Valuation Compression Hits Early-Stage Venture Capital

Median valuations for early-stage VC-backed companies dropped from $45 million in the third quarter of 2022 to $38.5 million in the second quarter of 2023, according to PitchBook.

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As valuation continue to compress at venture-backed companies, even early-stage startups have begun to feel the pinch.

During the 2022 market downturn, early-stage companies — those at series B or earlier — held up better than their late-stage counterparts, reaching a median valuation of $45 million in the third quarter of 2022, up 50 percent from the highest quarterly figure before 2021. One reason for this is that early-stage startups are further removed from potential exits, so the impact from the heightened volatility in public markets is less severe than that experienced by late-stage companies.

But the latest valuation data shows that even early-stage companies have begun to lose steam. According to the latest VC report by PitchBook, which is expected to be published on Thursday, the median valuation of early-stage companies came in at $38.5 million in the second quarter.

“What we’re starting to see is that insulation doesn’t last forever,” said Vincent Harrison, venture capital analyst at PitchBook. “Things that happen in public markets tend to hit the later-stage companies first. But the longer they go on, the greater the chance that they’ll eventually affect those early-stage companies, too.”

According to the report, persistent headwinds such as high interest rates and the lack of available liquidity have continued to add pressure to the early-stage. “The collapse of Silicon Valley Bank and other regional banks — institutions that specialize in lending to early-stage startups — has left the market with fewer lenders willing to partake in the risk profiles of early- stage startups,” the report said.

The median valuation step-up, which measures the increase in a company’s valuation from one financing round to the next, was 1.6x for early-stage companies in the second quarter, the lowest quarterly multiple since the third quarter of 2013. In the first quarter of 2022, a period of elevated private market valuations, early-stage VC valuation step-ups hit a record high of 4.5x.

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“The decline in early-stage step-ups will negatively impact [VC funds] by limiting the extent to which they can mark up their portfolios between rounds,” the report said. “At a time when the fundraising landscape is proving extremely difficult, the lack of paper gains to instill [investor] confidence could exacerbate the fundraising struggle for managers lacking robust networks and investment track records.”

Valuations look slightly better for late-stage companies. According to the report, the median late-stage valuation went up 19.3 percent from the first to the second quarter. The median valuation step-up for late-stage companies rose from 1.3x to 1.5x over the same period.

“This upward trajectory suggests a flight to quality, as investors are continuing to deploy capital, but only to the best-performing companies with robust business fundamentals, unit economics, and financial projections,” the report concluded.

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