Late-stage Inflation by Alexander Gornyi

The post was originally published in Russian on Startup of the Day. Alexander kindly agreed to republish what we think is of great value to our readers.

Over the past month, news has come of two very similar rounds of two completely different American #startups. Instacart attracted 265 mln at an estimate of almost 40 bln, Stripe – 600 mln at almost 100 bln. Of course, zeros are dazzling in the eyes; we admire, respect, envy, but I will pay attention to a couple of details in these billions.

High grades have become commonplace. Three years ago, the world laughed at Softbank for much smaller numbers, and now the most respected Sequoia is included in the deal, and no one is surprised at anything. 100 bln for a payment (Cloudpayments for our money, and I only partially exaggerate). So, yes, that’s how it should be.

It couldn’t have been otherwise. The S&P has doubled in 5 years. To put it very bluntly, US stocks have doubled in price, partly due to higher performance, but mostly because “the market has gone up”. The average multiple of capitalization to revenue (P/S) was 1.8, now, it’s 2.9 – + 60%. Revenue increased by 25%. The magic formula 1.25 * 1.6 = 2 illustrates both a two-fold growth in 5 years and its reasons in the roughest cut. And if you focus on the NASDAQ, it has tripled since 2016. Pre IPO startups, of course, have risen in price even more. Firstly, their assessments are guided by the most technologically advanced part of the NASDAQ, and not by the average for the hospital. Everything there is much more than doubled. The exact number can be counted in different ways,  but it’s not about them. Secondly, they are selling the future. If everyone believes that the trend will continue, and the multiples on the stock exchange will still rise in 2025 or 2030, then this is partially taken into account in the startup’s assessment already now.

The deals themselves didn’t grow so much. 250 mln and 600 mln – well, why not. We’ve seen this regularly for a long time, and it makes no sense to give examples; there were a lot of them. Yes, Instacart with Stripe has it for two for the fifth and sixth rounds in a year, but even if you add them all up, nothing fundamentally changes. The assessments will remain unique, the investments will remain usual, quite within the framework of 2016.

The underlying reason, it seems to me, is that there is “nowhere to spend.” Consumer product inflation in the US over 5 years is only 9.6%, and average income growth is 16% (adjusted for inflation – 6%). Compare this with the growth of indices! So, in the application to startups is how much servers or office rent cost, so much they cost. If before the user became loyal after a promo code for $10, now he needs 11. There are categories of expenses where it is different, but on average, it is so, inflation is not in vain considered on average. And as a result, the old scale of investments is quite enough at the same stage of the company’s development, no more is needed.

High valuations and “conventional” investments lead to a ridiculous share of investors. In the current rounds, Instacart with Stripe has eroded roughly by half a percent each. They probably allocated more shares for options programs over the past year. The founders of Pre IPO startups didn’t complain about life before, but now they are in a double win, the companies have risen in price, their shares have increased on average.

This is the late-stage arithmetic in 2021.

#thoughts #usa #mega-round

Translation : Valeria Stupnikova