The US venture market continues a slow evolution by way of correcting expectations and valuations, “at least in some arenas of the market,” according to an update from PitchBook.
Artificial intelligence and machine learning (AI & ML) is “driving interest across the strategy, with company valuations far outstripping those in other verticals,” the report from PitchBook noted.
On its own, AI & ML received “nearly 50% of deal value in the US market in Q2.”
PitchBook also mentioned that this “was driven by CoreWeave and xAI’s large deals ($8.6 billion and $6.0 billion, respectively), but the vertical also captured more than a quarter of the completed deals in Q2.”
PitchBook added that it is true that AI is a broad category and “that many companies have pivoted their business, or at least their company story, to encompass AI and capture the market tailwinds.”
Broadly speaking, the PitchBook report pointed out that private markets “continue to grapple with the factors that led to the initial slowdown.”
Interest rate cuts this year may seem likelier “now than they did a quarter ago, but that sentiment is far less optimistic than it was a year ago.”
The PitchBook report explained that the pressure of “rising rates on public markets was quickly felt in the late stage and the venture-growth stage and has further impacted market dynamics in the early stage as liquidity challenges persist.”
The strong public market performance that “has been viewed as a potential driver of IPOs has also bifurcated.”
The PitchBook report further noted that the seven largest companies on the S&P 500 are up more than 32% year “to date, while the rest of the index is up just over 7%.”
Tech companies that listed this year have also “had relatively lackluster post-IPO performances.”
For several newly listed companies, the initial listing price “was a strong increase fromthe IPO, but the stocks have trended negatively since.”
Price/ sales ratios have not “expanded materially under the weight of higher cost of capital, and subsequently, valuations have continued to flounder in the private market.”
The PitchBook report explained that the “challenge with the data is that median valuations look high, but context is needed for color on those figures.”
In fact, the YTD annual medians “are higher at some stages than they were in 2021. That is hardly the entire story, nor is it necessarily correct or incorrect.”
It just depends on “what you are looking for,” the report noted.
The median Series A valuation “in Q2, $40.0 million, matched the figure from the two peak quarters in 2022.”
However, the number of reported valuations “in Q2 2024 is well less than half that of each of these other high quarters.”
The median Series B valuation in Q2 showed “a rebound of more than 30% from the 2023 low, yet it remains 30% below the highs of 2021.”
What cannot be seen in the data is the revenue multiples “generated by the valuations or the growth rates of startups raising capital.”
According to the report from PitchBook, the market narrative is “that investment benchmarks have increased, and if this is taken as truth, then the increasing valuations (record medians or not) come into a different context.”
The fewer priced rounds are due to the inability of companies to “raise a new round, as well
as companies opting for convertible notes or debt, when possible, rather than raising a new priced investment at a lower valuation.”
Another factor in the rising medians has “been the number of companies that are finally coming back to market to raise.”
The median time between financing has increased significantly for companies.
In Q3 2021, Series D+ rounds were being raised “roughly 1.2 years after the previous round.”
Companies closing Series D+ rounds in Q2 of this year had not raised for a median time of more than two years, “meaning that companies raising now also last raised when pricing was at its highest and they already had a high valuation pinned to themselves.”
With more context, the relatively high median valuation figures “highlight a more challenging market for startups.”
The PitchBook report concluded that those that “can raise are doing it over a longer time period to reach milestones, and they are raising at a much lower step-up because their previous valuation was based on much higher multiples in the market two years ago.”