Newsletters: To mark down or not to mark down

To mark down or not to mark down

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The Weekend Pitch

July 10, 2022

Presented by Corinex

(sesame/Getty Images)

If you're wondering just how much valuations of private companies could drop amid the downturn and rising interest rates, look no further than Klarna.

Last summer, the Swedish buy now, pay later lender was valued at $45.6 billion. But the winds have shifted dramatically since then. The most valuable private company in Europe is reportedly raising a new round of financing at a valuation of $6.5 billion—a drop of more than 85%.

While other startups may not be as affected by current market conditions as the buy now, pay later companies, investors can't simply dismiss Klarna's potential down round as an anomaly.

There is little doubt that a great many other startups, especially late-stage ones, would have a hard time raising capital at the valuations they once fetched. And since investors often say that an asset is only worth what somebody is willing to pay for it, many startups seem blatantly overvalued, even if they won't seek fresh capital for a while.

"Never has previous round valuations felt more stale and inconsistent with the current market," tweeted Eric Paley, a co-founding partner at Founder Collective, a seed-stage VC firm.

The question that many VCs are now struggling with is what, if anything, they should do about it. One answer is to mark down portfolio companies to reflect what they may be worth now.

But that's far from straightforward.

I am Marina Temkin, and this is the Weekend Pitch. You can reach me at marina.temkin@pitchbook.com or on Twitter @mtemkin.

Although all US venture firms are required to review valuations every quarter—a process called marking-to-market—they don't all share the same philosophy on how and when an asset should be written up or down.

A message from Corinex

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Quote/Unquote

Ramesh "Sunny" Balwani (Justin Sullivan/Getty Images)

"I am responsible for everything at Theranos. All have been my decisions too."

—A text message sent in July 2015 from former Theranos COO Ramesh "Sunny" Balwani to Elizabeth Holmes, presented in court by Assistant US Attorney Jeff Schenk during his closing argument.

Balwani was found guilty on Thursday of defrauding investors and patients on all 12 criminal fraud charges, which included 10 counts of federal wire fraud and two counts of conspiracy to commit wire fraud.

Deal flow

(Dominic Dähncke/Getty Images)

Private equity investment in hotels and resorts is on pace to match last year's total, having completed seven deals at the year's halfway point, according to PitchBook data.

Here's a closer look at how PE firms are rediscovering their taste for leisure, restaurant and hotel companies, following the sector's crash during the economic crisis triggered by the pandemic.

Did you know ...

... That funding for 3D printing startups is at an all-time high? Venture funding for these companies totaled $1.5 billion in H1 2022, the most of any previous six-month period and the second-highest annual total on record.

Datapoints

(Drew Sanders/PitchBook News)

In the first half of this year, private equity firms and their portfolio companies backed 48 asset management deals worldwide worth a total of $6.7 billion, including both direct investments and add-ons, according to PitchBook data.

PitchBook's Madeline Shi took a closer look at the wave of consolidation sweeping the wealth management industry, fueled by PE interest, generational turnover and acquisitions.

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