The demise of Silicon Valley Bank (SVB) left a big hole in the early-stage/private firm ecosystem. SVB was a favorite bank of VCs and hence the companies they invested in. The failure of SVBs has exacerbated the already challenging funding environment for private firms that need growth capital as they scale and adapt.
EquityZen trades securities issued under Reg D, frequently to employees as compensation. While many holders will wait until an exit opportunity such as an IPO or acquisition, EquityZen provides liquidity on a trading platform.
EquityZen, a marketplace for shares in private firms, has shared some insight on the post-SVB landscape. EquityZen co-founder Phil Haslett explains that while SVB was a key player in the startup ecosystem and innovation economy, they are already seeing the stabilization of the private market as everyone adjusts to the new normal.
“If one thing is true in the world of startups, it’s that change is constant, and adaptation is core to both survival and growth. We’re seeing this adaptation amongst investors, private companies and shareholders within our ecosystem play out in a handful of ways,” says Haslett.
According to Haslett, their unique insight into private markets indicates people are focusing attention on supporting and protecting existing investments as opposed to seeking out new investment opportunities. This should come as no surprise as this topic has been widely reported. Haslett states that VC firms have spent the past few weeks focused on making sure their portfolio companies have access to cash and are safe from broader macro risks.
“Now that the market is stabilizing with initial triage steps taken, institutional investors are doing enhanced due diligence on new investment opportunities. This adds an additional speed bump to a fundraising environment that has already slowed down considerably,” Haslett states. “The best, most promising companies will still continue to get funded, but investors will take their time. As always, challenges create opportunities and this environment will also lead to increased M&A for market leaders. Other companies will come to accept that down rounds and “cram-downs” are a reality of the times, capitulating on fundraising terms that reflect the current market.”
Regarding secondary transactions, the area where EquityZen operates they are seeing discounts of around 40% on average to the most recent funding round valuation. This trend has “leveled out” and has reflected the “valuation corrections” seen in public markets during 2022.
“Last year, private companies with ample cash declined additional capital at a discount because they didn’t need to. As time passes and the public markets remain largely closed, more private companies will raise at lower valuations, which in turn will reset prices. This is a trend we’re already seeing amongst some large, decacorn companies. In the broader lifecycle of a growing business, we see this as a healthy (and prudent) adjustment, one that actually brings relief and allows a company to focus on their core business. For the private secondary markets, these new funding rounds should increase confidence in the market.”
Haslett adds that in the past few weeks, the importance of liquidity for shareholders has “solidified,” and companies continue to stay private for the foreseeable future, and shareholders will continue to have liquidity needs. Haslett reports that SVB’s collapse has accelerated some shareholders’ interest in at least partial liquidity as well as diversification.
Haslett says that he views SVBs collapse as an “exclamation point,” and they are close to being on the other side of this moment in the market, adding that he believes there will be renewed optimism from those who have “weathered the storm.”
“Volatility remains, yet businesses continue to grow, innovate and create opportunities. In the near-term absence of IPO liquidity, the private secondary market will remain the crucial venue for both investors and shareholders seeking access to investments and liquidity. While the broader impacts of SVB’s collapse are yet to be seen, we are excited to continue growing the private market ecosystem.”