[ajsharp]

Important distinction: this is for a growth fund ("mature companies" in the article). Growth funds are typically fund dedicated to either later stage financings or follow ons from earlier stage rounds that the firm invested in. Growth funds are heavily reliant on an active M&A market, or companies that are likely to IPO. M&A is effectively dead right now, and many late stage companies have valuations that are too high to IPO without taking a big valuation haircut.

[SoftTalker]

> many late stage companies have valuations that are too high to IPO without taking a big valuation haircut.

Isn't the market what determines the value of a company? If they can't get the IPO price they want, then they aren't worth what they think they are.

[nostrademons]

That's the point. The value of a company is determined by the price that people are willing to buy & sell its shares at, but you don't have to be that person.

The VC fund in the article is basically saying "We believe that anyone buying late-stage startups at these valuations is a fool and is unlikely to get a better price when it goes to the public markets, and we are not going to be the greater fool with your money."

[s1artibartfast]

Value isnt singular. Every single transaction in the economy is the result of a difference in opinion about value.

My House has a public valuation, but the value it me is much higher, so It is not for sale.

Im sure there are several things that you dont buy for their market price because they have less value to you. You dont go into the store and buy every Item you see, or put every item you own for sale.

[ajsharp]

100%. A lot of companies effectively waited too long to exit, and in retrospect probably should've gone public in 2021.

[everforward]

Yes, but the driving motivation is probably more financial than emotional. Trying to IPO at a price lower than the last valuation is announcing to the world that the last investors lost money, while simultaneously trying to convince the world to be the next investors.

In theory, the market will bounce back so IPOing now is effectively selling low.

[AYBABTME]

If they have enough cash/free cash flow, they don't have to take money at a lower valuation.

[akira2501]

> Isn't the market what determines the value of a company?

There are several markets involved here.

> then they aren't worth what they think they are.

Which is an indication that your market is corrupt or lacks the information discovery necessary for accurate pricing information to be generally available.

[TrackerFF]

Your house isn't always worth what you want it to be.

FOMO and free cash can work like magic for all kinds of assets.

[shivasaxena]

Not really, the DCF value of a company is sum of its discounted Future cash flows. But the value to a acquirer usually exceeds it because they can can extract a "hidden value" specific to them. It's called "acquisition premium"

If interested, look up "Valuation: Measuring and Managing the Value of Companies"

[CharlieDigital]

    > M&A is effectively dead right now

Curious if there is a reason why M&A is slow; any reading?

[candiddevmike]

I'm not sure if it's really anti-trust. I think companies are being stingy with M&A because most companies are no longer worth the acquisition cost. They're looking for more "strategic" buys as money isn't cheap anymore. You're still seeing M&A, it's just occurring with more complimentary companies that actually add value (or hires) to their existing portfolios.

[mschuster91]

Biggest one IMHO is interest rates. The days of virtually-free credit lines are gone for the near to mid future - at least until the situations in Israel/Palestine and Ukraine/Russia are sorted out, but even then, China may want to take over Taiwan leading to the next global crisis.

Another reason is the AI craze. Everyone and their dog is focusing on being a/the dominant power in that area, so interest in "old tech" is waning.

And the last/smallest factor is that many of those individuals who exited in the last few years are hesitant where to put their money, and there is not much space for multi-billion dollar established companies to make acquisitions when they're all forced to let people go as a result of the post-/mid covid hiring spree and anti-trust authorities worldwide being very critical of more agglomerations at the moment - some because of strategic reasons (Europe in particular isn't looking too friendly to more of their companies being bought out by foreigners), some because they do not want to risk even more companies growing too-big-to-fail.

[JamesBarney]

A combination of interest rates and cap tables being all messed up from 2021.

If you have a company that raised a 100m of preferred at a 500m valuation, are you going to take an offer for 150m? Most founders are just going to keep grinding hope things get better.

[ajsharp]

Will echo what many have said here already, but with a slight twist:

1. Anti-trust activity takes a HUGE portion of the liquidity that does M&A out of the market. That has a dynamic effect -- other players who are not under direct anti-trust scrutiny think twice about their potential M&A activity. This, in theory, should reduce M&A prices (reduction in supply supply), but this is probably largely offset by point 2. 2. Inflated valuations from 2021 era. Lots of companies raised ridiculous late stage rounds around this period. Then interest rates rose. Now your company that raised on 100x ARR is worth a lot less than it was. But the company still has to grow into and beat it's last valuation. Combined with the M&A dynamics, it's much harder to justify a post-money above what your last raise was if that raise was a post-covid valuation, unless the business is just truly on ripping (e.g. Wiz).

[hodgesrm]

It's not anti-trust in the case of smaller acquisition targets. There are also fewer strategic acquirers in some if not all markets. For example, if you built a good product 10 years ago on top of an open source project, there were a number of companies looking to grow by acquisition, such as RedHat, VMware, Rackspace, and Salesforce. Of those only Salesforce is still a factor.

Edit: clarity

[schmidtleonard]

Interest rates.

[bpodgursky]

Anti-trust

[jppope]

Anti-trust, yes. But also VCs funding a bunch of weak companies early stage for the last several years

[cellis]

Right, better to give the money back and preserve IRR/ reputation than try to simply earn carry.

[patrickhogan1]

They aren’t giving it back they are converting it into a new fund for early stage companies. The article is click bate.

