The Bid/Ask Spread in Venture Capital
I wish I had a chart of the bid/ask spread in venture capital today.
The bid/ask spread in VC is the difference between the post-money valuation between a VC (the bidder) & a company (seller).
In the past few years, the spread has been tight. The market is liquid. Many startups sell shares to buyers at mutually attractive prices. Like the old stock trading floors with brokers yelling at each other, but in our era, we negotiate over Zoom coffees instead.
Today, the bid/ask spread measures in the tens or hundreds of millions of dollars depending on the company’s stage.
A startups who had verbal offers in Q1 at $500m may expect to raise at $450m. The 10% originates from the Founder Sentiment Survey.
But the stock market comparables imply the company should trade at a 50% discount or $250m. The bid/ask spread stretches to 200m on 450m or 44%.
That’s not so much a spread as an abyss.
When the bid/ask spread exceeds 5 or 10%, the market seizes up, like a combustion engine without oil. No one trades. Investors pack their vests into a rolly-suitcase and head to the beach.
Over time, buyer & seller price expectations will converge. The market will cough, sputter, & turn over again, the engine humming.
A chart of the bid/ask spread would visualize when startups can expect healthy market once more and where it will settle.
So true. The Bid/Ask spread is a clear window into the market dynamics. There are VCs with dry powder and also companies with real products and customers. I am confident the venture market will settle down to a normal spread - give it a minute! P S - We (PDS founders) believe in the power of a bid/ask order book to drive market based pricing, so we incorporated this functionality into our data licensing API system for using data and IP across enterprises and supply chains. Proper valuing of data will unlock data and new revenue.
Principal @ Structural Capital | Emerging Chief Financial Officer (CFO) | Growth Credit | Venture Debt | Growth Financing
2yTo add another layer of complexity think about how future M&A discussions will play out. Also, really tough and potentially unfair for new employees being hired without a repricing of equity that is being given to them. I hope CEOs and boards can be sensible and fair.
Founder: Practical Venture Capital, 500 Startups
2ydefinitely on target... to confirm this analysis, just look at the secondary market (and how limited the activity is in the past 2 quarters). abyss, not gap, is indeed an apt description.