Venture capital gets another wake-up call

Klarna was ranked as the fifth largest unicorn in the world in early June by research firm TradingPedia. But the sixth on the list is a homegrown hero: design software platform Canva, whose soaring valuations have delivered remarkable results for Australia’s venture capital sector in recent years.

Canva was valued at $40 billion last September after a slight capital increase, and as tech stocks have plummeted in the last nine months, there’s a lot of debate about where that valuation will take today.

Franklin Templeton, who invested in Canva in late 2021, continues to cut the value of his stake in the business. The company’s Growth Opportunity Fund paid $20.2 million for its shares last December, but has cut that valuation repeatedly this year. The latest filings show the stock was worth $7.4 million as of May 31, down 63.4 percent from its entry price.

To be clear, this is just one investor’s view of Canva’s valuation and several others are less bearish. It’s also important to note that venture capital firms have traditionally revalued shares in start-ups when a funding round occurs in the company – this is clearly not the case at Canva, which has consistently demonstrated strong and sustainable growth.

Further re-evaluation

However, the local venture capital sector is not ignoring moves in tech valuations around the world and there seems to be a reasonable acceptance that pretending valuations based on previous fundraising rounds remain valid will not help VC firms, their investors, or start-ups. self.

For example, pioneering Australian VC firm SquarePeg, founded by Paul Bassat, has added external independent assessments to its valuation process, which it said last month was “fully appropriate given the scale some of our portfolio companies have now reached”.

The downturn at Klarna should prompt further re-evaluation of valuations across the local and even global VC sector.

While private markets are not subject to the daily, weekly, monthly and even quarterly ups and downs of public markets, the pain of higher interest rates, slower economic growth, and lower valuations will never be confined to equities.

And a spin-down at Klarna said the readjustment of private company valuations could look more dramatic than what public market investors saw this year because it happened all at once.

And while it’s hard not to look at the massive valuations Klarna and Canva achieved in the last year, there’s an argument that any drop in valuation should be seen in context.

There is no doubt that the froth on the market in 2021 looks ridiculous today. Even if we put aside the irrational excitement seen at the time in private markets, global interest rate moves alone say valuations should fall.

Arguably it’s brazen from Klarna chief executive Sebastian Siemiatkowski to point out that the company’s valuation has increased from $2.1 billion to $6.7 billion since late 2018 when the company was quite happy to celebrate last year’s big valuation. But he had a point: doubling the value of the company in three and a half years is still impressive.

Similarly, if Canva’s valuation hypothetically dropped from the $40 billion to $15 billion implied by Franklin Templeton’s valuation, it would still represent a nearly fivefold increase in value, given that it raised $3.2 billion in late 2019.

Finally, the bottom loop does not need a terminal. In 2009, the promising social media group then known as Facebook experienced a one-third drop in valuation to $10 billion when it raised capital in GFC. The business, now called Meta, is currently worth $445 billion.

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