All Your Late Stage Valuations Are About to Suck

You may have heard that the market isn’t looking to good for IPO-oriented startups. What may surprise you is the extent to which the late stage venture market doesn’t seem to care.

Late stage valuations are still high, despite the prolonged slide of public comps. It’s driving some investors who can walk in both worlds to spend more of their time looking at small cap tech stocks they can buy for 1X revenue and 5X EBITA rather than private companies at 4X revenue valuations with no earnings.

“I wish I could send all the late stage guys a calculator and a set of comps,” says IVP’s Todd Chaffee.

Other investors, such as Bridgescale Partners Managing Director Rob Chaplinsky expect a 40% to 50% price correction between now and Christmas.

The impending smack down is the product of over-optimistic venture investors, especially those in the middle stages, that have been green lighting valuation increases for years. Late stage investors that can negotiate down their prices will fare well when the market turns back around.

But there’s no guarantee that the late stage guys will get the lowered prices they’ll need to see stellar returns. There’s just too many players in the late stage market, too little competition and too much money to put to work. The number of late stage deals done so far this year sits just above 600–that’s more than were done in all of 2003–and 2008 may even surpass 2007, which saw more than 1,200 late stage deals done, the most ever.

Although I’ve written about the disappearance of crossover investors and Roger Longman covers it with greater clarity today, there are more other players willing to step up and fill in the cracks. Most notable of these isn’t the hedge fund, but the formerly-early-stage-now-balanced-stage VC. Their track records and industry consolidation have allowed them to raise ever larger funds and take bigger ownership stakes in each startup they back. They, more than anyone else, are doing these deals and they too are keeping valuations artificially inflated.