The startup valuation party isn’t over, but someone sure turned the music down

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2021 saw unprecedented levels of VC activity with high valuations and record deal flows, resulting in quite the party for many startup founders. But economic headwinds have hit in 2022 with high inflation, rising interest rates, public market volatility, and uncertainty in the financial markets. The valuation party’s not over, but the excitement level has certainly dropped.

2021 was a crazy time for early-stage VC valuations

When looking at valuations in 2022, it’s important to remember what happened to valuations in 2021. Pitchbook’s US VC Valuations Report for Q2 2022 shows that the median early-stage VC pre-money valuation increased  by 100% over 2021, from $30M in Q1 up to $60M in Q4. 

High levels of VC activity at the start of the year got the party started, and it continued to run for the remainder of the year. The graph below based on the Pitchbook data shows the climb. 

Given the rise in valuations throughout 2021, it’s important to keep some perspective when looking at the valuations in 2022.

The first half of 2022 shows a correction but not a disaster

Pitchbook’s valuations data shows the median early-stage VC pre-money valuation in the second quarter of 2022 dropped by 16.1% from the previous quarter, from $62M in Q1 of 2022 to $52M in Q2 of 2022. The graph below based on the Pitchbook data shows the decline.

But it’s not all gloom and doom – the data shows the Q2 2022 median valuation was still higher than the Q3 2021 figure, which was a record at the time. This indicates the correction in the first half of 2022 represents a return to more sensible levels, rather than something more sinister. 


Data source: Pitchbook’s US VC Valuations Report for Q2 2022

Late-stage VC valuations held steady in the first-half of 2022

While 2021 saw significant increases in valuations for early-stage VC, it was a calmer story for late-stage VC, which saw strong growth of 22% in the median valuation across the full year of 2021. In the first half of 2022, the median valuation for late-stage VC held steady, as shown in the following graph based on data from Pitchbook:


Data source: Pitchbook’s US VC Valuations Report for Q2 2022


There’s still some life in the party with record VC dry powder

When considering the valuation outlook, the level of VC dry powder is an important factor. Data from the Q2 2022 Pitchbook NVCA Venture Monitor shows record levels of dry powder at well over $290B at the end of the second quarter of 2022. Such a high level of investment funds looking for a home could help underpin valuations to some extent, which may help cushion the impact of adverse economic conditions in the back half of 2022.

Key takeaway on valuations

My key takeaway on valuations is that the early-stage valuations in 2021 were crazy and fueled by irrational exuberance. I believe the correction that has come in the first half of 2022 was well overdue, and there doesn’t seem to be any reason for panic just yet. I think valuations are headed for more reasonable levels with some consideration of business fundamentals rather than overly ambitious projections.

Valuations may continue to decline for companies that don’t have strong fundamentals, rather than heading for falls across the board. However, I do recognize that market sentiment and perception is just as important as reality, and the performance of the public markets does impact the private markets, so these factors may continue to drag down valuations. On the flip side, I believe the motivation of VCs to deploy their dry powder is a factor that may support valuations, which could help to mitigate further falls.

So, it might be a good idea not to leave the party just yet, but maybe hang around a while longer to see if any good opportunities come your way.

If you are interested in building your portfolio by adding investments in startups, you can find more information here on how to start angel investing and how to find opportunities for angel investing on the Propel(x) platform.


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