VCs foresee more flat and down rounds this year for companies that last raised capital at heady valuations during the venture boom.
Notwithstanding mounting concerns over geopolitical instability, increasing optimism about the economy – including the promise of lower interest rates in the US – is expected to spur venture fund managers to pick up their investment pace in 2024. However, all but the strongest companies in need of cash that were last priced during the peak market of 2020 and 2021 will find it challenging to attract new investors if they resist accepting lower valuations, dealmakers told Venture Capital Journal.
The rationality of valuations continues to vary by industry and funding category, said Jason Felger, a partner at Jump Capital. But regardless of funding stage, pricing for deals is also extremely divided between companies on a more certain path to profitability and those that have not been able to prove product-market fit. Valuations remain ”exuberant” for companies that are demonstrating great traction with customers “because there’s a tremendous amount of demand for those companies that check all the boxes that your prototypical Series A investor is looking for,” Felger said.
Jump Capital, based in Chicago, invests in the Series A and B rounds of fintech, IT and data infrastructure and B2B SaaS companies. The shortage of companies that fit that bill is likely contributing to how lofty those companies’ valuations remain, Felger noted. But he believes valuations for strong companies are fairly rational now for the most part.
Pre-seed valuations don’t have much room to adjust, but there has been more volatility at the seed stage, ranging from $12 million-$30 million, said Alexa von Tobel, co-founder and managing partner of Inspired Capital, which invests in seed through Series A companies.
“It’s one of the places where we’ve seen greater change,” von Tobel said. “Valuations a few years ago were in the $30 [million range] and they’re now trending back to the sub-$20 million valuations and very clearly varying based on progress.”
She has also seen Series A valuations fall, with investors “really dialing into the progress of the companies” and giving closer attention to traction, revenue and product-market fit before writing a check. Four years ago, a company exhibiting early signs of product-market fit could get priced at $70 million, but “now you may see Series A with a few million dollars of [annual recurring revenue] priced below $70 million,” she said.
For the most part, companies beyond Series A have “materially reverted back to rational valuations,” guided by public market multiples, said Jump Capital partner Sach Chitnis. But companies that raised a seed round between 2020 and 2022 and are now looking toward a Series A round are in a tough spot. Even those that “have done amazing work and grown the business” since then are facing the likelihood of a flat or near-flat round this year.
Reversion to more reasonable prices will depend largely on “how far away the company is from being able to wear their past valuation,” said Sean Park, co-founder and chief investment officer at Anthemis Group. That’s more plausible for some than for others whose cash runways may not afford enough time for them to grow into their valuations before having to raise more capital.
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