Startup Valuations in 2023

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. And this is confirmed by an interview we had with a leading, very-early stage VC; scroll to the end to see a video of our conversation. Before we get too deep into the weeds, here is what you may have come here for:

TLDR: What Are Startup Valuations In Q4 2023 and Headed Into 2024

  • Seed: $15M
  • Series A: $44M
  • Series B: $114M

In this blog post, we’ll particularly focus on the dramatic shifts we’ve observed in Series A and Series B valuations, although we’ll also talk about Seed stage metrics. Series A companies saw a meteoric rise in median valuations, peaking in the high forty millions at the end of 2021 and 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 $80 million by early 2023. Seed rounds, while off their peak valuations, have been surprisingly resilient.

However, the most recent valuations in Q4 2023 and Q1 2024 are showing strong rebounds, which suggests that 2024 startup valuations will be much higher than the numbers we saw in the 1st part of 2023, particularly in Series A and Series B rounds. This positive shift can be attributed to several key factors:

  • Selective Investment Climate: There’s been a noticeable decline in high-quality deals, leading to more intense competition among venture capitalists, who have money to deploy and are now all competing for the same deals. Investors are increasingly willing to offer higher valuations for startups that stand out with strong growth potential and solid fundamentals. This trend is especially pronounced in the AI sector, where startups are attracting significant funding at impressive valuations.
  • Market Recovery: A recovery in the stock market has played a pivotal role in improving investor confidence. This uplift is largely driven by signs of inflation being brought under control, fostering expectations that interest rates might decrease. Lower interest rates generally boost investor appetite for riskier assets like startups, as they search for higher returns.
  • Optimistic Economic Indicators: The potential taming of inflation suggests a more stable economic environment ahead. This stability is key for venture capital and startup ecosystems, as it reduces the uncertainty that can otherwise hinder investment decisions and valuation growth. Plus, the thought that the Fed may decrease interest rates would mean that risk capital appetite goes up, pushing the VC market to get more aggressive.

Together, these factors contribute to the rejuvenated valuation figures we’re observing in 2024 that started in the 2nd half of 2023. It’s a period marked by cautious optimism, with a strategic focus on investing in startups that demonstrate not just potential, but also resilience and a clear path to sustainable growth.

First, a special thanks to Carta, the cap table management provider, 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. Kruze advises our clients on their due diligence when they raise, and we are well aware of the valuations our clients get - while we are using numbers from Carta, they align with what we see our clients doing. And our clients have raised over $3 billion in 2023, so we see a lot of deal flow.

OK, now let’s dig into the data.

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 a ton, and valuations decreasing to one-fifth of what they were during the bubble. It’s really hard to raise a late stage round right now. And since the large cross-over investors like hedge funds have pulled back, the decrease in volume has also decreased the price investors are willing to pay.

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. This not only impacts startup valuations, but how easily VCs open their purses - so deal volume is way, way down since the last part of 2023 and into 2024.

Let’s look at the stages; note these are pre-money valuations, again from Carta:

Series B Valuations in 2024 and Late 2023

Series B valuations, after reaching a peak of $160M in Q1 2022, experienced a dramatic drop, bottoming at $80M in Q4 2022. However, in Q4 2023, there’s a rebound to $103M, which sustained into Q1 2024 at $114M. This volatility reflects the broader market dynamics and investor sentiment, where the focus on quality over quantity has intensified. It’s clear to VCs which companies deserve funding - and there aren’t a lot of them - so the investors are fighting of the right to invest. Which is leading to increased valuations.

The steep decline and decent 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 based off of what they raised their A’s at in 2021 or 2022. And the metrics that Carta sees are right in line with the ones we see our clients hitting for the Series B. Of course, some top tier AI startups are raising at much higher valuations. 

Series A Valuations in 2024 and Q4 2023

The Series A segment saw its valuation peak at $48.2M in Q1 2022, followed by a decline. At Q4 2023 valuations rose $45.5M and they were more or less flat to $44M in Q1 2024. This aligns with the trend of investors gravitating towards startups with strong fundamentals, especially in AI and tech sectors, leading to competitive funding scenarios.

