Citi says more startups embracing ‘down round’ as private markets show signs of life amid IPO slump: ‘Boards have come around’

A conference at Citigroup’s Tribeca headquarters drew record attendance this week, including almost 150 institutional investors and about 50 so-called unicorns, or startups that are valued at more than $1 billion. More than 20% of the companies have either signed up the Wall Street giant to help them raise private capital or are close to doing so, up from less than 10% at the same conference a year ago.

“We’re very early in this market rebound,” Paul Abrahimzadeh, Citigroup’s co-head of equity capital markets in North America, said in an interview on the sidelines of the conference. “This is a great sign that there’s still a very strong bid and strong interest in private capital formation.”

A rebound would mark a stark turnaround from the doldrums of 2022, when equity private placements plummeted as the Federal Reserve aggressively raised interest rates. Still, no one is predicting a return to the heyday of just two years ago, when venture capital companies poured money into startups of all shapes and sizes, minting a record 580 unicorns in 2021 alone, according to PitchBook. 

Part of what’s helping now is that more startup boards and chief executives are finally open to the idea of raising new funding, even if it means they have to accept a lower valuation than they previously received — known as a “down round” in industry parlance. 

“Boards have come around and realized that 2021 was an aberration,” Abrahimzadeh said. “Less boards today are saying ‘I’m wedded to my 2021 valuation.’”

Building a Team

Citigroup has spent years building out its offerings for companies that haven’t yet gone public. The lender now has roughly 20 bankers, including five managing directors, dedicated to the business around the world. 

For years, though, startups wouldn’t even need to hire a banker to ink a deal for a funding round. These days, with institutional investors becoming increasingly choosy about the startups they want to invest in and the structure of the deals they’re looking to strike, more startups are seeking out bankers for their fundraisings.

“Companies realize you do need an adviser in this market,” said John Collmer, who joined Citigroup in 2021 to lead its private capital markets business globally. “Deal sizes have shrunk. You used to be able to just go out and raise an unlimited amount of money; now you really need to be precise.”

Citigroup’s conference this week kicked off with a welcome dinner hosted by Chief Executive Officer Jane Fraser. Donn Davis, chairman of the Professional Fighters League and an attendee at the conference, characterized investor appetite for new deals as “medium.”

“I’ve seen it low and I’ve seen it high,” said Davis, who is in the process of raising capital for the PFL’s regional leagues in the Middle East, Africa, Asia and Mexico. “What we’re now seeing though is people want growth, but they’re being cautious. When it’s high, they want growth and they’re being more aggressive. When it’s low, they want growth but they’re scared to do anything.”

No Hurry

Still, it could take time for the budding optimism in private fundraising to trickle through to public offerings. More companies have been taken private this year than have listed publicly, according to research from Bloomberg Intelligence analyst Andrew Silverman.

“We’re not as enthusiastic,” Gina Bartasi, founder and executive chairman of Kindbody, a chain of fertility clinics that’s weighing an initial public offering for sometime next year. “I know bankers are tired of not having any IPOs. The New York Stock Exchange is a client of ours, they’re also tired of not having any IPOs. But we’re fortunate with some deep-pocketed investors that we don’t have to hurry and go out.”