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Tech stock meltdown spills into private markets

Jessica Sier
Jessica SierJournalist

The nosedive by listed technology stocks undermines the lofty valuations booked by private tech companies over the past year, prompting investors to recalibrate their expectations for high-growth businesses.

Rising interest rates has meant growth-style investing is firmly out of favour, in effect restricting capital for early-stage companies and placing pressure on those who enriched themselves at the top of the cycle to sustain their valuations.

Roger Montgomery is chief investment officer at Montgomery Investment Management. Michel O'Sullivan

While large “downrounds” aren’t yet commonplace, high-profile stock picker Roger Montgomery said tech investors are re-discovering the fundamental difference between price and value.

“The reality is rising interest rates act like gravity on the value of all assets,” Mr Montgomery said, in a note to clients.

“Just because a group of people sit around a room and agree on a valuation at which they will tip money into an unlisted business does not mean that is the value of that business.”

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Last September, unlisted graphic design company Canva was valued at $US40 billion on operating revenue of $US1 billion.

Since then, Canva’s institutional investors such as Franklin Templeton, T. Rowe Price and Capital Group have slashed the value of their stake, pointing to the rising cost of capital and debt as a dampener on the company’s ability to raise money and further its growth.

Loftus Peak’s Alex Pollak says public market woes are spilling over into private markets.  James Brickwood

“Few businesses, if any, are worth 40 times revenue,” Mr Montgomery said. “In the stockmarket, efficiency is frequently observable, but the market is not always efficient.”

As monetary policy tightened, investors fled cash flow-negative and longer-dated growth stocks. Exposed to an intentionally slowed economy, these companies fell sharply in value.

Given so many were unprofitable, the market is anticipating many will be forced to find new funding with fresh debt or equity but at significantly higher cost to existing shareholders.

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Alex Pollak, chief investment officer at Loftus Peak, said this is pushing valuations down further in the private markets.

“You won’t be able to see it clearly until they try and raise money again, but the public market valuations have dropped which will have also cascaded into private company valuations,” Mr Pollak said.

“So the gap between public market valuations and private market valuations is closing.”

Stewart Glynn, managing partner at TEN13, a Brisbane-based syndicated venture capital platform, said the rapid unwind of public market multiples has dramatically changed the funding landscape for private companies.

“The multiple compression has happened quite quickly, which means highly valued companies are having to go out and live up to their valuations,” Mr Glynn said.

“And you can see the public market is trading at much more compressed multiples than what they were last year, which is obviously having an impact on what private companies are worth.”

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Canva’s record-breaking $US40 billion valuation last year came amid a wave of highly valued Australian start-ups.

Last June, Brisbane-based Skedulo raised $100 million in a Series C round. In the same month, Sydney-based health platform Eucalyptus raised $30 million, before raising another $60 million six months later.

Stew Glynn, co-founder of TEN13, an angel investment syndicate. Dan Peled

Accounting software start-up Practice Ignition banked $65 million in November and last December, Sydney-based Dovetail raised $89 million in a Series A on a $960 million valuation.

Speaking generally, Mr Glynn said last year’s abundance of capital meant there was huge competition between investors to get a slice of fast-growing tech companies.

“But that does mean that some valuations might have been pushed up higher than they probably should have been,” he said.

“And now things have reverted to the mean, the public and private markets are undergoing a period of price discovery that will mean capital inefficient businesses will be locked out of the funding markets.”

Jessica Sier writes on technology, internet culture, cryptocurrencies and software from our Sydney newsroom. She has previously covered global capital markets and economics. Connect with Jessica on Twitter. Email Jessica at jessica.sier@afr.com

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