Ever since technology stocks began getting repriced in late 2021, we kept hearing that the correction would eventually trickle down to private startups.
Each quarter brought its share of answers on how the venture capital slowdown would shape up. Would it impact late-stage deals first? Yes. Would it ever reach the angel and seed stage? Maybe not.
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It didn’t take long for a trend to emerge: Last quarter, we reported that the venture slowdown was impacting fundraising for startups of every size and sector. And we also noted that round sizes from the Series A to C stages in the United States were in decline.
Our conclusions were based on early data from Carta on Q1 2022 activity through its ownership management platform. As such, it was a good proxy for overall investing into startups in the first three months of the year — and the tendency was confirmed when the platform released a fuller roundup that we analyzed a couple of weeks later.
We are now looking forward to Carta’s next dataset, which the company is set to break down in its newsletter over the coming weeks. But in the meantime, we got our hands on another revealing document: PitchBook’s Q2 2022 U.S. VC Valuations Report.
That the research firm chose to focus on valuation data for Q2 is particularly useful for our purposes.
We already had some information on Q2 deal volume and dollar volume in aggregate. But even when complemented with deal size information, general data only goes so far in understanding what things are like for startups that have been trying to raise funds in the last quarter.
Why? Because a startup’s valuation isn’t only a valuation metric — it also reveals how much dilution founders are having to accept.
As it turns out, there’s been a noteworthy shift: According to PitchBook, the median valuation of early-stage U.S. startups that raised venture capital was lower last quarter than in Q1 2022. Let’s unpack what PitchBook means by this before taking a closer look at even earlier stages of the venture capital journey.
Hit in the middle
Let’s start by noting that PitchBook’s definition of “early stage” might not be the same as yours — it excludes seed and angel investing but includes everything up to a Series C. But the easiest is perhaps to use numbers, quoting directly from PitchBook: In the first half of 2022, the average size of what it calls an early-stage deal was $24.8 million.
Deal size is one thing, but valuation data is what caught our attention. And since dispersion can skew averages, let’s look at medians: Per PitchBook, “the Q2 median pre-money valuation for early-stage VC was $52.0 million, exhibiting a 16.1% decrease from the Q1 2022 median pre-money valuation of $62.0 million.”
A 16.1% quarter-on-quarter decline may not seem that sharp, but the downtrend is noticeable in itself. This is not what we had been used to: This is the first time in 10 quarters that median pre-money valuations for early-stage startups declined, PitchBook wrote.
Carta’s head of insights, Peter Walker, gave the Exchange a heads-up that the platform also recorded a “sharp dip” in median pre-money valuation at the Series B stage in Q2 compared to Q1.
It’s worth noting because Carta had previously reported an oddity: That median Series B post-money valuation had increased during the January-February 2022 period compared to November-December 2021. (That was post-money, not pre-money, but still.)
However, Carta didn’t notice a similar dip for Series A data, which would fall under PitchBook’s early-stage category. “According to our data,” Walker told TechCrunch, “valuations for seed and Series A rounds are holding up quite well from Q1 2022, though fewer rounds occurred for each of those stages.”
We can’t directly surface Series A data from PitchBook’s report, but it does include a breakdown of seed and angel investing.
Earlier times, happier times?
“Seed valuations show strength,” PitchBook wrote to summarize its findings on U.S. seed and angel deals in Q2. During the last quarter, the median pre-money valuation for seed deals was $12.2 million.
That number increased quarter on quarter, but also year on year: “The median pre-money valuation for seed in 2022 [so far] has reached $12.0 million, 33.3% above 2021’s full-year figure of $9.0 million.”
There are many factors that may have helped seed-stage investment weather the broader slowdown. PitchBook pointed out one fact we didn’t necessarily expect: the “continued presence of large, multistage firms and nontraditional investors in the seed stage.”
Commenting on its July VC Funding Report, Crunchbase News also reported that “investors continued to shift their attention from late-stage to early-stage companies,” with an important caveat: These are “investing fewer dollars in both stages.”
Still, seed funding is doing OK: According to Crunchbase, its volume is lower than a few months ago but relatively steady year on year, with $2.5 billion in July 2022 compared to $2.4 billion in July 2021.
What happens next, then? Well, it is hard to tell. PitchBook made sure to warn readers that “although seed investments have remained strong so far through this year, the stage is not immune from a slowdown.” But with signs suggesting that the value of public cloud companies might be recovering, maybe the correction will dry up before it fully trickles down.