What links the stock market downturn to startup valuation?

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AT analysis of the market, Justin Kahl and David George of Andreessen Horowitz show data on how public companies have seen their revenue multiples shrink by an average of 60% with high volatility across sectors.

They use this central data point to suggest how startups should weather the downturn, with the primary goal of returning to their previous valuation. But have the ratings really dropped? For all startups? If so, why and what should we expect in the short and medium term?

What links the stock market decline to startup valuations?

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Startup valuation has little to do with the stock market. Risky early-stage companies with few customers correlate little with the big picture. However, there is still a connection, and it is worth analyzing.

Valuations are, or should be, a reflection of risk and return. These parameters are only slightly affected by the unstable and unpredictable behavior of the stock market. The main factors affecting the sales side (startups) during a market downturn are greater difficulty in closing corporate accounts and a lower likelihood of a major exit through a corporate sale.

But when we look at the buying side, things get more dramatic, which explains why lower stock prices are more of a concern for investors than startups.

Startup valuation has little to do with the stock market.

As for the buyers, the shares of companies that invest in venture funds are usually listed on the exchange or are pension or mutual funds in which the value of their assets is significantly reduced due to lower share prices.

This is the biggest impact of the recession: it will be harder for venture capital funds to raise money for investments, which reduces the capital available to founders.

However, it will take months (probably up to a year) to see the impact of this on the startup market.

Of course, knowing this, VCs will adjust their portfolios and try to invest less per ticket, hoping to benefit from being the only one with the capital available when things go wrong.

Let’s take a second and look at these two sides in detail, starting with the buying side.

Buy side

Corporate venture capital

The first money that disappears when stock prices fall is corporate venture capital. Already under pressure from shareholders, public companies will refrain from long-term bets on the startup sector.

Credit: techcrunch.com /

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