Money for so-called ‘unicorns’ is increasingly scarce, and experts predict more late-stage companies in Europe will have to take a haircut on valuations.
“Reports of major VC-backed companies—including US-based Stripe and Sweden-based Klarna—taking valuation haircuts could trigger further down rounds for VC-backed companies,” Nalin Patel, lead analyst for EMEA private capital at Pitchbook, told Proactive.
“The revaluation of lofty private-market valuations of late-stage tech businesses in the global VC ecosystem appears to be underway.”
After a spike in the first quarter, investment in start-ups valued at more than US$1bn fell by almost two-thirds to €2.6bn in the three months to the end of June, according to a new set of figures released today.
Available funding for unicorns dropped in the second quarter, when the number of deals fell to just six, down from 40 the prior quarter.
Tech unicorns such as Swedish payment platform Klarna were forced to take a haircut on valuations. The payment start-up's valuation was slashed from €37.5bn to €6.4bn in July.
“The severity of the haircut has piqued interest across the European VC landscape and could signal further haircuts for companies seeking financing in upcoming months,” Patel said.
“Layoffs have also been reported at Getir, Gorillas, and Hopin in 2022, all of which demonstrated strong pandemic-induced growth during lockdowns. The depth and breadth of cuts could expand as we move further into 2022.”
Investment in Europe’s most valuable VC-backed companies has all but “dried up”, Pitchbook said in its latest valuations report for European venture-backed companies.
Investors have been cautious to invest in companies that could be overvalued in the current market, which led to declines in dealmaking in the second quarter, Pitchbook said.
Public tech stocks have also faltered this year, making listing as an exit route unfavourable for many late-stage privately funded unicorns.
The war in Ukraine, supply chain issues, and stagflation further compounded the pressure on valuations, while the market caps of tech stocks continue to tumble.
“With an economic downturn on the horizon, conversations focused on down rounds, layoffs, and valuation haircuts have intensified,” Patel said.
“As we move further into 2022, we believe additional high-profile late-stage companies will announce valuation haircuts as they secure funding to extend runways.”
Lofty valuations are expected to cool as dealmaking flattens in the second half of the year, with investment in unicorns expected to slump further, according to Pitchbook.
To secure funding, unicorns may be forced to take valuation haircuts to ensure their long-term survival, it said in the report. They may also have to extend their funding runway until market conditions improve if turbulence in stocks causes exit bottlenecks, it said.
Despite this, the latest figures show that aggregate post-money unicorn valuations in Europe grew by 34.8% to €378.6bn in the first half, with signs the bubble will burst after a slump in deal-making in the recent quarter.
Pitchbook said there are currently 113 venture-backed unicorns in Europe, including 31 that were created in the first half.
CUTS
“It is too early to determine how severe and widespread the cutbacks in late-stage valuations will be.
A lack of suitable exit options due to declining public equities or unwilling acquirers could lead to bottlenecks and the stagnation of mature VC-backed companies, according to Pitchbook.
Companies that aggressively accelerated growth plans during the past two years and saw their valuation soar could now face tougher conditions as discretionary spending falls and costs are scrutinised, Pitchbook said.
A combination of factors led to the decline, chiefly the fact unicorns are competing in size with the public markets, Pitchbook said.
The slump comes amid a backdrop in which previously venture-backed businesses have had their valuations slashed in the public markets.
Early signs emerged in the first half that companies which boomed during Covid-19 have had to take valuation haircuts.
Part of the challenge for late-stage venture capitalists is that the exit market has declined, following a slump in debut public listings.
have added to the headwinds facing financial markets in H1 2022 could further see cuts to record-high valuations after financial markets have shifted and tech stocks aare struggling with market caps declining.
Public listings are to remain muted, while acquisitions could become attractive, Pitchbook said.
Unicorn dealmaking is expected to flatten further in the second half.