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PitchBook Report Shows VC Dry Powder Aids Valuations, Raises Questions about Overvaluation

August 10, 2017

Valuations Hit a Decade High Across Nearly All Stages, According to PitchBook’s 1H 2017 Valuations and Trend

SEATTLE – August 10, 2017 – Median valuations remained high for most series in the first half of 2017, according to PitchBook’s 1H 2017 Valuations and Trends report. Several factors contributed to the growth in valuations, including VC’s success on the fundraising trail and the availability of capital across all stages. Further, companies are working through each stage of financings later in their lifecycles and raising record levels of capital in the process. Take Airbnb as an example. The company is currently valued at $31 billion following its $1 billion series F in venture funding in March of this year. However, the impact of rising valuations is most obvious in the exit phase, where we saw 26 companies exit at a lower valuation than their more recent private value during the same period in 2016. So far in 2017, we’ve only seen 13 such exits indicating VC dry powder continues to boost value and slow exits.  
 
“As time between rounds grows and investment sizes increase, the result has been companies that are more developed and further into the venture cycle,” said Kyle Stanford, analyst at PitchBook. “This has led to a steady climb in valuations, which are hitting decade highs. We expect valuations to continue to rise, though at a more sustainable pace than we’ve seen in recent years.”

Delayed Seed Funding Creates Domino Effect of High Valuations 
Valuations in both seed and early stage financings have remained high in the first half of 2017, as a result of companies entering each stage of financing later in their lifecycle, necessitating larger investments and also higher valuations. The growth of incubators and accelerators has offered startups several different avenues to launch and grow their business before raising seed capital, which correlates strongly with larger deal sizes raised at this stage. The median age of a company before bringing on seed investment lengthened to nearly 2.5 years, almost a full year longer than five years ago. Meanwhile, median pre-money seed valuations have hit $6 million, up from $4 million during that timeframe.
 
For early stage companies, the more developed business models at the seed stage has had a domino effect on the size of later rounds and corresponding valuations. Fast-growing companies at the series A and B stages have been able to raise larger amounts as investors become more selective and willing to pay higher price tags. This year, series A valuations have increased by 7.5% compared to 2016, with median valuations sitting at $15.8 million. Similarly, series B increased 6%, with $38.6 million median valuations.
 
Large VC Funds Allow Late Stage Valuations to Climb, But Not Without Struggle
For series D stages and beyond, median valuations hit $250 million, a growth of roughly 386% since 2009. A key contributor to rising valuations in this group is the surge of large funds as well as megafunds with ample dry powder ($95 billion in the U.S.) and minimum investment requirements reserved for late stage companies. Investors have kept capital available to this group, allowing valuations to hike even further, though at a slower pace. 
 
However, some VC-backed unicorns have had trouble maintaining the strong growth needed to justify sky-high valuations. For instance, last month’s news surfaced SoftBank is considering buying shares of Uber from Benchmark, valuing the ride hailing company between $40 billion and $45 billion, a drop from the $68 billion valuation it reached last year. Another example is Jawbone’s recent liquidation. Following a series of massive funding rounds, which led to a $3.2 billion valuation in 2014, the wearables technology company has since nosedived and continues to wind down the business.
 
Unicorn IPOs Suggest Overvaluation  
Overall, there were 13 exits so far this year which valued each company lower than their most recent private valuation. While this figure has dropped from 2016 – down from 26 exits during the same time last year – there’s still plenty of scrutiny about unicorn overvaluations, as evidenced by some of the most hotly anticipated IPOs this year. Snap Inc., Blue Apron, Cloudera, each went public at a lower valuation than each company’s most recent private valuation. What’s more, since their debuts, these unicorns have struggled to trade above their IPO price. Since Snap Inc.’s $3.4 billion IPO, which valued the company at $19.67 billion, shares have fallen nearly 40% in the past three months.
 
Additional findings in this report include:
  • Valuations & round sizes by stage, sector
  • Equity levels by stage, sector
  • Exit levels by valuation
  • Average age of VC-backed companies
 
Download the full report here.
 
About PitchBook
Founded in 2007, PitchBook is a data provider that tracks every aspect of the private and public markets, specializing in venture capital, private equity and M&A. More than 10,000 professionals access PitchBook’s data through the company’s award-winning software products. PitchBook is a Morningstar company with offices in Seattle, New York and London.
 

 
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