Defying VC gravity
2021 was the year price discipline went out the window for VCs. Valuations have been up and up but it’s been easy to justify: Just look at the public markets! COVID-19 increased digital adoption by a bajillion! But there are signs that investor jitters are starting to creep in. Late-stage valuations have contracted slightly after quarters of nothing but up and to the right.
Every week seems to bring new — and sometimes conflicting — data points on the pricing question. Let’s look at the latest batch.
Early-stage valuations are continuing to set records — and given the flood of supersized seed funds, I wouldn’t be surprised if it continued.
The median early-stage startup valuation in Q3 hit $53 million for the first time, crossing the $50 million threshold and double what it was three years ago, according to a new report from PitchBook on startup valuations.
The average early-stage startup valuation this quarter also hit an all-time high of $138 million with fintech financings in particular driving it up.
But late-stage is where the market is seeing the first signs of a contraction, according to PitchBook’s data.
Both the median and average valuation fell slightly quarter-over-quarter to $115 million and $736 million (respectively).
Valuations are still higher than in years past as megadeals have kept that measurement largely afloat.
So far, sky-high valuations haven’t negatively impacted exit step-ups, which is why you see VCs willing to pay the price.
The valuation step-ups for both acquisitions and IPOs remain high. The IPO step-up was 1.8x in Q3, but more impressive, the median acquisition step-up was 2.8x — the highest value PitchBook has ever seen.
For the bull case of “pay whatever it costs,” this week’s proof was in Rivian’s IPO.
The electric truck maker had zero revenue in 2020, projected at best around $1 million this quarter, and it still was the largest U.S. IPO since 2014 after it raised over $11 billion in its debut. Its market cap (for a company with practically no revenue) is now over $110 billion.
Rivian had raised $10.5 billion before going public, but those investors are now sitting on a mountain of cash. Ford’s stake, on which it spent around $820 million, is now worth $10 billion.
But not everything in the public markets is rosy. Just ask most of the tech companies who reported earnings in the last few weeks.
SPACs acted as a further lift to the market. That exit path may be narrowing.
Insurance company Metromile had been a market darling championed by “SPAC King” Chamath Palihapitiya. But it fell from investor graces by 82% in public trading before it was rescued this week for $500 million by Lemonade.
So is the market finally going to slow down? Or is it up and to the right forever? Most of my conversations with VCs right now are just a recap of how uncomfortable they are with the pricing and pace of deals; they say they’re begrudgingly accepting the market conditions because they don’t want to explain to their LPs how they missed the next Rivian. This quarter’s (minor) contraction at the late stage might be the first sign of a softening, but it’s hard to know when in the same week a revenueless company also pulls off the biggest IPO since Alibaba. We’re all reading the same tea leaves, and we’re well outside the comfort zone.