If you are raising money for an early-stage startup today, there’s reason to be hopeful when it comes to the price that you might be able to charge for shares in your company. The later stage your startup is, however, the worse your chances are to raise funds at a price that you like.
New data from CB Insights indicates that, on a global basis, the farther along the alphabet a startup’s next funding round is, the more valuation pressure that transaction will be under from a price perspective.
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The data is surprising in how clear it is in trend terms, but not too surprising. Recall that mega-rounds, or venture capital deals worth $100 million or more, have fallen precipitously this year. While median deal size through the third quarter has been flat in the early- and mid-stage startup market, late-stage deals have gotten smaller this year.
With that backdrop, falling late-stage valuations are hardly surprising. Venture investor and SaaS aficionado Jason Lemkin had this to say today:
My summary of Venture Markets in Nov 2022: Series B and later even worse than looks in data: 85%+ of investing here has simply ceased[.]
Lower volume implies less demand; less demand implies less competition around deal price; less competition means lower prices.
Let’s examine the pain that late-stage startups are dealing with today, and what it could mean for unicorns jammed between changing venture preferences and a seemingly closed IPO market.
The good and bad news
Compared to 2021, global seed and angel deals in Q3 2022 are being valued 29% more richly, clocking in at $15.1 million (all per-round data reported on a median basis), according to CB Insights. Series A deals, per the same dataset, are up a more modest 20%.
The decline from +29% to +20% as we move from seed to Series A is precisely the trend we see continuing as we go later stage. Here’s the rest of the data:
- Q3 2022 Series B median valuations are off 11% compared to 2021.
- Q3 2022 Series C median valuations are off 21% compared to 2021.
- Q3 2022 Series D+ median valuations are off 31% compared to 2021.
That’s a regular and somewhat steep descent. And it makes sense; last year we saw too many companies raise too much money, too quickly, at too great a price. An explosion in capital from outside normal venture circles played a role in inflating late-stage fundraising and valuations, partially predicated on buoyant public markets and seemingly infinitely rising revenue multiples.
Now, in the hangover phase of this particular party cycle, what went up must come down, and the farther any particular startup stage went, the farther — and faster — it is coming down this year.
The news is not all bad. For example, the same dataset indicates that despite all recent declines, the median Series D+ deal struck in Q3 2022 had a valuation of $1.1 billion. That’s still unicorn territory, even if it is off $500 million from 2021 and $400 million from Q2 2022. (That’s a steep recent decline, you should note).
Our recent theme of oh god what will the unicorns do now that capital is drying up and public markets remain inhospitable at existing valuation marks is exacerbated by the above data. With revenue multiples in the basement — something that the public markets told us would eventually be reflected in late-stage startup valuations — I honestly don’t know what unicorns do in the current market. Can they take a haircut big enough to survive? Are they willing to? And how many are simply uninvestable today?
Dead unicorns walking.