The 30% Haircut: Venture Capital Markets Follow the Broader Market Down

The downturn afflicting the broader markets is flowing into the venture capital financing markets in a big way.

Per the WSJ, startup valuations are dropping hard and fast.  One founder interviewed said he is seeing a 30% haircut to his company’s valuation from VCs.   Others have reported 30-50% discounts with some VCs even backing out of signed term sheets.

Return of participating preferred.  Investors seem to be asking for so-called participating preferred shares again, a deal structure that investors couldn’t ask for during the founder-friendly times of the recent venture boom.  These shares essentially guarantee that an investor can recoup their original investment and a percentage of the proceeds in the event a company is sold.

Deal-making is down too

  • This quarter – $47.5B in 2,251 deals (during the second quarter through June 15)
  • Last quarter – $70B in 3,369 deals (in the first quarter, according to CB Insights)

Silver lining?  It’s hard to see a silver lining here, but if pressed, some founders like the fact that there is “less noise” in the environment, less competition for talent and more realistic expectations from VC investors once they do fund.

The final word.  “Now is not the time to hide under your desk,” says Samir Kaul, a founding partner and managing director of Khosla Ventures. “It’s the time to be clever, shore up your balance sheet and prepare for an 18-month slowdown.”

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