In 2021, it felt like every startup was able to raise at an inflated valuation no matter its size, sector or underlying business model. Today, things look a lot different.
Comparing pre-money valuations, every startup fundraising stage except seed saw median valuations decline last year compared to 2022, according to data from PitchBook. Things were slightly better in 2022, when only the median late-stage and growth-stage valuations were down from 2021, while the median early-stage valuation continued to rise.
Things aren’t looking so good this year either. A recent TechCrunch+ survey of more than 40 investors found that very few VCs actually expect valuations to rise again this year. In fact, a lot of VCs said valuations will continue to drop, while others think we are already at the bottom.
However, they all agreed on one thing: In 2024, stage and sector will matter now more than ever for determining valuation trends.
Early stage
When the market started to turn in 2022, seed and early-stage valuations did not decline as quickly as the late stage, because younger startups are more insulated from the public markets. Because of that delay, some investors think there is still room for seed valuations to come down.
Kirby Winfield, founding general partner at Ascend, predicted that seed valuations will likely keep declining another 5% to 10% before they normalize. Drew Glover, a general partner at Fiat Ventures, also thinks we aren’t at the bottom quite yet.
“At the earliest stages, we’ll continue to see those valuations come back down to earth, but overall, settle in a position that everyone feels like it’ll provide value to investors and to the employees of those companies as well,” Glover said.
Some investors like Rachel ten Brink, founder and general partner of Red Bike Capital, feel that seed valuations have already normalized and, based on the structure of these young startups, don’t have much room to descend any more.
“Valuations at the pre-seed/seed stages have been more resilient, and I expect that trend to continue as they have a structural floor,” ten Brink said. “Founders need a minimum level of capital to get started, and there is only so much dilution that is workable to have a healthy cap table, therefore limiting how low valuations can fall at these early stages.”
When looking at the Series A stage, there was some consensus that valuations have likely come down as much as they will. Some investors, including Sarah Sclarsic, founding partner of Voyager Ventures, predicted Series A valuations may start to tick back up in 2024. George Easley, a principal at Outsiders Fund, added that he’s currently seeing a lot of attractive risk profiles at the Series A stage.
Late stage
Late-stage startup valuations were hit the hardest and the quickest when the market softened in 2022. Still, investors aren’t sure if they have hit rock bottom yet.
Multiple VCs predicted that we will see more down rounds next year as startups need to raise capital but can’t do so at a valuation that matches or surpasses their last round. Since many of these startups have avoided raising in current market conditions, Sarah Guo, founder of Conviction, thinks startups and investors will have to reckon with reality once again in 2024.
“The ‘other shoe’ is still to drop on mid-stage, venture-backed companies that raised at peak market heat, and even many of those executing well will reprice with flat or down rounds,” Guo said. “There will also be some rationalization of venture firms that performed poorly over the last cycle that should remove some excess capital in the system, but this happens very slowly.”
Some investors also predicted that this year, now that the public markets have stabilized, we will see a return to late-stage startup pricing being based on public comparables. Matt Cohen, the founding managing partner of Ripple Ventures, expects late-stage companies to go back to being valued at 5x to 10x ARR. This would be a noticeable drop for companies that raised late-stage rounds in 2021 but could be a healthy place to start for startups just entering the later stages.
Sector
While stage is likely going to be the biggest factor in determining valuation trends in 2024, which sector a startup is operating in is also going to play a big role. Startups in climate, AI and defense have seemed almost immune to market conditions despite a general lack of funding in most other sectors, for example, while those in nearly every other sector have struggled to find capital.
Sophie Bakalar, a partner at Collab Fund, expects that trend to continue in 2024. She said the valuation divide will grow even wider this year between the companies that are raising competitive deals in hot categories and the companies that are not. “There seems to be a dramatic bifurcation,” Bakalar said. “Notably, the top 1% to 2% of the ‘hottest’ startups continue to close rounds at strong valuations, often consistent with pricing from 2020 and 2021.”
Michael Marks, the founding managing partner of Celesta Capital, thinks that founders, especially those who have waited as long as they could to raise, can’t afford to get hung up on valuation trends in 2024. Instead, he suggests they should just focus on getting the capital they need to survive.
“In the current environment, there isn’t the leverage for startups to drive a hard bargain or focus solely on the price,” Marks said. “Instead, the priority will be securing the necessary capital, even if it means being flexible with the terms. Those who focus on living to fight another day and continuing to build value in their business will be the winners.”
“The valuation of a company will take care of itself in the long run.”