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Startups, Markets and Money
Valuation Pressure Mounts for Late-Stage Startups
If you are raising money for an early-stage startup today, there’s reason to be hopeful when it comes to the price that you might be able to charge for shares in your company. However, the later stage your startup is, the worse your chances are to raise funds at a price that you like.
New Data from CB Insights
New data from CB Insights indicates that, on a global basis, the farther along the alphabet a startup’s next funding round is, the more valuation pressure that transaction will be under from a price perspective. This trend is surprising in how clear it is in trend terms, but not too surprising.
The Decline of Mega-Rounds
Recall that mega-rounds, or venture capital deals worth $100 million or more, have fallen precipitously this year. While median deal size through the third quarter has been flat in the early- and mid-stage startup market, late-stage deals have gotten smaller this year.
Why Q3’s Median Valuations Actually Make Perfect Sense
With that backdrop, falling late-stage valuations are hardly surprising. Venture investor and SaaS aficionado Jason Lemkin had this to say today:
"My summary of Venture Markets in Nov 2022: Series B and later even worse than looks in data: 85%+ of investing here has simply ceased[.] Lower volume implies less demand; less demand implies less competition around deal price; less competition means lower prices."
The Pain of Late-Stage Startups
Let’s examine the pain that late-stage startups are dealing with today, and what it could mean for unicorns jammed between changing venture preferences and a seemingly closed IPO market.
The Good and Bad News
Compared to 2021, global seed and angel deals in Q3 2022 are being valued 29% more richly, clocking in at $15.1 million (all per-round data reported on a median basis), according to CB Insights. Series A deals, per the same dataset, are up a more modest 20%.
The Decline of Valuations
However, as we move further along the alphabet, valuations decline sharply:
- Q3 2022 Series B median valuations are off 11% compared to 2021.
- Q3 2022 Series C median valuations are off 21% compared to 2021.
- Q3 2022 Series D+ median valuations are off 31% compared to 2021.
The Hangover Phase
This decline makes sense; last year we saw too many companies raise too much money, too quickly, at too great a price. An explosion in capital from outside normal venture circles played a role in inflating late-stage fundraising and valuations.
What It Means for Unicorns
For unicorns, this trend is particularly concerning. With changing venture preferences and a seemingly closed IPO market, these companies are facing significant challenges in raising funds at the right price.
The Future of Late-Stage Fundraising
As the market continues to evolve, it’s likely that late-stage fundraising will become even more challenging for startups. However, this trend also presents opportunities for innovative companies that can adapt and thrive in a changing environment.
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