view, we’ve returned to a much more normalized valuation environment.
Deal activity may have slowed but private equity innovation continues
Amid the downturn in deals, I’m often asked if I’m worried about the plummeting number of IPOs. My answer is that the IPO market is low on my list of worries. Looking across early-, mid-, and late-stage private companies, I believe the level of innovation continues unabated in biotech, climate tech, and other sectors. We are just scratching the surface of disruptive technologies throughout the market, and, in my view, that should inevitably lead to innovative new companies going public. The IPO market has closed before and historically it takes about 12 – 24 months for it to bounce back from similar periods of reduced activity.
Excitingly, many of these disruptive companies have grown significantly and continue to have great business models but are now available at valuations that look much more reasonable than they did a year ago. I believe firms with experienced management teams that are dedicated to building substantial funding reserves and adjusting their spending plans to reflect the new regime should be well-positioned to weather today’s challenges and will be particularly appealing investment opportunities.