Private market valuations

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How are private company valuations affected by the crypto bear market?

This question continues to surface in conversations with institutional investors who are trying to wrap their heads around different investment opportunities in crypto. The liquid markets are easy to measure, require greater reliance on trading strategies (less attractive to institutions), and have seen an 80%+ decline in prices.

The private market is much more opaque. There are no minute-by-minute price tickers and many times companies won’t announce funding rounds or valuations. Recently, Jalak Jobanputra (founder of Future Perfect Ventures) gave an interview to Fortune that said “given how much the volumes have decreased in the last year, I wouldn’t be surprised if we are seeing valuations come down on the secondary markets for some of these companies.”

These comments were specifically talking about privately held companies, where investors own illiquid equity, that have business models based on trading volume of different cryptoassets. Many of these companies (Coinbase, Gemini, Circle, Kraken, etc) have multiple revenue streams, including exchange fees, OTC trading, and other infrastructure-related fees. While Jalak’s comments are directionally correct, there are a few outliers that have successfully weathered the bear market.

Take Coinbase for example — the largest exchange by trading volume in the US was able to capture ~$1 billion in revenue in 2017. The company only offered trading of Bitcoin and Ethereum, with reports surfacing that almost $400 million of top line revenue came in the heart of the 2017 mania (Q4). With prices and volume dropping so aggressively throughout 2018, you would expect revenue to fall off a cliff, but that didn’t necessarily happen. 

My guess is that Coinbase actually made more money last year, than in any previous year. They likely did this by increasing the number of assets they had listed, while also expanding the geographies that they serve. Essentially, if volume from existing customers is decreasing, you have to combat that by bringing new customers to the platform and giving them the option to trade a wider variety of assets.

Private market valuations are not only affected by bear markets in late stage companies though. The early stage market saw insane valuations in the tens of millions of dollars for pre-product, pre-revenue companies throughout 2017. The last 12 months brought those valuations down drastically, but it is not uncommon for me to see $7-10M pre-seed round valuations right now.

Even though valuations have come down for the youngest companies, they are still fairly overvalued. Just 2-3 years ago it would be common to see $3-5M pre-seed valuations, regardless of the industry. In my opinion, the early stage valuations reveal much more about the frothiness of a market because at that stage, every company has the same thing — a team and an idea.

As the liquid market continues going sideways in 2019, it wouldn’t surprise me if private company valuations, especially in the earliest stages, continue to decrease. Some of this will be crypto related and some will be a more macro force across all venture capital.

Either way, we should start seeing more semblance of normal in the months to come.

— Pomp

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