Compared to a year ago, startup valuations have fallen across the board, regardless of whether it's a startup raising a seed round or a Series E. But there's good news if it's a mid-stage startup. of growth.
But there is good news if your company is in the growth phase: According to data from CB Insights, in the first quarter of 2023, the valuations of startups that raise Series A, B and C rounds around the world increased compared to the fourth quarter of 2022.
However, the outlook is not good for early- and late-stage operations: Valuations for angel, seed, series D and subsequent rounds are trending downward worldwide.
In the United States, however, PitchBook data paints a different picture, one that confuses and fascinates at the same time: Early-stage valuations have risen, while Series A, B, C, and beyond are now worth less.
It seems that startup trends in the US diverge from the rest of the world: What goes up in the United States goes down in other countries, and vice versa.
This dissonance is interesting, but today we are going to explore a question that is even more intriguing. If we continue to see valuations rise for startups raising seed rounds while prices drop in later phases, how long will it be until the journey from seed rounds to Series A becomes a journey in that companies lose value?
The problem is quite obvious: if Series A investors are willing to pay less than they used to as seed rounds become more expensive, startups may end up stranded when they are ready to raise a Series A, finding themselves unable to raise a round at a price that makes sense given its existing valuation. This could force them to expand their financing or conduct bridge rounds, or even cause them to come up with horrible names for financings, like “pre-series A,” while they try to stay alive until a viable valuation materializes.
Of course, the best startups won't stumble on the rise from seed to Series A because they are exceptional. But what happens today with the average startup in the seed phase? Their first round may be much harder to raise than their older counterparts, not to mention they'll have to target a group of investors with different expectations.
Signs of what's to come?
According to PitchBook, the average pre-payment valuation of early-stage companies increased 16,9% to $12,9 million in the first quarter of 2023 compared to the fourth quarter of 2022, and 28,6% compared to the last year.
In contrast, the average pre-payment valuation of growth-stage companies decreased 5,7% to $38,2 million in Q2023 2022 from Q8,3 2022 and fell further compared to a year ago. The average valuation of late-stage startups also decreased by XNUMX% compared to the fourth quarter of XNUMX.
One could argue that startup valuations are simply correcting across the board, becoming more equitable, as early deals were undervalued and later-stage deals were overvalued. But that seems unlikely, given that seeding round valuations continue to rise, despite the massive amount of complaints about seed prices we've had to endure since time immemorial.
We're not saying that rising seed round valuations are going to doom an entire generation of US startups. We're simply pointing out that the seeds of a future Series A crisis are likely being planted as we watch.
The bills come out, but at what price?
One reason for rising valuations in the launch phase could be the fact that investors are tighter than ever.
When the market was in full swing and crossover funds were hyperactive, investors did not think twice before paying large amounts of money for a share of a hot company. Nowadays, everyone is looking for a bargain, which, in practice, means trying to get into the most attractive companies of the future as soon as possible.
A16z's rumored move to create a formal fund of funds reflects the growing appeal of empty cap tables at promising startups. The investment company apparently intends to use the fund of funds to distribute capital to emerging fund managers, who would in turn invest in young emerging companies and advance their own investments.
The math makes sense. The best time to get into a company at a good price is to invest early. If we are talking about a possible IPO candidate, giving it a high valuation in the seed phase will not really matter in the long term. This likely explains why early stage valuations are rising despite current market conditions.
The problem with this approach is that not every startup is a rocket ship. Many will fail, and even those that survive will have to pass key milestones to raise money. If investors are lax about initial valuations but want to frown and mutter when evaluating subsequent rounds, aren't they just pushing startups off a cliff?
It's impossible to talk about the US launch phase without referring to Y Combinator, especially since it changed its standard agreement. His decision to invest $500.000 in the companies in his batch is likely to contribute to the rise in early-stage valuations. But the main factor is its "most favored nation" clause, which probably influences the price of initial financing operations in the market.
Obviously, Y Combinator is doing what works best for its core business, which is making early bets on space rockets. But his decisions are widening the gap between the seed phase and what follows.
Of course, many investors are aware of this growing disconnect and are trying to find solutions.
For example, in our latest survey of psychedelic medicine investors, we learned that before investing, VC funds ask each other about a seed-stage team's ability to raise its next round. “Our due diligence process now involves speaking with Series A and B investors to understand what they would need to see to make each potential investment investable,” said Greg Kubin and Matias Serebrinsky, general partners at PsyMed Ventures.
What else will the market come up with to avoid putting seed-stage startups against the wall?
