Generative AI businesses aside, the past few years have been relatively tough for venture capitalists, with very few startups being able to raise capital at prices above their previous valuations.
Now, nearly two years after the venture recession began in early 2022, some investors, like IVP general partner Tom Rabelo, say the worst of the downturn is over and surviving startups should shift from cash preservation mode to investing in growth.
These aren't totally empty words: Valuations for all companies except the seed stage fell in 2023 compared to the previous year, according to PitchBook data. But in the first six months of 2024, the prices investors were willing to pay for new deals for U.S.-based companies not only recovered, but hit all-time highs for the median value of early- and late-stage deals, according to a new report from PitchBook and the National Venture Capital Association.
“The valuations for the companies that received the term sheets were high,” said Stephanie Chu, a partner at fintech-focused Portage Ventures.
Fintech has fallen on hard times with investors since the recession began, but Chu said the number of companies being able to raise capital at higher valuations has increased since the beginning of this year. Chu pointed to U.K. challenger bank Monzo, which was valued at more than $5 billion in March, a nearly 15% increase from the $4.5 billion it was allocated by investors at the start of 2022.
Chu said many startups have cut spending over the past two years, which has helped them grow and, in some cases, surpass their previous valuations.
Samir Kazi, founder of Allocate, a startup that helps family offices and wealth advisors invest in venture capital funds, is also optimistic that startup valuations and the fundraising environment have improved this year. “Since the beginning of 2022, things have been much more optimistic,” he says. “Capital markets are slowly recovering, and once real growth and fundamentals are achieved, we see a lot of growth.” [your startup].”
But those “all-time high” valuations are a bit misleading, says Kyle Stanford, lead U.S. venture capital analyst at PitchBook, because deal volume remains sluggish: The number of companies that raised new funding rounds with known valuations in the first half of 2024 was lower than typical for a six-month period.
PitchBook's valuation dataset is primarily comprised of established companies that were able to grow to their previous valuations, but the data may exclude startups that were unable to secure funding at higher valuations: Stanford explained that many companies raised unpriced rounds through convertible notes or insider rounds, or delayed raising capital altogether.
“It's a good market right now if you're a strong company, but it's a very tough market for companies that are struggling to meet the growth targets they set before the pandemic,” he said.
Kaji echoed that sentiment, but was a bit more optimistic: He said that while startups remain divided into the “haves” and “have-nots,” the group of companies that could potentially be funded at higher valuations is expanding in 2024.
Startup valuations are improving for stronger companies for a few reasons.
There is renewed optimism that inflation is under control and the Federal Reserve may soon cut interest rates. Additionally, the stock market has risen significantly this year, influencing retail investors' outlook. Finally, a large proportion of companies that have raised capital in 2024 include AI companies, and AI startups are being valued significantly higher than other sectors, Stanford said.