It may not seem like a big deal if a Roy Lichtenstein painting sells for less than it should have at auction, but the impact on your business could be profound.
On Wednesday night, as Sotheby’s kicked off several days of old master and modernist auctions, the art house barely met its minimum sales level of $375 million, by notching $377 million in transactions.
That’s a far cry from just five months ago, when Sotheby’s and competing house Christie’s garnered record sales, and worldwide attention, by each selling $1 billion worth of paintings and sculptures over the course of a week. Then, paintings such as Picasso’s "Women of Algiers (Version 0)” fetched historic prices, with the final gavel falling at $179 million. By contrast, plenty of paintings on Wednesday sold at the lower end of estimates, and some, like Jasper John’s “Disappearance I” failed to sell at all, the New York Times reports.
While the rarefied art world may seem like it's worlds away from the concerns of your own company, you probably want to pay attention. Not only may the paintings and sculpture you bought now fetch less money, but your own company's value may soon slide as well.
There’s a link--albeit tenuous--between art sales and stock market performance, and at this point, the message seems to be clear: the hype cycle that’s pushed up valuations for everything from hot technology startups like Uber and Snapchat to modernist paintings seems to be coming to an end. For entrepreneurs, it’s yet another sign you may need to take a more sober view of things too. In addition to lower valuations for your own company, the changing winds of the art market may further signal a retrenchment in the economy. And just like Sotheby’s and the art market, the big lesson is that you shouldn’t let over-inflated valuation expectations interfere with your exit plans, which could include a sale or plans to go public.
Though, that's already been the trend. As Inc. has reported before, fewer tech companies went public in 2015. Yet more venture capital continues to chase companies than exits can support. As of early October, investors poured $42 billion into tech companies in 2015. Exits, which include either initial public offerings or mergers and acquisitions, were only worth $26 billion, venture capital researcher CB Insights reported.
Further, nearly a quarter of the 50 tech public offerings in the past 12 months are now trading below their pre-IPO prices, per the Wall Street Journal.
As one example, cloud storage company Box, an Inc. 5000 company, went public in January, at a pre-IPO valuation of around $2.4 billion. By the time Box went public, however, its valuation had dropped more than $700 million to $1.7 billion, with shares pricing on the low end, at $14. Although the company’s price per share popped to $25 soon after its IPO, shares have fallen by half since then, and are currently trading at around $12. Its market cap is now $1.5 billion.
Similarly, once high-flying Twitter has a current valuation of about $21 billion, about 20 percent lower than its immediate post-IPO market cap.
The lower valuations on everything from tech startups to modernist paintings may have a bright side, however. You might be able to get more reasonable terms from potential investors, as my colleague Jeff Bercovici reported in September in his story about the technology bubble. There’s also less chance that, as the bubble shrinks, it will inflict huge damage on the economy when it does finally pop, simply because it will be smaller.
And in the meantime, you can probably get a really good deal on that Jasper Johns Sotheby’s failed to sell on Wednesday night.