In 2021 it seemed like every startup was capable of raising money at an inflated valuation regardless of its size, sector, or underlying business model. Things are very different today.
Comparing previous valuations, across all stages of early-stage fundraising except seed, median valuations declined last year compared to 2022, according to PitchBook data. Things were slightly better in 2022, when only late-stage and growth-stage median valuations declined relative to 2021, while early-stage median valuation continued to rise.
Things aren't looking good this year either. A recent survey of more than 40 investors found that very few investors actually expect valuations to rise again this year. In fact, many said valuations will continue to fall, while others think we are already hitting bottom.
However, they all agreed on one thing: In 2024, stage and sector will matter more than ever in determining valuation trends.
Initial stage
When the market began to turn in 2022, seed and early-stage valuations did not decline as quickly as in the later stages, because younger startups were more isolated from the public markets. Because of that differential, some investors believe there is still room for seed valuations to decline.
Kirby Winfield, founding general partner of Ascend, predicted that seed valuations will likely continue to fall by 5% to 10% before normalizing. Drew Glover, general partner at Fiat Ventures, also believes we haven't hit rock bottom yet.
"In the early stages, we will continue to see those valuations come back down to earth, but overall, we will settle into a position where everyone feels that it will provide value to the investors and employees of those companies," Glover said.
Some investors like Rachel ten Brink, founder and general partner of Red Bike Capital, think that initial valuations have already normalized and, based on the structure of these young startups, they no longer have much room to go down.
“Valuations in the pre-seed and seed stages have been more resilient, and I expect that trend to continue as they have a structural bottom,” ten Brink said. “Founders need a minimum level of capital to get started, and there is a limited amount of dilution that is viable to have a healthy cap table, limiting how and how low valuations can fall in these early stages.”
By observing the stage already in Serie A, there was some consensus that valuations have probably fallen as much as they should. Some investors, including Sarah Sclarsic, founding partner at Voyager Ventures, predicted that Series A valuations could begin to rise again in 2024. George Easley, director of Outsiders Fund, added that he is currently seeing many attractive risk profiles in the scenarios. of Serie A.
late stage
Late-stage startup valuations were hit hardest and fastest as the market weakened in 2022. Still, investors aren't sure they've hit bottom yet.
Several venture capitalists predicted that we will see more down rounds next year, as startups need to raise capital but can't do so at a valuation that matches or exceeds their last round. Since many of these startups have avoided growing in current market conditions, Sarah Guo, founder of Conviction, believes that startups and investors will have to face reality again in 2024.
«Another space pending reduction is that of companies backed by venture capital that are in the intermediate stage and that rose at the moment of greatest market activity, and even many of those that obtain good results will adjust their prices with flat or bearish rounds »Guo said. "There will also be some rationalization of venture firms that performed poorly during the last cycle, which should remove some of the excess capital in the system, but this will happen very slowly."
Some investors also predicted that this year, now that public markets have stabilized, we will see a return to early late-stage prices based on public comparables. Matt Cohen, founding managing partner at Ripple Ventures, expects late-stage companies to once again be valued at 5 to 10 times ARR. This would be a notable drop for companies that launched late-stage rounds in 2021, but could be a healthy place to start for startups just entering late stages.
Sector
While the scenario is likely to be the most important factor in determining valuation trends in 2024, the sector in which a startup operates will also play an important role. Startups in climate, artificial intelligence and defense seem almost immune to market conditions despite a general lack of funding in most other sectors, for example, while those in almost every other sector have struggled to find capital.
Sophie Bakalar, a partner at Collab Fund, expects that trend to continue in 2024. She said the valuation gap will grow even larger this year between companies that are striking competitive deals in popular categories and companies that are not. "There seems to be a dramatic fork," she Bakalar said. "In particular, the top 1% to 2% of 'hottest' startups continue to close rounds at strong valuations, often consistent with 2020 and 2021 prices."
Michael Marks, founding managing partner at Celesta Capital, believes that founders, especially those who have waited as long as they could for their fundraising rounds, cannot afford to obsess over valuation trends in 2024. Instead, he suggests that They should simply focus on raising the capital they need to survive.
“In the current environment, startups don't have the ability to negotiate hard or focus solely on price,” Marks said. “Instead, the priority will be to raise the necessary capital, even if that means being flexible with the terms. “Those who focus on living to fight another day and continue generating value in their business will be the winners.”
"The valuation of a company will be resolved autonomously by itself in the long term."
