Virtual Round Table, Conference Presentation, Fireside Chat
Roundtable #4 with Jason Lemkin, Woody Marshall, Deven Parekh, Harry Stebbings | E1071
- Underlying company growth is expected to persist despite macro challenges, though the pace of new investment deals in 2023 is predicted to be dramatically lower than in 2021 and 2022.
- Companies funded in prior years face capital raising needs approaching early 2024, likely at valuation levels below previous expectations due to market conditions.
- Deal-making is anticipated to normalize, extending exit timelines from the previous three to four years to five, six, or seven years, with initial capital recoupment potentially delayed until the five or six-year mark.
- A significant portion of companies will need to realign equity incentives and options as current valuation levels are deemed unsustainable, with early-stage VCs potentially marking down portfolios by 50% to 60%.
- Valuation drivers are shifting from revenue growth multiples, which had a 72% correlation in 2020, to profitability and free cash flow with current correlations in the mid-30s, moving toward a "Rule of 40" standard by 2025 and 2026 requiring approximately 30% growth and 10-20% EBITDA margins.
- Long-term software multiples are forecasted to remain 15% to 20% lower than their 15-year median, though upside is expected from current levels without a return to 2021 valuations.
- Late-stage growth (pre-IPO) is predicted to be the least active market segment as companies seek valuations higher than public comparables, while IPO windows are expected to open in the back half of 2024.
- Companies holding inflated valuations may make suboptimal long-term decisions or issue heavily structured securities to avoid book mark-downs, while high-quality firms with 50% growth and high net retention can command revenue multiples north of 5x to 6x if they possess significant runway in large total addressable markets.
- Recent IPOs like Instacart and Klaviyo are expected to see stock prices determined by execution and performance over the coming years rather than prior round valuations, with prices influenced by macro factors such as 10-year Treasury yields exceeding 4.5% and high short interest due to trading dynamics.
- Infrastructure software volumes are expected to have bottomed and begun recovering after a downturn driven by cloud optimization conversations.
- AI valuations in 2023 are viewed as being in a hype cycle and priced ahead of actual capabilities, with investors noting that pricing for infrastructure companies invested in 2021 may have been more favorable than current LLM-focused companies.
- Large institutional investors are expected to utilize late-stage private rounds to establish long-term positions intended to be held for five to ten years, whereas early-stage VCs face pressure from LPs to wait on marking down portfolios.
- A specific market opportunity is anticipated for SaaS companies generating $100 million to $200 million in ARR that are not ready for public listing but are viable acquisition targets for sponsors or firms.
- Future valuation assessments will focus on the sustainability of growth compounding rates over a five-year period, rejecting assumptions that current multiples will persist indefinitely.
- The speaker proposes a view that Klaviyo's stock could trade at $20 or higher from its current level of $36 within 12 months, while maintaining a neutral stance on ARM due to insufficient market knowledge and potential drivers unrelated to fundamentals.