Private markets are "overvalued" and must "rebalance," SoftBank Vision Fund CEO Rajeev Misra

Private markets are

According to Rajeev Misra, chief executive officer of SoftBank Group Corp. Vision Fund, private markets are "overvalued" and must "rebalance."

Startup funding has been soaring, breaking records last year. According to CB Insights data, venture capital dollars spent on startups will exceed $600 billion in 2021, more than doubling previous year highs. Valuations have risen as well. According to CB Insights, there are currently over 900 startups with valuations of more than $1 billion.

All of the easy money last year resulted in companies strutting into investor meetings, attempting to dictate the valuations they deserved, Misra said at an Axios Pro Rata event on Wednesday. However, the tone has shifted.

Founders who once said: “‘Our company is worth $20 billion, send in a term sheet, and we’ll decide whose money to take’ — that’s gone,” the investor said. Instead, in recent weeks, several of the same companies who were unable to get capital on the favourable terms they sought have returned to the Vision Fund and requested a reengagement.

Some investors have cautioned that while the public markets have entered correction area, the private markets may experience a similar cold. Many private businesses are still valued higher than their public equivalents, according to Misra, a complaint shared by other investors.

Some have advised their portfolio companies to be cautious now, fearing that a drop in values could make it more difficult to raise capital in the future.

As an example, Misra referenced the software-as-a-service business. Private companies are routinely valued at 20 times forward revenue there, he noted, but SAAS company prices have dropped to around 12 times revenue in public markets.

“That gap is going to tighten over the next six months,” he said of the discrepancy between public and private markets.

The Vision Fund is "significantly" increasing its valuation discipline, according to Misra. The Vision Fund 2 - a newer, smaller version of SoftBank's startup investing arm — has an average check size of $200 million, compared to around $1 billion for the first Vision Fund.

The first fund was backed by other investors, whereas Vision Fund 2 is solely funded by SoftBank. He expects the fund to take money from outside investors again in the future.

Misra also expressed optimism regarding Chinese businesses, predicting that the current "turmoil" will be resolved in the second half of this year.