Though the venture market was in a state of declines over the past couple of years, much of the pricing pressure has not yet forced pre-seed or seed-stage valuations below the highs of 2021, according to an update from Pitchbook.
While it’s true this area of the market is relatively insulated from macro pressures that have pushed late-stage valuations down, and set off public market volatility, “that isn’t the full story,” the Pitchbook team noted.
Pitchbook also mentioned that the past few years “have been abundant for small funds (under $50 million), which have made up more than 50% of the fundraising counts. In aggregate, these funds have kept competition relatively high.”
Alongside that, stakes acquired in these deals “increased in 2023, compensating investors for the high risks of the stage.”
Along the same lines, early-stage valuations have “seen little volatility over the past six quarters, but the stakes acquired have increased from the lows of a couple of years ago.”
Pitchbook further noted that during 2023, the late stages of the venture ecosystem “grappled with challenges as valuation multiples and capital supply dwindled, putting increased pressure on dealmaking for mature startups.”
The median late-stage pre-money valuation “declined to $50.5 million, while the median venture-growth pre-money valuation declined 47.5% YoY. Of course, startups are aware of the current state of the market, and as such, have opted to preserve existing cash reserves for as long as possible to avoid raising capital in a less startup-friendly fundraising environment.”
Pitchbook also mentioned that the median time “between funding rounds for Series D+ startups in 2023 stands at 1.78 years, making it the lengthiest duration between raises observed in over a decade. Looking to 2024, we expect these trends to persist given numerous factors such as limited exit avenues for mature enterprises.”
Pitchbook added that startups continued “to struggle finding exit avenues at or near the premiums observed just two years ago, with public listings, in particular, experiencing a continued downward spiral.”
The median exit valuation for startups “making their public debut in 2023 declined $117.0 million YoY to $110.6 million, the lowest in over a decade, despite the strong performance of public markets during the year.”
Alternatively, acquisitions emerged as “a seemingly more viable route for liquidity given the more resilient valuations attached to many M&A transactions.”
The median acquisition valuation in 2023 “reached $61.4 million, a 25.1% increase from 2022. Despite this bright spot, the median M&A step-up in 2023 was just 1.33x, the lowest since 2016, suggesting that value creation upon acquisition still lagged prior years.”
While expectations for lower interest rates may help to “create a more favorable environment for both IPOs and M&A transactions in 2024, economic and geopolitical uncertainties will likely bring about a more cautious approach in the first half of the year.”
VC continues to be an incredibly investor-friendly market, “highlighted by the increase in down rounds over the past couple of years. Q3 and Q4 down rounds were some of the highest counts we’ve tracked in the past decade as a proportion of completed deals each quarter.”
The pricing pressure is now reportedly coming “from the relative lack of capital availability—at the late stages, spurred by the pullback in nontraditional investors—and the rapid descent of valuations for many stages.”
While down rounds aren’t yet near the high proportions seen during the GFC, completed deals are coming with much more structure, which can “keep top-line valuations high while bringing higher dilution to founders and existing investors should growth falter for the company.”
Pitchbook pointed out that cumulative dividends “are one of these structure terms now included in the highest percentage of deals seen in the past decade.”
Throughout 2023, the lack of exit opportunities continued “to plague startups and their investors. Despite notable IPOs such “as Instacart and Cava, the public listing area
experienced significant challenges.”
As stated in the report, the median exit valuation for public listings in 2023 “saw a YoY decline of roughly $117.0 million, reaching $110.6 million and marking the lowest annual median valuation observed in over a decade.”
According to Pitchbook, this record decline may be “a surprise to some given how well public markets performed in 2023; the S&P 500 rallied over 26.0% this year, including dividends, while the Nasdaq soared 43.0%.”
Of course, it is important to note “that this performance was heavily driven by mega-cap tech giants including Amazon, Apple, Nvidia, and Tesla. If we look outside of the “Magnificent Seven,” many stocks fell short relative to public index benchmarks; for example, 72% of the S&P 500 components underperformed the index in 2023.”
Pitchbook concluded that this discrepancy is “a significant indicator that the broader market has struggled to mirror the success enjoyed by these tech giants and raises concerns about the overall health and resilience of the public market.”