As the leading CPA firm serving VC-backed startups, we are acutely aware of the trends in startup funding - including valuation trends. Our clients frequently ask us for advice on what their startup is worth as they begin their fundraising process - and are frequently frustrated (or confused, or frustrated and confused) by the “methodologies” VCs use to come up with startup valuations.
The truth is that most VCs are following the market, meaning that if you have a company that’s good enough to raise the next stage of funding, they’ll expect it to be worth more or less what other companies at that stage are worth. Of course, things like revenue and revenue momentum can help change a company’s value at a fund raise - although not as much as a charismatic CEO or hot market, in my experience.
In this blog post, we’ll particularly focus on the dramatic shifts we’ve observed in Series A and Series B valuations. Series A companies saw a meteoric rise in median valuations, peaking at $48.1 million in Q1 2022 before experiencing a significant downturn. Similarly, Series B startups felt the gravity of a deflating bubble more than any other category, with valuations reaching as high as $160 million in Q1 2022, only to plunge to $81 million by Q1 2023.
First, a special thanks to Carta for providing invaluable data on seed, Series A, and Series B valuations. We recommend following their Head of Insights, Peter Walker, on LinkedIn for insightful analyses and trends that affect the startup ecosystem.
OK, now let’s dig into the data.
Startup Valuation Trends in 2023
The startup landscape has been anything but static. From a valuation bubble in 2021 to the current fluctuations in 2023, startups at every stage have been impacted differently. Several macroeconomic factors, such as a decline in the Nasdaq Composite, rising inflation, and increased interest rates, have further complicated the environment. These shifts have varying implications for investors and startups alike, and understanding them is key to making informed financial and investment decisions.
Bullwhip Patterns - Late-Stage Trends Flow to Early-Stages
One intriguing aspect that warrants discussion is the “bullwhip” pattern we’ve observed in startup valuations.Fluctuations in late-stage investments can reverberate backward, impacting earlier-stage rounds. To provide some context, the number of Series E rounds in recent quarters is roughly a third of what it was at the height of the 2021 bubble. Valuations have also taken a significant hit, plummeting to about a quarter of their 2021 levels. Series D has also not been immune, with deal volume off by 50% and valuations decreasing to one-fifth of what they were during the bubble.
This bullwhip effect takes time to reach the seed and Series A stages, but when it does, it ushers in a more conservative investment climate across all stages. And it’s there, the early stage funding market has dramatically slowed down and valuations are down.
Let’s look at the stages:
Series B Valuations in 2023
Series B valuations in 2023 are around $100 million. This stage experienced one of the most pronounced shifts in the venture capital space. Climbing to stratospheric heights, the median valuation peaked at an astounding $160 million in Q1 2022. However, the descent has been just as rapid, mirroring the larger contractions in the market. By Q1 2023, the median valuation had fallen to $81 million — nearly halving in just a year. This drop has been a bitter pill for many of our clients to swallow.
As of mid-2023, there has been a modest recovery, bringing the median valuation to $100 million. However, this is still far from the zenith reached in 2022. The steep decline and modest rebound encapsulate the volatility that has come to define Series B funding in recent times. The drop in valuation didn’t occur in isolation; it was preceded by similar, though less drastic, declines in later-stage Series D and E rounds, showcasing the ‘bullwhip effect’ in action. Of course, this wasn’t the only reason for the drop in this round - several major players in this stage of the market were hedge funds who invested very, very aggressively in 2021. These investors have seriously reduced their investment pacing in 2023, which is not helping Series A founders looking for their next round.
This is a really hard round to raise right now. Several Kruze clients have been successful, but at valuations that were much lower than the founders had originally envisioned. And the metrics that Carta sees are right in line with the ones we see our clients hitting for the Series B.
Series A Valuations in 2023
Series A valuations in 2023 are stabilizing just under $40 million. The Series A landscape has also been a rollercoaster of highs and lows over the past few years. During the valuation bubble of 2021, Series A startups were getting median valuations as high as $48.1 million in Q1 2022. However, this bubble didn’t last long. By Q4 2022, the median valuation had dropped to $36.6 million, a clear reflection of the market’s evolving dynamics.
As we stand in mid-2023, the median valuation for Series A startups has seen a modest uptick, sitting at $39.6 million. While this is a hopeful sign of resilience, it’s important to note that it still falls significantly short of the heights achieved in early 2022, and we don’t see it coming back. Kruze clients are successfully raising their A’s, and the startups that we are seeing be successful have good fundamentals (as in revenue and growth for SaaS companies), haven’t raised a ton of seed financing, and are executing well.
Seed Stage Valuations in 2023
As of mid-2023, seed valuations seem to have stabilized at around $13.7 million. This moderate uptick from $13 million in Q4 2022 signals a stability that is generally absent from later funding stages.
Unlike their Series A and Series B counterparts, seed valuations have demonstrated a remarkable resilience to the market’s tumultuous waves. While they experienced some fluctuations, the median valuation for seed-stage startups was relatively stable, varying between $8.8 million and $15 million from Q1 2019 to Q2 2023.
Key observations from these seed valuation trends are:
- Lower Vulnerability: The insulation of seed valuations from the dramatic shifts in later stages suggests a lower vulnerability to broader market forces, I’d bet that this is because there is still a decent amount of money available from seed and pre-seed funds, and that founders can only sell so much of their business in the initial funding and still have enough of the company to make it worth their while.
- Volume Decline: While valuations have remained steady, it’s essential to note that the volume of new seed rounds has dropped significantly since the peak in 2021. This suggests that while the companies that do get funded are still highly valued, fewer are making the cut.
- Risk Tolerance: The stability in seed valuations may also be a sign that investors are willing to assume higher risks at this stage, given the potential for higher returns in an uncertain market.
- Importance of Fundamentals: Just like in Series A and Series B, the steady but selective funding landscape at the seed stage emphasizes the importance of strong fundamentals, a compelling pitch, and a robust business model.
So what explains the dramatic decrease in these early-stage metrics?
- Market Bubble & Stock Market Decline: Low interest rates and ample VC funding created a frothy environment in 2021. The Nasdaq Composite reaching its peak in November 2021 was a significant indicator. Its subsequent decline has had a direct impact on late-stage funding.
- Economic and Geopolitical Factors: Rising inflation, increasing interest rates, and geopolitical instability due to the war in Ukraine have contributed to a general investment slowdown.
- High-Interest Rates & Risk-Free Options: With interest rates on the rise, US Treasuries now offer over 5% returns, which are essentially risk-free. This naturally diverts capital away from the more volatile startup ecosystem.
- Lack of Big Exits for VCs: VCs have not seen many profitable exits recently, slowing down the reinvestment cycle into new ventures. This impacts Series A and Series B more directly than seed stages, given the higher stakes and valuations at these stages.
In summary, the startup funding landscape has been in flux due to market, economic, and geopolitical conditions. This has led to varying degrees of impact across seed, Series A, and Series B stages. Investors are becoming more risk-averse, a trend seen by the attractiveness of risk-free options like US Treasuries and a slowdown in VC reinvestment. It’s a period of cautious optimism as the market adjusts to these new variables.
Founders need to stay hyper focused on hitting the milestones that unlock their next fundraise. For many startups these will be attractive revenue growth rates at the right ARR for the stage. But other important milestones will matter as well - proving that there is a market for the product, building a team, getting important client logos, all of these things matter in 2023’s competitive and difficult market.
We’ve also created some other resources that will help founders in 2023. These include a guide to downrounds, an investor update template that will help keep your investors warm and excited about investing, information on 409a valuations, and a due diligence checklist. Good luck raising your next round!