Link to the original article: ‘Tourist’ investors are still paying high prices for early-stage startups
As the momentum for late-stage companies falters, nontraditional venture capital firms like corporate VCs and mutual funds continue to have an appetite for high-priced, early-stage startups.
The median valuation of early-stage companies in the US with nontraditional investor participation has hit a record $75 million through the first half of the year, according to the latest PitchBook US VC Valuations Report.
vs. without has widened in Q2 2022.
While median valuations at the early stage showed signs of contractions in Q2, the first half of the year still marks the highest gap between median valuations of companies with nontraditional investor participation than without—a sign that nontraditional investors value early-stage startups more highly than other kinds of investors might.
This is due in part to their large size relative to other venture firms, which makes them less sensitive to prices or market conditions.
“Because the narrative is that the late stage has stalled, rather than building up more late-stage portfolio companies, nontraditional investors can look to the early stage to find companies that can balance out the VC portfolio,” said Kyle Stanford, a senior analyst at PitchBook.
Nontraditional investors have made greater inroads with younger startups in recent years, with corporate venture capital more heavily involved in the early stage than mutual funds. Stanford said that a rise in deal sizes has also enabled larger nontraditional investors to invest a material amount at the early stage.
Nontraditional investors are generally larger than traditional VCs, so they need to put more capital to work. Stanford said that these investors often have the ability to lead rounds, which is where they usually put more direct upward pressure on valuations.
For several months now, nontraditional investors have been more cautious in their investment approach than in 2021. Yet despite slowing activity at the late stage, they have boosted the earliest stages of venture in recent months.
Such a strategy change comes with a learning curve.
“If a hedge fund is used to investing in public companies, evaluating an early stage business model is going to be a huge change, whereas looking at a company close to an IPO will be a more similar skill set,” Stanford said.
Related read: The market correction has come for Series A and seed startups
