Early-stage valuations fall for the first time in 10 quarters

  • Early-stage valuations fell quarter-on-quarter for the first time in 10 quarters, the data showed.
  • Investments in start-ups had been shielded from the market turmoil, but that seems to have come to an end.
  • The number of companies going public has dropped significantly, but acquisitions are still a possibility.

The chaos of the tech market downturn has finally reached an early stage.

According to new data from PitchBook, early-stage valuations fell quarter-on-quarter for the first time in 10 quarters. The median pre-money valuation of early-stage venture capital deals fell 16.1% from the first to the second quarter of 2022. A pre-money valuation refers to the valuation that venture capitalists award to a startup, excluding the last round of funding.

Public and later-stage tech companies have seen turbulence throughout 2022, with late-stage companies and unicorns like Instacart, ByteDance and Klarna losing billions in value. Investors have also pulled out of late-stage startup funding. But early-stage startups had been largely insulated from market turmoil until recently, as lower valuations and the withdrawal of venture capital began to trickle down from the public market to the private market at a later stage.

In the second quarter, early-stage investing saw falling valuations and an increase in median deal size, according to PitchBook. It may seem contradictory for startups to accept lower valuations but more capital from venture capitalists. But given the market uncertainty, startups seized the opportunity in the second quarter to fill their coffers due to the unpredictability of future funding in the venture capital market and warnings from investors to conserve cash.

While some startups prepared for the impending cash crunch by building cash reserves, others responded with drastic cost and workforce reduction measures. Companies like Coinbase, Robinhood and Microsoft have recently made headlines after laying off thousands of employees.

For investors or employees of startups looking to cash in through lucrative initial public offerings, the options also look bleak. In the first half of 2022, only 10 companies valued at over $1 billion went public, in stark contrast to the IPO frenzy of 2021, when 102 companies valued at over $1 billion went public via public markets, according to PitchBook.

Companies that went public in 2022 tended to be smaller. For example, private equity firm TPG completed the largest IPO in the first half of 2022, raising $1 billion at a valuation of $9 billion in January. That number pales in comparison to Rivian’s $77 billion valuation when it went public in November.

Overall, the top quartile of public listings in the second quarter fell 72.2% from the previous quarter, according to PitchBook. This decline was likely also a function of the limited number of IPOs, as massive multi-billion dollar IPOs were rarer.

But investors and startups can find refuge through acquisitions, the median value of which has remained relatively stable since the third quarter of 2021, according to data from PitchBook. During the first half of 2022, there were several deals with private companies worth more than $1 billion, such as the acquisition of iRobot by Amazon for $1.7 billion and the acquisition of Pensando by AMD for $1.9 billion.

This implies that buyers are still looking for attractive offers in 2022 and have not necessarily reduced their willingness to pay due to falling valuations. Likewise, stable acquisition values ​​suggest that startups aren’t selling out of desperation or because it’s their last option.

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