If you are a startup founder raising a venture round this year, you’ll get a lower valuation than you might have in 2021 or 2022. New data from CB Insights details that there have been sharp valuation declines across nearly every startup stage around the world.
But you probably know that already. A more interesting question to ask, then, is whether deal volume is going to shrivel across stages, too. Sure, it’s useful to know what the new norm is for, say, seed-stage or Series B deals, but it’s far more important to understand how quickly the later stages of the venture market are contracting.
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A sharper decline in late-stage dealmaking may be a bad thing or not, depending on how large you think the startup market could grow before there are too many companies trying to scale at the same time.
On one hand, a more extreme decline in late-stage dealmaking would mean that startups past their youth — your Series B and C companies — will find it harder to raise pre-IPO capital from venture investors. On the other, startup stages are not only a way to segment the venture market into simple buckets, but they also serve as a sort of filter to weed out companies that do not meet expectations for growth and scale.
From that perspective, a smaller late-stage market would imply that weaker startups would not be able to access capital that they couldn’t use efficiently. That’s brutal for startups stuck between rounds and stages, but it could be a good thing for the wider tech market — quick failures recycle human capital faster than overfunded startups that end up as expensive zombies.
This morning, let’s talk about new valuation norms and explore just how sharply the late-stage market is on pace to contract this year.
Falling valuations
Let’s get the obvious stuff out of the way: No matter which stage we are looking at, median valuations declined in the second quarter of 2023 compared to a year earlier, according to CB Insights. And it appears the later the stage, the sharper the decline: Seed/angel deal valuations fell about 15%, while valuations for Series D rounds and later tanked by a whopping 60%.
But things aren’t as straightforward as they might seem: A closer look at more recent periods yields a slightly better picture. Median valuations improved slightly for seed/angel and Series B deals in Q2 2023 compared to Q1 2023. Startups that raised Series D rounds or later, however, still don’t seem to be doing well: Their median valuation declined by 33% quarter-on-quarter.
Pain and agony in Silicon Valley
Valuations may be declining across the board, but it’s the declining deal count that might prove to be the most damning trend for late-stage investment.
CB Insights expects fewer deals across all stages this year compared to 2022 and 2021. (Note: CB Insights is counting only venture capital investments and not debt, except convertible notes. That may mean some deals could fly under the radar, especially those by some later-stage companies that might have access to venture debt.)
Indeed, CB Insights estimates that we’ll have only 420 Series D+ deals in the entirety of 2023. That’s 41% less than 2022 and 62% less than 2021.
The earlier stages are doing better. CB Insights expects 10,552 seed/angel deals this year, only 31% less than in 2022 and 28% less than in 2021. However, we can see a trend forming as we progress through the stages:
| Stage | Difference in 2023 deal volume (estimated) | |
|---|---|---|
| 2021 | 2022 | |
| Seed/angel | -28% | -31% |
| Series A | -34% | -33% |
| Series B | -42% | -31% |
| Series C | -47% | -33% |
| Series D+ | -62% | -41% |
The later you go, the worse the data looks.
One way to feel about this trend is to accept that it was unavoidable. With the retreat of more generalist, nonventure investors from the startup market — names like Tiger Global come to mind — a great spigot of capital has been effectively turned off. And since such investors have large pools of capital and they often only play in the late-stage waters, it makes sense to see fewer deals at those stages as these investors leave with their suitcases of cash.
You could even argue that the late-stage market was actually artificially pumped up when things were fine and dandy in 2021. More capital than ever was flowing into startups, so fewer ran out of cash as they scaled, and so, more startups made it to the later stages and started raising money when they got there.
Obviously, such a reading of the market will bring little comfort to Series B or C startups that are staring down the barrel. Proponents of capital efficiency may very well feel this is the medicine the market needed, pain be damned.
A thawing IPO market could offer some of these older startups an alternative to venture capital, but we’re not seeing any efforts to go public even at startups with strong brands, scale and solid fundamentals. It’s hard to imagine a world where late-stage startups that cannot raise more capital would be attractive IPO candidates.
Consolidation could be the answer to this dilemma. Or perhaps we’re simply going to see more startups fail. They certainly no longer have a safety net to depend on.