Private Market Update October 2024
Has the Great Reset Run Its Course?
In July of 2023, the Private Market Update exposed a notable trend: As macroeconomic headwinds – inflation, war, and high interest rates among them – roared on, valuations for private companies nose-dived, culminating in a -52% median discount to last funding round in that month’s report. Median valuations would eventually bottom out in Sept. of 2023 at -62% to last round1. But Forge data showed that the impact stretched further back than the most recent funding cycle of the time.
We wrote then: “New data from Forge shows that companies are trading at just a –5% discount to their second most recent primary fundraising round. In other words, the valuation growth that occurred over the last few years during the height of the low interest rate era has essentially been wiped out.”
Forge ran this chart to illustrate the point:
We named the start of the period The Great Reset, and we’ve been watching it play out over the past several years, freezing investors, stymying up-rounds, and rewriting the rules about who can, and how to, raise capital.
Many companies put off fundraising as long as they could, hoping to grow back into something like the valuations of 2021. But the Great Reset persisted. Eventually, companies would have to raise again before a market recovery, and most did so at deep discounts to their last rounds or with structure that granted oversized preferences to the smattering of investors continuing to invest2. (The Private Magnificent 7 are the obvious outliers here.)
But times, as Woody Guthrie put it, they are a-changing. Slowly, yes. Frustratingly? Maybe. And yet, the median discount to last funding round has generally crawled upwards since scraping that brutal -62% bottom a year ago – clocking in at -8% in August, and -12% in September, flirting with the possibility of par for the first time in more than two years. And since it started moving upwards, some of those macro headwinds have at least lessened from “gale-force” to “blustery” – I’m looking at you, interest rates and inflation.
With the US Presidential election just weeks away, one could hope at least for a distinct outcome that investors can feed into their models. There are also signs that the IPO market may finally be waking from its fever-dream of the last two years. With this environment, is it time to start asking ourselves if The Great Reset may soon be over?
And if it were nearing its end, what would that mean? 2021 was a year of explosive fundraising for the venture-backed, high-growth asset class, but history has shown that this simply was not the recipe for long-term growth. Instead, the end of The Great Reset might manifest itself through a more measured environment where a healthy market helps companies with product-market fit, customer traction, and clear paths to profitability raise money at reasonable step-ups each round without overextending themselves (and in the process, still creating jobs and developing world changing technology in a sustained way).
It appears we may be a little closer to that reality today.
AI Companies Keeping Private Market on the Upswing
The Forge Private Market Index, which represents the 75 most liquid names in the private market, moved down 2.8% in the quarter (and came in flat in September). A significant influencer in the quarter was Exabeam’s merger with LogRhythm, which completed in July3. This eliminated the cybersecurity company from the index at no gain, and dragged the performance overall. Index performance remains positive year-to-date at +2.4%. AI will have a larger impact in Q3 as more pure-play AI companies joined the index on Oct. 1st, displacing mostly non-AI names.
The Forge Private Market Index was flat in September, but a handful of names – particularly AI-focused companies – held the index up on their shoulders, preventing it from turning negative. That trend is continuing into October - enter OpenAI's latest funding round, with a valuation that ballooned by nearly double to $157 billion earlier this month.4
This valuation gain helped lift the Private Magnificent 7 – identified by Forge as the seven companies that have grown larger and delivered outsized performance compared to other private, venture-backed tech unicorns – all while outperforming the Public Magnificent 7 (a group of publicly traded mega-cap tech companies).5
As of early October, the Private Magnificent 7 has gained 14.6% over the last months, while the Public Magnificent 7 has dropped by -3.8%.6
OpenAI isn't the only AI company benefitting from surging investor interest. Forge reconstituted the Forge Private Market Index at the start of October, which meant the debut of five new AI-centric companies in the index: Figure AI, Shield AI, Glean, Groq, and Scale AI.
That brings the total number of AI-related companies in the index to 34, meaning nearly half the index consists of companies who claim AI as a core component of their product and innovation. In addition to OpenAI, AI companies such as Lambda, Glean, Scale AI, Dataminr, SambaNova Systems, and Databricks have all been top performers.
Yet without AI, the story of the private market’s trajectory would surely take on a less optimistic tone, with many investors waiting for clarity on IPO conditions before they might take a chance on deeply discounted assets across sectors.
Did anyone say IPO?
There were a few more signs of movement in the IPO calendar in Q3. AI chipmaker Cerebras, said to be the upstart rival to NVIDIA, filed its S-1 at the end of September7. But almost just as fast as market-watchers celebrated the news, word that Cerebras might delay its IPO due to a delayed review by US National Security related to one of its investors, UAE-based G42, poured cold water on that enthusiasm8, according to Reuters.9
That said, private-to-public pathways could improve in 2025, assuming the uncertainty that characterizes this pre-election period eases and investors once again feel confident about the direction of the economy. With that view in mind, several prominent companies are reportedly eyeing IPOs as soon as next year, including Ryan Reynolds' ad-tech firm MNTN,10 and two virtual care health companies – Omada Health11 and Hinge Health.12 View the Forge IPO Calendar for ongoing updates on upcoming IPOs.
Meanwhile, AI companies continue to rake in funding, with Cisco reportedly nearing an investment in CoreWeave at a $23 billion valuation, according to Bloomberg.13
Bid/Ask Spreads
For more than a year now, the bid/ask spread has more often than not, remained below the median spread. That was the case again in September when spreads narrowed to 5.5%.
That's not to say that the same trend will definitely follow the AI sector, but it's not uncommon for there to be a rush of new companies into an emerging industry that have some success, only to then be weeded out shortly after.
So, while there's a lot of positive momentum behind AI companies right now, and they're helping to support more positive conditions across the private market, it's not necessarily a sign of long-term strength. Other private market sectors likely need to bounce back for more diverse and sustainable private market growth.
Median Discounts Flirt With Par
The median discount to last primary round was -12% in September – its second highest mark in more than two years after it posted a -8% discount in August. Companies in the 75th percentile and above, on average traded at a median premium of 14% to last funding round. Median trade prices on those companies have remained in the black, so to speak, for four consecutive months. While only sustained price trends can help market watchers tell for sure, a median premium to last funding round above zero could be the best sign yet that the era of The Great Reset may be coming to an end.
New buy and sell IOIs remained balanced in September after a buy-side dip in August.
And speaking of dips, sell-side interest sprang back to life in September after a significant August drop-off.