Are start-up prices falling faster than we thought?
Tech stocks have recouped a good chunk of their early year losses, but the damage in the private market has been done, so says the head of Salesforce Ventures.
The revenue multiples investors are paying for late-stage software investments have dropped by between one-third and 40 percent since the frothy days of 2015, said John Somorjai, executive vice president of corporate development at Salesforce.com and the venture group.
Companies choosing to maximize their valuation instead of accepting prices at or below their previous rounds are often having to accept onerous terms that potentially give investors additional shares in the future.
"People are taking a more realistic view on the long term," said Somorjai, who Joined Salesforce 11 years ago. "It is healthy. We're getting back to more normal valuation metrics."
That means companies at the later stages are raising money at six to nine times forward revenue, down from multiples of 10 to 12 in early and mid-2015, he said.
Salesforce Ventures was the third most active U.S. corporate venture group last year behind Google Ventures and Intel Capital, according to CB Insights. (Bloomberg reported last week that Intel is looking to sell up to $1 billion worth of its venture assets. The company declined to comment to Bloomberg.)
The start-up downturn kicked in late last year, after a stock market correction in August. Venture investing in the U.S. dropped 28 percent in the fourth quarter from a year earlier, according to the National Venture Capital Association, even as full-year financing reached the highest since 2000.
There hasn't been a tech IPO in the U.S. this year.
Salesforce has still participated in some hefty rounds, including a $90 million investment in enterprise planning software developer Anaplan in January and a $56 million financing of marketing software start-up BloomReach the same month.
Salesforce Ventures has more companies worth at least $1 billion in its portfolio than any other corporate VC, CB Insights' data show. Among them are DocuSign, MuleSoft and Anaplan.
"Good companies continue to be able to raise money," Somorjai said. "Even though valuations have compressed a little bit, that's OK."