Signs abound that the valuations for venture capital-backed tech companies are dropping, from sagging private stock prices on secondary exchanges to plunging share prices of comparable companies on Wall Street.
But a pair of reports last week also showed that the valuation slump appears to be limited to later-stage companies, which in better times likely would have gone public by now or would be preparing to do so.
"It's a tale of two worlds," said Ashraf Hebela, head of startup banking at Silicon Valley Bank. SVB said in one report that while funding deal sizes and valuations have moderated, they are still pacing well above pre-pandemic levels.
Founders of early-stage companies who are able to raise funding are doing so at generally higher valuations, the report said. Those that are raising money in later stages see more investor resistance, resulting in lower valuations than they got in their last funding rounds.
"This isn't catastrophic," Hebela told the Business Journal last week. "Comparing yourself to valuations from last year, which was by far the best year in history, and calling this a down year is accurate. But it ignores the longer trends."
Valuations remain quite high compared to where they were before the Covid-19 pandemic hit in early 2020, he argues.
"To get back to where we were in 2019, Series A valuations would need to fall 49%, Series B by 55% and Series C by 72%," Hebela said. "We don't think this is likely."
A second report from CB Insights made similar observations. It showed the second quarter's median valuation for rounds from seed to Series D were all above comparable medians for the full year in 2021. Those Q2 valuation jumps ranged from 41% at the seed stage to 5% to 6% in the Series B and C rounds.
It wasn't until Series E or later where median valuations dropped, by about 9%. But even at the late stages, the median valuation was about 35% above where it was in 2020.
"2021 just seems like an outlier year by almost any measure," said Brian Lee, senior vice president of CB Insights' intelligence unit. "We’re not done with falling valuations, but you have to remember that they almost doubled between 2020 and 2021 and they bounced even higher in the first quarter of 2022."
Activity on the secondary markets, where shares of private company stocks get bought and sold, appear to indicate how far out of whack investors think things got last year. ApeVue Inc., a research firm that pulls data from nine secondary markets, shows much bigger drops in late-stage company valuations than the reports from SVB and CB Insights do.
CB Insights analyst Lee doesn't think the valuation drops on companies are likely to be validated in new funding rounds or by the businesses going public anytime soon, either.
"We saw a lot of large funding deals last year," Lee said. "Founders got funding while they could. If they were smart about where things were going and can keep control of expenses, they probably still have a couple of years before they will need to raise more."
Those later-stage companies that can't wait will likely take a haircut of about a third of their valuation, he said.
"Last year there was a fear of missing out on companies as valuations soared," Lee said. "This year, there is a fear of taking on a big risk in a market that isn’t doing well."
