If you were hoping (against hope) that the doom and gloom of 2022 would recede into the background in 2023, well, it hasn't happened yet. The first quarter of 2023 saw European startup valuations remain flat and VC dealmaking slow down even further, according to a new report by PitchBook.
Later-stage valuations have seen the biggest drop over the past 18 months — and are, analysts and investors say, highly unlikely to balloon again anytime soon.
Later stage valuations take the biggest hit
Average early-stage valuations (Series A to C) are down 23% from Q1 of last year while late-stage valuations (Series C+) have fared substantially worse, registering a year-on-year decline of 77%.
Venture growth stage (Series E+) saw a bump — largely due to one major deal that saw the German heavyweight solar startup Enpal raise €215m at a valuation of €2.2bn. Despite that, average venture growth valuations in Q1 2023 are only about a third of what they were in Q3 2021, their peak.
Nalin Patel, lead analyst at PitchBook and one of the authors of the report, says that the bumper valuations of 2021 and 2022 may be a thing of the past. “I think that that record year probably won't be eclipsed in the next few years,” he tells Sifted.
He says the combination of low interest rates and large sums of money being funnelled into the VC ecosystem will probably not happen again for the foreseeable future.
Early-stage funding holds strong
Average angel, seed and early-stage valuations have been robust — even inching upwards. The average angel valuation stood at €7m, while seed-stage startups were valued at €10m and early stage at €32m.
VC funding into European startups has continued to decline, reaching only €11.8bn in Q1 2023, down 32% on last quarter and 65% on Q1 last year.
Downrounds on the rise?
The percentage of startups raising at a higher valuation than their previous round — an upround — dropped in Q1 2023, to 71%.
The dreaded downround — where a company raises at less than its previous valuation — and flat rounds increased, up to 18% and 9% respectively.
Patel expected to see more downrounds. “That may just be a consequence of these companies reviewing their financials and valuations internally, and not actually disclosing it to the public,” he says.
He reckons that there are “dozens of companies” working with reduced valuations. Revolut, for instance, has faced writedowns by some of its investors to the tune of almost 50%.
Patel says that it's surprising that so far Klarna is the only VC-backed European giant to announce that it's taken a valuation haircut.
“I thought there would be more already. And that may just mean that they are really, really managing costs at the moment and focusing on extending runway. And we could see more downrounds announced later this year,” he says.
What will it take for things to change?
The rate of inflation is, of course, the key metric that the world has been focusing on — and it's vital for the VC and startup ecosystem as well.
“I think once inflation does get close to that 2% mark, we will then see monetary policy loosening a bit. That's going to then unlock capital and borrowing costs are going to flatline,” Patel says.
FAQs
After lingering around 18.0-19.0x for most of 2021, the median revenue multiple started its rapid descent in early 2022, just as monetary policy tightened. By the beginning of 2023, the median revenue multiple declined to 6.7x. It has since rebounded to around 7.8x Revenue at the end of the first half of 2023.
What are the down rounds for VC in 2023? ›
Down rounds, which represented approximately 8% of VC deals in 2022, accounted for 20% of VC deals in 2023. Not all VC-backed companies were able to slow their cash burn in 2023, and many of those same companies couldn't raise additional rounds of capital.
Is VC funding down in 2023? ›
Ongoing uncertainty about the economy, projected interest rate hikes and the lingering aftermath of bank failures continue to weigh on the startup ecosystem. Venture capital (VC) investment in Q2 2023 dropped to $29.4 billion, down from $44.4 billion in Q1 2023, a decline of 34%.
What is the average pre seed valuation in 2023? ›
(The average value of U.S. seed deals rose to $1.3 million last year, which we last saw happen in 2006.) While the median pre-money valuation for all Series A and later rounds declined in 2023 compared to 2022, seed deals' median pre-money price tag rose to $12 million in 2023, up from $11 million in 2022.
Have startup valuations fallen enough to feel sane again? ›
Today's startup prices
Each figure is down from recent highs: $49.4 million for Series A in Q1 2022; $161 million for Series B in Q1 2022; and a staggering $416 million for Series C rounds in Q2 2021. Those valuations, however, are imperfect.
Is 2023 a good year for startups? ›
In 2023, the Indian startup ecosystem faced a formidable challenge as over 35,000 ventures succumbed to the intensifying funding winter. Factors including inflation, investor performance expectations, and geopolitical uncertainties prolonged this winter, hindering startups from demonstrating necessary performance.
Is VC hard to break into? ›
The truth is, like most careers, there are multiple paths into VC despite how daunting it might appear. But it's still hard. If you only have a few minutes, here are some takeaways to consider when thinking about how to break into VC: Go niche to stand out.
Is it hard to break into VC? ›
Jobs in Venture Capital are notoriously hard to land. They don't come by often, and they are seldom advertised—except in large VC firms, mainly for entry-level positions. Aspiring VCs often don't understand Venture Capital well enough to apply at the right type of firm, or one that is interested in their skillset.
What is a down round in VC? ›
A “down round” is a financing in which a company sells shares of its capital stock at a price per share that is less than the price per share it sold shares for in an earlier financing.
Has VC funding dried up? ›
VC funding is set to have its worst year in a decade, according to some measures. After a shockingly successful 2021 and a mixed 2022, the party seems to have truly come to an end for startups and venture capitalists in 2023.
The average venture capital firm receives more than 1,000 proposals per year. Approximately 30% of startups with venture backing end up failing.
What percent of VC funds fail? ›
Experts from The National Venture Capital Association estimate that 25% to 30% of startups backed by VC funding go on to fail.
What is the angel round valuation? ›
Angel round valuation refers to the value of a company that is seeking angel investments. Angel investors will closely examine a company's value before providing any of their money, so understanding your business's valuation is important if you're in need of funding.
What is the average startup valuation at seed round? ›
3. What is the typical value of a seed round today? A typical seed round valuation today is anywhere from $2 million to $10 million. This valuation is based on a number of factors, including the stage of the company, the size of the market, the team, the technology, and the business model.
How much should I raise for pre-seed? ›
Your goal here should be to take as little money as possible that will still let you prove out your idea. We often see pre-seed rounds being between $500,000 - $1 million, with the valuation around the $5 million mark. This means you are still selling 10-20% of your startup.
What is a typical startup valuation multiple? ›
Startup valuation multiples:
- SaaS: usually 10x revenues, but it could be more depending on the growth, stage and gross margin.
- E-commerce: 2-3x revenues or 10-20x EBITDA.
- Marketplaces, hardware or low-margin businesses: 1-2x revenue.
- Travel: 1-2x revenue for low-margin verticals like flights, 6-8x for hotel bookings.
In start-up valuation, the most often used multiples are the following: enterprise value-to-revenue (EV/R), enterprise value-to-EBITDA (EV/EBITDA), enterprise value-to-EBIT (EV/EBIT), and enterprise value-to-free cash flows (EV/FCF).
What is the revenue multiple of 2023? ›
The median (excluding outliers) revenue multiple in the 2023 cohort was 6.9x versus 10.0x in the 2022 cohort, when calculated on pre-money valuation. Using post-money valuation as the numerator increases these multiples to 9.5x (2023) and 12.8x (2022).
What are the multiple valuations for start up? ›
Startup valuation often involves applying multiples such as price-to-sales (P/S) or price-to-earnings (P/E) ratios to estimate the company's worth. P/E Ratio (Price-to-Earnings Ratio): One of the most common stock multiples is the price-to-earnings ratio (P/E ratio).
