- Median valuations of early-stage startups have reached record highs, according to PitchBook data.
- Intense competition for deals at the hottest startups has driven prices up, investors told Insider.
- Investors are turning to younger startups and restructuring the terms of the terms to deal with it, they said.
- See more stories on the Insider business page.
About a year ago, Ben Narasin, a partner at venture capital firm New Enterprise Associates, just missed getting his company into the Series A of a startup he had invested in.
It turns out the founder sent Narasin a note to an old email address. But given his personal connection to the founder, Narasin thought he would stand a good chance in the next funding round. So he waited.
This turned out to be a mistake. By the time Narasin returned with the founder a few months later, the Series B deal was already done. Another company had started with an investment that valued the start-up at over $ 1 billion – about 25 times more than when Narasin initially invested – and the founder was ready to sign the conditions sheet tonight- the.
It’s a scenario that’s happening more and more, Narasin told Insider, as fierce competition for transactions propels valuations to unprecedented levels. He likened the current fundraising environment to a rocket.
“Right now some of these rockets are like straight out of the atmosphere and on their way to Mars,” he said.
Although determining the value of a start-up has always been an art rather than a science, in recent times more and more investors have gone wrong with the highest multiples in order to claim their rights to the next one. multi-billion dollar business. Late-stage startups have hit record valuations, while young companies – at least for now – have given some investors a break from the frenzy.
Insider spoke with six investors about their experiences determining how to fairly assess companies in an environment where unicorns are becoming less mythical and more mundane.
“We are seeing more good companies”
Valuations of late-stage U.S. startups – those in Series C or later – hit record highs in late 2020, and they’ve only been climbing this year, according to PitchBook data.
The pre-funding median valuation of a start-up business rose to $ 170 million in the first quarter of 2021, from $ 120 million in the fourth quarter of 2020. The top 25% of early-stage startups are in command now pre-funding assessments of $ 840. millions or more.
Additionally, unicorns, or businesses valued at $ 1 billion or more, are emerging at a faster rate. Around 166 startups have reached this level since the start of 2021, while the entire previous year produced only 163, according to Crunchbase.
In the opinion of some investors, this trend of soaring valuations is not necessarily a bad thing. David Tisch, managing partner of Box Group, avoided the concerns, attributing them to savings among some investors.
“I don’t think it’s anything other than a complaint,” he told Insider.
In many cases, other investors told Insider, the bigger dollar values startups are commanding these days are justified. On the one hand, it takes less time for many software companies to scale, so backers can get a return on their investments sooner. Due to the greater ease in reaching a large customer base, companies have a greater market opportunity. Additionally, the pandemic has helped bring more resilient startups to the fore.
“All of these trends are massive headwinds,” Joe Raczka, co-founder of venture capital firm York IE, told Insider. “We are seeing more good companies.”
But it is not necessarily the only quality of companies that drives up valuations. Competition between companies is one of the main factors driving valuations soaring, investors said. As a result, companies can derive more favorable terms.
In addition, more experienced founders may be less constrained by other services provided by venture capital firms, such as assistance with marketing or business development. This allowed investors outside of the venture capital world to win deals in the hottest startups by offering cash sums, several VCs said.
Only a relatively small group of venture capitalists stand out for the non-financial support they offer to startups, so the size and terms of the check often carry more weight, said Amy Nauiokas, founder and CEO of fintech-focused venture capital firm Anthemis, at Insider. . But the tradeoff is that startups will face a higher bar to be successful, she added.
“There will be pressures, especially if the company is only offering cash and expects a financial return,” she said.
How investors are adapting
Given the intense struggles to break into the more lucrative deals at a later stage, some companies are turning to investments in younger companies. Even Tiger Global Management, the hedge fund with a prolific history of supporting late unicorns, has recently made a start-up investment.
Another advantage of focusing on early stage companies is that their valuations are still relatively modest. According to data from PitchBook, the valuations of the youngest companies – angel startups and early stage startups – actually declined in 2020, and they have remained stable so far this year.
In the first quarter of 2021, the median before money was $ 5 million for angel-funded startups and $ 7 million for seed-stage companies, according to PitchBook.
Other investors have put in place safeguards to offset rising valuations. In the months following the pandemic, David Blumberg, managing director of Blumberg Capital, traded warrants in several of his firm’s mandate sheets. The warrants, fixed for a period of 30 months, allow the company to put in place additional capital at a predetermined price.
In the event that the funding environment cools down considerably the next time the companies in its portfolio need to raise funds, the warrants would give it the ability to provide additional support without financial penalty, Blumberg told Insider.
Indeed, several investors have told Insider that they expect the venture capital foam to subside over time.
For example, Natalie Hwang, founding managing partner of Apeira Capital, whose investing activities include short-term startups the company considers overvalued, is looking to public markets – where tech stocks have recently cooled – as a market leader. precursor.
Until then, investors must decide whether they are ready to face a growing group of funders with deep pockets.
“If you’re incredibly disciplined on valuation, it’s a tough market to play right now,” Tisch said.