A valuation of €8 billion is an impressive feat for any start-up raising funds in a tough market. But for UK fintech SumUp, it is less than half the amount that was discussed at the beginning of the year. In contrast, the price of US digital asset platform FalconX has more than doubled to $8 billion since last August, despite the plunge in crypto markets.
FalconX is the outlier. Payments processor SumUp’s lower-than-expected valuation – although 20 times higher than in the last funding round – reflects a broader trend. Investors’ appetite for risky tech bets has waned. Klarna is the Swedish “buy now, pay later” store trying to get new money at less than half of its peak valuation of $46 billion.
FalconX claims a flight to quality from investors explains their support. The company said it was profitable in the first quarter. But there is limited information. Not all of the $150 million raised by new and existing investors went to the company; Some investors sold an undisclosed stake.
During the stay-private-longer era of the last decade, a company could secure multiple rounds of funding. Each time it achieved a higher rating, existing investors could add value to their portfolio. There was an incentive to pump up the price to inflate paper profits. The lower the proportion of shares sold, the less credible the price increase.
Rounds of downside, with stocks selling for less than before, remain small. They accounted for just 5 percent of all venture capital deals so far this year, says PitchBook. That’s an all-time low, just a third of 2017’s share.
Down rounds hurt morale and reputation, and dilute existing shareholders. Sometimes companies save face by agreeing to pay a high price for onerous terms that favor new investors. An example would be an entitlement to a multiple of the capital invested before any payments to other shareholders.
Carousel venture capital financing and takeovers led to claims that private capital had outgrown pricing to public markets. A hard downturn would show how fallacious these claims were.
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SumUp/FalconX: escalating up rounds will feel the downdraft of recession Source link SumUp/FalconX: escalating up rounds will feel the downdraft of recession