Market turmoil hits late-stage venture capital valuations

The venture capital market is showing early signs of weakness.

Although market turmoil has yet to affect deal sizes and valuations at all venture capital stages, the average valuation before late-stage silver has declined from 2021 highs, according to the PitchBook’s VC Valuations report released Thursday. Specifically, the median size of late-stage venture capital deals increased from $134 million in 2021 to $110.3 million at the end of the first quarter of 2022.

PitchBook analyst Kyle Stanford, the author of the report, wrote that the late-stage drop in valuations points to a potential problem: while deals are still being closed, deals with the highest valuations are most vulnerable to macroeconomic problems such as inflation, rising interest rates, geopolitical uncertainty and the technology bubble. Indeed, these companies are generally closer to the public market and tend to feel the effects of economic problems before other companies.

“VC is facing the onslaught of economic headwinds plaguing every other market at the same time, and for many reasons this feels like real market change,” Stanford wrote in an email. “Valuations are set to fall and deal sizes will likely pull back from the highs of the past two [of] years.”

While median deal size contracted from 2021 to the first quarter of 2022, Stanford noted that it will be some time — perhaps not before the end of the year — before the macro issues trickle down. completely on the data. However, he also noted that the venture capital market has a few tricks up its sleeve to protect itself from public market volatility. For example, there is a massive amount of dry powder in mega funds. PitchBook cited a total of $100 million or more in dry powder that is ready to fund late-stage deals.

Another positive point is the large number of venture capital funds in the market and the fundraising events that will take place throughout the year. Stanford said that since the start of 2020, nearly 2,000 venture capital funds have been raised in the United States “That’s more than [the number that] closed during the seven-year period from 2006 to 2013,” he said. “Although we expect fundraising to slow in the second half of 2022, the market is looking at somewhere around 3,000 funds still in their investment window.”

For this reason, late-stage companies could benefit from a soft landing, especially if they raised capital in recent quarters when the market was booming.

Here are some proofs. Although IPOs have not offered the same opportunities as in 2021, valuation increases (i.e. an increase in a company’s pre-money valuation between rounds of financing) at output remained high in the first quarter. The report says the median increase for the first quarter of 2022 remains one of the highest in PitchBook’s dataset.

While late-stage exit valuations have declined from 2021 to 2022, median exit valuations reached $90 million in the first quarter, an increase of $14 million from any annual figure in the PitchBook dataset. This is important because while some companies exit at higher valuations, many others exit closer to the median valuation.

“Continued headwinds may drive this figure down,” Stanford wrote, “but for now, the core of the venture capital-backed exit market has continued to produce.”

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