[JumpCrisscross]

> preserve IRR/ reputation than try to simply earn carry

Management fees. Carry is performance based.

[ned_at_codomain]

FWIW, the IRR clock doesn't start until they call capital from the LPs.

[financetechbro]

M&A is not dead. Not at 20/21 levels, but certainly not dead. Some sectors in tech are much stronger than others, now if you’re a company that is burning cash and doesn’t have an appealing growth profile then yeah you won’t get a deal done (source: me). IPOs are basically dead atm

[miki123211]

There's also the fact that antitrust regulators seem hell-bend on killing the M&A market entirely.

Historically, there were two main paths for startups, IPO and being acquired by a larger competitor. The latter path is now a lot more difficult, due to the DoJ, the EU and whatever the UK's thing was called suing everybody who tries to do an acquisition.

In the long run, this means fewer startups will get acquired, fewer startups will have an opportunity to exit, the potential upside for VC firms is going to diminish drastically, fewer companies will get funded, which will ultimately lead to the incumbents having all the power and startups having none. This is a very bad thing.

[woooooo]

Any links handy to justify that claim? My impression from headlines was that some massive enterprise M&A was blocked recently but not so much "startup exits". Maybe I missed it though!

[Vegenoid]

I don’t know very much about business - but having the goal of most new companies being to be bought by a larger company doesn’t really sound healthy to me.

[dartos]

Sounds like a slippery slope fallacy.

What’s to say startups don’t start being creative or truly innovative and focus on making and selling products while making a profit?

I’m sure another viable exit strategy will be discovered

[_DeadFred_]

Man the 'it's really bad government is enforcing antitrust laws' crowd sure is pushing this hard on HN this week. You understand all of the original thought on capitalism explained how it was essential the government keep this type of control on markets in order for capitalism to work, right?

If your only business model is to get bought out by a larger company capitalism SHOULD world to reduce the number of startups.

Also, the incumbents just buying everyone up also = incumbents having all the power, and is also a very bad thing. Hence the creation of antitrust laws, and the concept of it being baked into foundational capitalist thought.

[londons_explore]

> late stage companies have valuations that are too high to IPO without taking a big valuation haircut.

AKA, we've made a loss, but don't want to admit it yet.

If I were tax policymaker, I would force all assets to have a valuation every year, and published in a register, and allow anyone else to buy any of those assets for the declared value.

If you over declare, you pay more tax. (you'd pay perhaps 1% of the asset value every year, and that would replace income tax, capital gains tax, etc)

If you under declare, someone else will come take your asset off you for whatever value you said.

Suddenly this whole idea of "unrealised gains/losses" goes away, as does fake valuations for tax avoidance.

[krisoft]

> If I were tax policymaker, I would force all assets to have a valuation every year, and published in a register, and allow anyone else to buy any of those assets for the declared value.

That feels problematic. How much is your wedding band? Or the urn with your grandma’s ashes? Or the favourite teddy bear of your child? Or all coppies and rights to your wedding photos?

I hope you declare them high enough or people might just take them for the lolz.

[JumpCrisscross]

> I would force all assets to have a valuation every year, and published in a register, and allow anyone else to buy any of those assets for the declared value

This would make investment bankers and lawyers happy and nobody else.

Note that any company with a '40 Act investor already has public valuations per those investors' opinions published--it's how you get "Fidelity marks down value of Twitter stake again" headlines [1].

> this whole idea of "unrealised gains/losses" goes away

As does the entire American private capital market, including small business, since illiquid investments now become punitively expensive to hold.

The more I think about it, the more impressive this proposal becomes in terms of solving almost zero problems while actively making the problem worse in different ways.

[1] https://www.reuters.com/technology/fidelity-marks-down-value...

[singron]

This is has actually been used before.

Ports would tax ships on the value of their cargo. It wasn't viable for the port to create valuations themselves, so they left it up to the ship, but the port had the right to buy the cargo at that price.

The scheme kind of works well if it's liquid commodities (e.g. grain, oil, lumber) and the purchasing right is held by a non-capricious authority (i.e. one that only exercises that right to call a bluff).

Taking a down-round on an IPO can be very damaging to a company. Since employee equity is based on options, that puts those options underwater and means employees will make nothing in the IPO. Internally, the company is doing 409a valuations and admits in writing that the valuation is down.

[JamesBarney]

> If I were tax policymaker, I would force all assets to have a valuation every year, and published in a register, and allow anyone else to buy any of those assets for the declared value.

You and your dad run a plumbing business. Every year you have to pay someone 10k to get a valuation. Then strangers can buy a piece. Do you have an operating agreement? If not he can force a sale if the company.

I don't think this is a great policy.

[axus]

Couldn't the annual valuations be gamed by insiders? Who's going to impartially decide the declared value?

Best alternative I can think of is a soft fascism where the government receives a small stake in the company each year instead of cash. Then holds or auctions it as some bureaucrat sees fit.

[happyopossum]

> and allow anyone else to buy any of those assets for the declared value.

Pretty problematic to force the sale of assets from private individuals in anything remotely resembling a free country.

That aside, wouldn't this just result in megacorps owning literally everything in a matter of a few years?

[ttymck]

"allow anyone else to buy any of those assets for the declared value"

How would this work?

[s1artibartfast]

You just eliminated the right to hold assets and conduct most long term planning. Sounds terrible.