That being said, it’s hard to raise an A. Not only do most startups need solid revenue growth, they also need capital efficiency. So, while Series A valuations are surprisingly solid, that doesn’t mean it’s easier to raise funding - quite the contrary, it’s actually a quite a bit harder.

Seed Stage Valuations in 2023

The Seed stage shows a gradual increase in median valuations, reaching $13.9M in Q4 2023 and $15M in Q1 2024. Despite a reduction in the number of deals, the quality of opportunities has resulted in decent valuations for startups that meet investor criteria. There is a real drop in volume at the Seed stage, which we will write up later, but the tldr is that PitchBooks’ preliminary data suggests that there were only 800 US seed deals in Q4 2023 - a trend that continued into the first quarter of 2024.

The drop in volume seems counter-intuitive with the uptick in the prices paid in 2023 slowly increasing quarter over quarter. The rational that we see happening is that the companies getting funded are quite good, and that multi-stage funds are deploying less price-sensitive capital into seed rounds. Again, quality companies are getting good valuations (if their founders are good at fundraising/connected), but many companies are failing to raise.

Unlike their Series A and Series B counterparts, seed valuations have not dropped as much during 2023, and are not popping in the same way leading into 2024. And the valuation changes at the seed round lagged the later stage changes, which we partially attribute to the bullwhip effect we mentioned earlier.

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.

Underlying Factors

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. Now that it’s heading back up, the later stage valuations are the first to start to rebound.
  • Economic and Geopolitical Factors: Rising inflation, increasing interest rates, and geopolitical instability due to the war in Ukraine and the Mid East 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. However, the Fed’s signals that inflation may be tamed could mean that rates are lowered, meaning VC investing is more interesting.
  • 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.
  • Multi-Stage Firms Investing in Seed: Multi-stage firms have entered the early-stage market aggressively. Some of our VC friends have postulated that they are looking to stay busy; whatever the reasoning, they are less price sensitive (although they do have a high bar for the companies that are willing to fund).

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 2024’s competitive and difficult market.

How VCs Value Startups

Traditional valuation metrics don’t really work at the earliest stage. No one uses DCFs, balance sheet ratios, etc. when determining the value of a seed/seed extension, series A, etc. company. If you did, you’d encounter the problem that the startup would have such a low value that it would sell such a high % of the business at that early stage that the founder would quit because they don’t own enough of the business to make it worth their while.

Instead, early-stage investment valuations are really based on what the market will bear. Note that the valuations tend to be higher in areas like San Francisco, where there are a lot of VCs competing for deals. There is a “going rate” for companies in particular industries at specific stages that have similar traction. Asking other founders who are adjacent will help narrow into this particular range, as will asking current investors who know a lot about the market dynamics. Watch this video with Eric Ver Pleog, a GP at Tunitas Ventures, as he goes into the details on how VCs value startups. To quote Eric, “There’s a market rate and if you ask five venture investors, take the name off the company and just give the relevant details, they’d all come up with close to the same number as here’s the market rate for a company in that kind of position, with how much revenue and growth and what level of credibility, the team, and what sector and defensibility business model and size of the market opportunity. You’d be shocked how close the numbers were for all of them. Because they’re all in the market and they’re all seeing what the prevailing prices are on deals that are getting done. The trivial answer is: price is supply and demand.”

Typically, VCs want to purchase 15% to 25% of a company at any given round. The honest way I valued companies as a VC was to take how much money the company needed to raise, and then divide it by the 25% that I wanted to own to get to the implied valuation. I’d then check to make sure that if the company grew well it could exit at a reasonable valuation (looking at public companies and recent, related M&A deals) - the goal was to make sure we could make at least 10x our investment, and hopefully much much more if it exited at a reasonable valuation.

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, the difference between a post-money valuation and a 409a valuation, and a due diligence checklist. Good luck raising your next round!