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Investing in Stealth Mode

October 2nd 2020

Recently the Wall Street Journal reported that “many startups are having trouble raising new funding on favorable terms amid the pandemic, according to new data.”  The WSJ went on to comment on numbers released by AngelList, the decade old U.S. website for startups, angel investors, and job-seekers.  AngelList had compiled data on more than 200 startup/early stage businesses that had raised investment through it’s platform during the second quarter of 2020.

The key finding is that there was a jump in the number of startups raising down round investment.  A down round is simply when the pre-money valuation of a fundraising round is lower than the post-money valuation of the previous round. 

However, down rounds have been part of the landscape as long as there’s been investment, so how significant is this finding?

The team at Beauhurst has started to shed some light on the matter – with some surprising results.  They examined so called stealth rounds, where neither the company nor the investors seek publicity on the fund raise.  They report that a staggering 69% of all equity deals in the UK are kept quiet.  So what’s going on?

Looking over historical data from the last 10 years shows that this fraction is fairly constant.  Startup companies are slightly more likely to have stealth rounds than growth companies.  However, deal size for stealth rounds are much smaller than announced deals - and the total investment raised via is much smaller too.

This helps explain some of the underlying issues.  Companies may have many reasons from keeping quiet about a round – it may be oversubscribed by existing investors so there’s imply no need to make a fuss or there might be amore significant event (IPO for example) coming up.  However, these reasons feel more applicable to later stage business, not early stage.

The fact is, it’s a flat or downward valuation that is the most likely explanation for a quiet round in an early stage business.  And that should not be a surprise.  Valuation is such a subjective entity – even in established public businesses [Tesla?] – that a correction to an over valuation should really be viewed as par for the course.  And particularly so in these pandemic permeated times.  In fact, many investors see valuation journeys more like roller coasters before they finally decide to get off the bandwagon.

After all, there are only two valuations that matter to an investor – the price you buy in and the price you sell at.  Everything else is just scenery.

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