During the early days of the COVID-19 pandemic, concern was high, public markets were suffering and it wasn’t hard to find wags on Twitter declaring that the world had changed and startup valuations were now off 40% — if you could put a round together.
But last night, we reported that more startups than expected were raising new capital at a higher valuations than prior rounds, an event often called an “up round.”
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The data looked remarkably steady. As Connie Loizos wrote, “so-called ‘up rounds’ only declined modestly, from 72% [of Silicon Valley financings] in March to 70% in April.” Hardly doom and gloom.
The notion that the funding environment is not as bad as it was anticipated has been borne out in other data, including what appears to be a falling pace of startup layoffs. Perhaps the sky is not falling for private, growth-oriented companies that we tend to call startups?
More data helps fill in the picture. Surveys from NFX, a San Francisco-based seed fund, and DocSend, a platform that some founders use to distribute pitch decks, detail how sentiment has changed amongst founders and investors alike. There’s some good news in the collected sentiments, albeit with a few warning signs as well.
What seems clear from the reports is that the purported startup apocalypse hasn’t come, provided that they weren’t serving or working in a sector of the economy that zeroed-out due to COVID-19.
Let’s dig into the numbers to better ground our understanding of how entrepreneurs and venture capitalists really view — and disagree on — today’s private markets.
Concerns and realities
TechCrunch covered the first NFX COVID-19 survey back in April, writing at the time that founders seemed a little more optimistic than venture capitalists when it came to the economy’s rebound and their short-term fortunes.
The new NFX dataset (451 seed and Series A stage founders, 141 VCs) shows that founders have become more optimistic, while VCs are hanging onto their concerns. For example:
- From the April survey to the more recent June installment, the share of founders who are “not worried” about the pandemic rose from 23% to 44%. Over the same period, the portion who are “extremely worried” fell from 52% to 31%.
- In contrast, the June survey shows that just 23% VCs are “not worried” about the pandemic’s impact on their portfolio. 50%, in contrast, are “extremely worried.”
This optimism-pessimism gap is reflected in how much capital founders and VCs think startups need today. Around 35% of founders think 12 months or less runway is enough to survive the downturn. Just 9% of VCs agree.
But the gap between founder optimism and investor pessimism doesn’t always shake out the way you’d expect in other areas. Sure, VCs sound a little down, but NFX data shows that investors have become more active since the first survey; around a third are now investing at 100% or more of their prepandemic levels, a jump of around 10% in two months.
Still, some founders are changing their fundraising plans. According to DocSend’s slightly dated survey (250 “startup founders and leaders”), 50% of founders have changed the timing of their fundraising, either pushing it up or pushing it off; the more recent NFX data has this number at around 74%.
Those temporal adjustments are leading to some interesting notes on pricing, bringing our discussion back to where it started. According to the latest NFX data, around 50% of VCs report a 20% decrease in early-stage valuations or less. Another 30% have seen a 30% decrease. So, 80% of VCs surveyed have seen early-stage valuations fall by 30% or less.
DocSend data, in contrast, has founders reporting that just 8% have seen valuations fall by 20% or less, and only one in six (16%) have seen a drop of 20% or more. In total per DocSend, around a third of founders have cut their valuations.
Sorry for all the data, it’s a lot I know. Gisting all that down for you, here’s what we’ve seen amidst all the numbers:
- Founders are less worried than VCs about the pandemic, and their fears are falling over time.
- Around half of VCs are still very worried about pandemic-related impacts on their portfolio companies.
- That said, investors are picking up the pace of their dealmaking in June, compared to April data.
- Valuation declines appear to exist at the early stages of the market, with 10%-30% declines seemingly normal.
Does this all comport with what TechCrunch wrote yesterday? It seems so. As we wrote:
For what it’s worth, many of [the recently surveyed investments] were later-stage deals. Fenwick’s data shows the percentage of Series D and E+ deals increased to 38% of all financings in April, up from 21% in March and the highest that figure has been since August 2018, when Series D/E+ deals combined for 42% of all financings.
While, in contrast, we looked at more early-stage focused data this morning. So we can add to our list that, it appears, earlier-stage valuations are a bit more variable than later-stage valuations in today’s market. Perhaps the roaring stock market and an explosion in SaaS multiples helped late-stage startups defend their worth, while more worried early-stage VCs tried to batten the hatches.
No matter what happened, the data this far into the pandemic just isn’t as bad as many expected it to be. That’s good news.