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Valuations on Early Stage Companies Are Holding Up — But Will It Last?
Nontraditional investors, such as hedge funds and mutual funds, poured in about $2 billion in seed-stage deals in the past quarter, setting a new annual record.
Even as the valuations of late-stage, venture-backed companies continue to tumble amid rising interest rates and fears of recession, seed and early-stage start-ups appear to be holding their own.
The pre-money valuation for seed deals reached a median of $10 million in the third quarter, according to the latest venture capital report by PitchBook, which is expected to be published on Tuesday. Early-stage companies — those raising series B or before — also hit a median valuation of $45 million in the third quarter, up 50 percent from the highest quarterly figure before 2021. Early and seed stage companies are still at highs reached last year.
According to PitchBook, the median valuation for late-stage companies was $71 million in the third quarter, down 29 percent from the first quarter. The deal value at late-stage companies also declined to $24.9 billion in the third quarter, the lowest quarterly figure in almost three years.
Nontraditional investors, such as hedge funds and mutual funds, poured in about $2 billion in seed-stage deals in the past quarter, setting a new annual record of $6.7 billion in just the first three quarters of 2022. As of the end of June, VC funds under $250 million have accumulated $73 billion in dry powder — a large amount of money to be channeled to early stage companies, according to the report. Late-stage companies, on the other hand, are raising less money from institutional investors compared to 2021.
“Our data estimates that more capital is expected to be sought at the late stage this year than ever before, yet the availability from investors, especially large nontraditional institutions, seems likely to leave a large gap between the numbers,” the report said.
Zack Ellison, managing general partner at Applied Real Intelligence, said that part of the reason why seed and early-stage companies are priced at higher levels is that they are simply harder to value to begin with. “There’s greater visibility into how later-stage companies are faring because you can look at metrics like revenue, whereas with early-stage companies, there’s less data available,” he told II.
Ellison expects the valuation multiples of seed and early-stage companies to eventually come down as the macroeconomic conditions keep worsening. “I think a lot of investors, when they see the third-quarter numbers [for earlier-stage companies], are going to be unhappy with how much they are losing,” he said.
Nevertheless, some venture capital firms are still confident about their earlier-stage investments. Daniel Kimerling, founder and managing partner at Deciens Capital, a VC firm supporting early-stage founders, told II that he thinks emerging markets are an area of opportunity, especially in financial technology. “They present a unique proving ground for new ideas in financial services to ‘leapfrog’ those from traditional markets,” he said.
“We are also big believers in needing a new generation of financial infrastructure to power next-generation consumer experiences,” Kimerling added.