Few things are more unwelcome to venture capital investors than a down round. It’s not just that raising money at a depleted valuation leaves backers worse off. In an industry stacked with big personalities, down — and even flat — rounds represent a shrinkage of status too.
For an ambitious plutocrat like Elon Musk, such things are hard to tolerate. His social network X is reportedly looking to raise money. But from the outside, it’s not obvious the app once known as Twitter deserves a higher valuation than the $44bn that Musk paid for it in 2022.
For one thing, X made $1.2bn of adjusted ebitda in 2024, Bloomberg has reported — a little less than in 2021. If that grows by a third this year and is valued by investors at 15 times ebitda, roughly where Alphabet, Pinterest and Meta Platforms trade, X will command just $24bn.
Of course, X is a different beast today. For one thing, it reportedly owns a stake in xAI, an artificial intelligence venture Crunchbase values at $50bn. And for another, numbers only tell part of its story. These days, political influence matters as much as metrics like “daily active users”, and Musk — an adviser to US President Donald Trump — has plenty.
For an idea of the value of the Musk halo effect, just think that the banks that financed his takeover in 2022 recently managed to sell large chunks of the debt that they had remained saddled with at a small discount of 97 cents on the dollar.
Even if X were to get over the 2022 watermark, investors should apply a pinch of salt whenever a tech company recouped its former valuation peak. For starters, $44bn in 2022’s money is no longer worth $44bn. But even without the time value of money, X should by now be worth much more.
At the time of the buyout, for example, Twitter’s bankers reckoned that by 2024, based on a multiple of 2025’s estimated profit, the company would be worth up to $67bn. As it happens, that’s also roughly what it would be worth had its value just risen in line with Google parent Alphabet.
In general, down rounds are now becoming less common as a share of VC deals, PitchBook data suggests. And it’s possible to overstate the ignominy of a depleted valuation. Meta Platforms, then Facebook, weathered a down round in 2009. Its market capitalisation is now more than 100 times what it was after that cut.
Still Musk, who has suggested X could be worth $1tn, has something to prove in any future capital raising. And it would therefore be foolish to bet against him. Power has usurped profitability as a driver of financial value. What the world’s richest person wants has a habit of coming to pass — whether logical or not.
john.foley@ft.com