Late-stage VC is being hit hardest by the much reported ‘reset’ in valuations, as the number of high-profile examples snowballs through 2022. In a Private Equity Wire survey in July, over half of all respondents (53%) expected to see a markdown in the valuation of their VC investments in 2022, compared to 2021
- Over half of survey respondents expect to see a markdown in the valuation of their VC investments in 2022
- After missing last year’s IPO window, ‘much hyped’ late-stage start-ups are among hardest hit
- At reduced valuations, some start-ups may prove attractive targets for M&A
Late-stage VC is being hit hardest by the much reported ‘reset’ in valuations, as the number of high-profile examples snowballs through 2022.
In a Private Equity Wire survey in July, over half of all respondents (53%) expected to see a markdown in the valuation of their VC investments in 2022, compared to 2021. The findings were explored in Private Equity Wire’s latest Insight Report ‘Silicon Valley Blues: How VCs are adapting to a down market’.
Eighty percent of investors still view venture capital as overvalued, according to a Preqin survey of 300 LPs in June.
The valuation uplift in the growth stage of the market has been around nine times over the past five years, says Ed Knight, president at Antler, compared to around two times in the early stage. According to Stephanie Choo, partner at Portage Ventures, early-stage valuations were “easily in the $20m-$30 million range, up to $50 million last year”. In the current market, they are dropping to low teens and high single digits, she says
With a tighter IPO window in 2022, many late-stage start-ups in particular now face more pressure to justify high valuations as public market equivalents have crashed.
“The start-ups that enjoyed sky high valuations based on hype and ‘FOMO’ are the ones that will feel the brunt of the downturn,” says Nic Brisbourne, CEO and managing partner at London-based VC firm Forward Partners. “While there has been a recalibration of valuations, this also reflects the fact that many of the impacted companies were overvalued. Now the market has a chance to normalise, and investors can sift out the hype and froth.”
At one point last year, payments start-up Stripe was the most highly valued VC investment in the US. In recent weeks, its valuation was slashed by 64% by one investor. Weeks earlier, valuations were cut at Swedish buy-no-pay-later fintech Klarna, following delivery app Instacart before it. UK-based digital bank Zopa had planned to go public this year, but in July, the CEO told one reporter: “The markets have to be there [and they are] not there — not for fin, not for tech”.
According to data from CB Insights, the average increase in valuation between all financing rounds has been trending down since the end of last year but first-half data from 2022 is yet to show the full extent of the damage to late-stage start-up valuations.
During H1, US median late-stage deal value fell only 7.1% compared to 2021, according to PitchBook’s latest valuations report. In Europe, late-stage valuations and round sizes paced above 2021 figures.
The Q2 median pre-money valuation for early-stage VC in the US fell 16.1% quarter-on-quarter, according to PitchBook data. In Europe, early-stage valuations paced above 2021 figures in H1 2022.
Seed stage valuations have held up and have not fallen from the previous quarter since the onset of the pandemic, attributed by PitchBook to the high participation of non-traditional investors and micro-funds still active there.
Where valuations decline further, an opportunity may emerge for VC fund managers to bolt-on undervalued start-ups to their existing investments. Some start-up founders have said publicly that a wave of consolidation now seems likely among late-stage fintech start-ups, if the IPO window remains closed.
“I expect acquisition opportunities to continue to increase through the next two years as companies want to exit and can’t exit through the public markets,” says Choo.
Apollo’s co-head of private equity David Sambur told Bloomberg this month that the firm is looking for opportunities for strategic acquisitions among former venture capital-backed companies whose valuations have collapsed this year.
Key Takeawy | LPs Falling valuations at VC-backed start-ups may still take months to feed through to reported VC fund NAVs but funds which invested in the run-up to 2021’s peak will be most exposed