Canva’s Devaluation Highlights Venture Capital’s Great Concern

While Franklin Templeton and T.

With venture capital valuations soaring last year and winning investors racing to get a piece of the action, This cross-money helped push ratings to very high levels.

In fact, the funding round in September 2021 that saw Canva double its valuation to $40 billion in just five months now looks like a high watermark for the surplus it has accumulated in the venture capital sector. The tour was led by T-Roe Price cross funds, with Franklin Templeton’s cross money also invested.

But while US venture capital heavyweight Sequoia Partners warned its portfolio companies in a presentation that toured financial markets last week, cross-funds’ ability to invest in private startups is constrained by the significant losses they have incurred on the general public. Market bets.

“Unlike previous periods, sources of cheap capital are not coming to the rescue,” Sequoia said.

“Cross hedge funds, which have been very active in private investing over the past few years and have been one of the least expensive sources of capital, tend to have wounds in their hard-hit public portfolios.

“Many do not even have the capacity to invest, as the gradual withdrawal of their public portfolios has resulted in an imbalance in their hybrid funds where their private investments (which are not significantly capped) represent more than the maximum private capacity within funds.”

The global venture capital sector is teetering with money drying up and valuations dropping.

Commonwealth Bank CEO Matt Komen said this week that his discussions with top venture capital industry leaders on his recent trip to the US He noted that the fundraising environment was more difficult than during the World Financial ForumTech companies have been cutting their staff by 10 to 30 percent in an effort to cut costs.

Of course, cutting costs will affect revenue growth – which will further affect valuations. And lower valuations will mean the stock options that startups have used to attract and retain employees aren’t working as well as they used to, adding to the sector’s problems.

Crossovers have also emerged as the most visible channel through which valuations of declining tech stocks are transferred to private markets.

This is forcing Australian venture capital firms – including those that have enjoyed astounding gains from Canva’s meteoric rise, iIncluding Blackbird Ventures, Square Peg Capital and AirTree Ventures Think seriously about the evaluation process.

Standard practice in the VC industry is to review valuation only when there is a credible funding round. When the share prices of listed startups rise, the venture capital firm leaves its valuation unchanged. And it’s the same story when the peers of listed startups collapse, as it has in the past six months.

But there is movement in this regard. Paul Passat, lead venture capital and founder of Square Peg, says his company aims to be as transparent as possible with its investors, known as Limited Partners, and is adjusting its valuations.

“We handle our valuation process across our portfolio on a quarterly basis and have recently added an additional measure to our valuation process which is to have independent external valuations of our physical assets,” he says.

“We think this is a perfect fit given the scale that some of our portfolio companies are now reaching.

“On a larger scale, one of the advantages of private markets is that they show less volatility than public markets as they are not priced on a daily basis. This means that private markets are not re-priced upwards as they normally would in market rallies, nor are they discounted as much in dips As a result, private markets avoid, at least in part, overshooting in both upside and downside trends compared to public markets.

We believe this is one of the main advantages of venture capital over other asset classes. What matters most to our long-term revenue is identifying outside companies that can be tremendous in success, and that is what we will continue to focus on.”

The Passat, which always takes a clear look at its segment – and its new Square Peg approach – seems very reasonable.

The venture capital industry knows that its limited partners, including pension funds that have increased their allocation to venture capital and private equity, are thinking a lot about this as well, particularly in light of The Australian prudential regulator’s recent focus is on tackling unlisted assets held by major funds.

APRA’s review of the way unlisted assets were handled found that “the funds’ revaluation frameworks were typically inadequate, with no pre-defined revaluation triggers and weak or no processes to monitor and adjust revaluations,” and “was overly dependent on External parties, including fund managers and asset advisors.”

Better valuation practices can make the venture capital sector stronger in the long run.