Generative AI businesses aside, the last couple of years have been relatively difficult for venture-backed companies. Very few startups have been able to raise funding at prices that exceed their previous valuations.
Signs of Recovery
Approximately two years after the venture slump began in early 2022, some investors, like IVP general partner Tom Loverro, say that the worst of the downturn is behind us and that the startups that survived should shift from cash preservation mode to spending money on growth.
Valuation Trends
These are not empty words. According to PitchBook data, valuations for all but seed-stage companies dropped in 2023 compared to the year prior. But during the first six months of 2024, prices investors were willing to pay for new deals of U.S.-based companies not only recovered but also reached an all-time high for median early- and late-stage deals, according to the latest report from PitchBook and the National Venture Capital Association.
Investor Sentiments
“The valuations for companies that are getting term sheets have been high,” said Stephanie Choo, a partner at fintech-focused Portage Ventures.
Sector-Specific Trends
While fintech has been out of favor with investors since the start of the downturn, Choo said that the number of companies that can raise capital at higher valuations has increased since the beginning of the year. She pointed to U.K. challenger bank Monzo, which grabbed a valuation of over $5 billion in March, a nearly 15% increase from the $4.5 billion investors assigned in early 2022.
Growth Amidst Cutbacks
Over the last two years, many startups have cut spending, which helped them grow and sometimes surpass their previous valuations, Choo said.
Improved Fundraising Environment
Samir Kaji, founder of Allocate, a startup that allows family offices and wealth advisers to invest in VC funds, is optimistic that valuations and the fundraising environment have improved for startups this year. “Things are much more sanguine than I’ve seen since the beginning of 2022,” he said. “The capital markets are coming back slowly, and if you can achieve real growth and fundamentals, there will be capital for [your startup].”
Misleading High Valuations
But those “all-time” high valuations are somewhat misleading, said Kyle Stanford, lead U.S. venture capital analyst at PitchBook. That’s because deal volume is still sluggish. Fewer companies raised a new round with a known valuation in the first half of 2024 than is typical for six months.
Selective Data
PitchBook’s valuation dataset primarily consists of solid companies that were able to grow into their previous valuations. However, startups that couldn’t secure funding at a higher valuation might have been left out of this data. Stanford explained that many took unpriced rounds through convertible notes or insider rounds or delayed raising capital altogether.
Market Conditions for Startups
“It’s a good market right now if you are a strong company. But if you’re struggling to hit growth targets, you had set out before. .
Divided Sentiments
Kaji echoed this sentiment, but his take was a little more upbeat. He said startups are still divided into “haves” and “have-nots. The companies that can potentially raise at higher valuations have grown more significantly in 2024.
Reasons for Improved Valuations
Startup valuations are improving for more substantial companies for several reasons. Lastly, Stanford said a meaningful portion of companies that raised funding in 2024 include AI companies, and AI startups receive significantly higher valuations than other sectors.
