Companies are opting for a lower valuation to attract fresh funds as the U.S. IPO market ground to a halt with only eight companies managing a successful flotation this year.
Driven by an inflationary and high interest rate environment, many private investors and venture capitalists are now taking a hard look at funding startups.
According to PitchBook data, 81 U.S. companies have lowered their valuation by a hair during their funding rounds in a so-called “down round.”
Instacart lowered its valuation by 40 per cent, citing market turmoil caused by blistering inflation and fears of an imminent recession, while cryptocurrency lender BlockFi and payments giant Stripe reported declines of 67 per cent and 28 per cent, respectively.
In July, Klarna raised capital in a down round that cut its valuation by more than 80% to $6.7 billion, far less than the $46 billion fintech attracted in 2021.
While U.S. companies raised $43 billion in IPOs in the first seven months of the year, it remains only a fraction of the record $102 billion raised in the same period in 2021.
Experts believe that even if the IPO market stabilizes in 2023, startups that struggle to break even, or those known to face massive liquidity constraints, could face stringent investor scrutiny of profits and valuations.