Late-stage valuations decline in Q1 as pressure mounts on VC deal terms
May 14, 2022
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The recent rout in public equities, which has been especially concentrated and violent within the tech sector, has brought intense scrutiny on the valuation multiples of growth assets that swelled during the post-pandemic recovery.
The valuation climate of 2020 and 2021 implied perfect adherence to long-term growth targets, but then the onset of significant inflation and subsequent increase in interest rates has challenged the feasibility of those future revenues and cash flows, causing the repricing we're seeing now.
Shifting to how this affects VC, we still seem to be in a wait-and-see pattern as of the end of Q1.
Our new US VC Valuations Report has yet to show any significant declines because of the illiquidity the private ownership affords these companies as well as the slight lag in data collection.
Median valuations in Q1 2022 are broadly flat relative to 2021, with the exception of late-stage VC, which has actually started to display a decrease. The average is the easiest space to see this as outlier transactions like unicorn creation and mega-deals have started to slow significantly.
For startups nearing an exit or facing pressures from early investors and employees, the realities of the valuation environment are even more evident.
The issue here is that institutional investors are leaning away from the full risk-on mode we experienced in 2021, which makes finding providers of liquidity much more difficult, especially if the downturn persists.
For instance, exit opportunities such as IPOs have already seen a serious pullback, and massive crossover VC rounds that could provide secondary liquidity are beginning to decline in volume as asset managers retrench in the face of the current volatility.
These liquidity transactions can also be complicated if the deal is anchored to a price or multiple that is no longer the market rate, but insiders want to avoid a negative revaluation.
Regardless of any of these benefits to the illiquid nature of VC around smoothing the market troughs, the persistence of this valuation repricing will eventually trickle through to VC-backed businesses even at the seed and early stage.
It may not be until next quarter's data or the quarter after, but the reality of public valuation multiples reverting to their current levels cannot be ignored or dodged forever by private investors and startups.
There will not be a lack of funding for startups as the stores of dry powder will continue to support fundraising. However, new conversations around capital raises are undoubtedly being negotiated within the context of this new normal as exit multiple assumptions are necessary even at the earliest investment stages.
We expect startups to get creative on ways to extend runways, perhaps opening previous rounds to raise capital on similar terms and valuations or taking on non-dilutive financing such as venture debt.
We also believe that more protectionist deal terms may emerge if the downturn extends for a few more quarters as investors look to gain back some control that has been ceded during the boom times of the last few years.
There's much more data and analysis in the free research. Click to download our US VC Valuations Report.
The valuation climate of 2020 and 2021 implied perfect adherence to long-term growth targets, but then the onset of significant inflation and subsequent increase in interest rates has challenged the feasibility of those future revenues and cash flows, causing the repricing we're seeing now.
Shifting to how this affects VC, we still seem to be in a wait-and-see pattern as of the end of Q1.
Our new US VC Valuations Report has yet to show any significant declines because of the illiquidity the private ownership affords these companies as well as the slight lag in data collection.
Median valuations in Q1 2022 are broadly flat relative to 2021, with the exception of late-stage VC, which has actually started to display a decrease. The average is the easiest space to see this as outlier transactions like unicorn creation and mega-deals have started to slow significantly.
For startups nearing an exit or facing pressures from early investors and employees, the realities of the valuation environment are even more evident.
The issue here is that institutional investors are leaning away from the full risk-on mode we experienced in 2021, which makes finding providers of liquidity much more difficult, especially if the downturn persists.
For instance, exit opportunities such as IPOs have already seen a serious pullback, and massive crossover VC rounds that could provide secondary liquidity are beginning to decline in volume as asset managers retrench in the face of the current volatility.
These liquidity transactions can also be complicated if the deal is anchored to a price or multiple that is no longer the market rate, but insiders want to avoid a negative revaluation.
Regardless of any of these benefits to the illiquid nature of VC around smoothing the market troughs, the persistence of this valuation repricing will eventually trickle through to VC-backed businesses even at the seed and early stage.
It may not be until next quarter's data or the quarter after, but the reality of public valuation multiples reverting to their current levels cannot be ignored or dodged forever by private investors and startups.
There will not be a lack of funding for startups as the stores of dry powder will continue to support fundraising. However, new conversations around capital raises are undoubtedly being negotiated within the context of this new normal as exit multiple assumptions are necessary even at the earliest investment stages.
We expect startups to get creative on ways to extend runways, perhaps opening previous rounds to raise capital on similar terms and valuations or taking on non-dilutive financing such as venture debt.
We also believe that more protectionist deal terms may emerge if the downturn extends for a few more quarters as investors look to gain back some control that has been ceded during the boom times of the last few years.
There's much more data and analysis in the free research. Click to download our US VC Valuations Report.
Cameron Stanfill, CFA
Lead Analyst, Venture Capital
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