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From its high in October of last year the public market place has fallen by about 15% through last Friday. As the market takes a well deserved holiday after a tumultuous start to the year, I ask myself "what if any impact these last four months have on the price of option grants?" And more importantly, "what if we see a continued correction through the first quarter?" Consider that many emerging companies last valued their grants right about the market peak and are now faced with setting a price as of 12/31/07. With a slew of annual updates on the way, how do we know factor in the changing sentiment in not only the public market but the economy in general? Recession/inflation talk is the new buzz while the housing market collapse remains a well versed threat. Yes, we base the value of most emerging biotech and tech companies on some future exit which may or may not be in this economic cycle. And, of course, we have already begun to hear the refrains, well we are actually "recession proof" and even some "new economy" talk sparks up from time to time much like 10 years ago. By no means, am I implying that we are on the edge of a similar bubble, but we are cognizant that despite the fact that most of our clients had great years in 2007, values must be tempered by the changing landscape. That means multiples might tick down slightly, we are going to more cognizant of company specific risk factors (e.g. how susceptible are you to the over all economy), and most importantly are the management teams we talk about in tune with the change in values around them.

While we do understand "real estate is local", its rare that you talk to someone who hasn't tried to sell their house who will admit that the value has declined in the last 12 months and they actually own a depreciating asset. Sometimes it matters little that you finished the basement, added a bathroom, and put in new carpet, market forces are powerful and the most important issue is the price that your neighbor took to get out. That's the situation that many private companies now face with a possible further correction in the public markets.

Category(s): Valuation Thoughts
Posted by Brett Suchor at 07:42 PM | Permalink | Comments (0) | TrackBacks (0)