Jan 18, 2023

Series B valuations were cut in half from the first quarter of 2022 to the last www.newcomer.co Early-stage startups finally got the message that there was a tech downturn in the second half of 2022, according to new data released by AngelList and Silicon Valley Bank. Series B valuations, in particular, were hammered, falling 50% from a median valuation of $250 million in the first quarter of the year to $125 million by the fourth quarter, according to AngelList data. In the third and fourth quarter, a smaller percentage of early-stage startups raised new money and of those that did more of them were down rounds than in previous quarters. Among those startups reporting a change in their price per share in the quarter, the percent of startups that raised a favorable round of financing or sold the company above the last round price dropped by 17 percentage points year-over-year to 67%, according to AngelList. Source: AngelList AngelList and Silicon Valley Bank shared their annual report on the state of early-stage startups and venture capital with Newcomer in advance of the report’s publication today . They also gave me permission to publish their findings. “In 3Q22, turbulence in the broader market trickled down to the early-stage market in a major way, with deal volume and positive activity dropping to levels not seen since the onset of the pandemic,” the report states. Much of the data is specific to startup activity on AngelList’s platform, but AngelList touches a wide range of startups, particularly at the early stages. For much of 2022, the narrative has been that the tech IPO market and late-stage growth rounds were essentially frozen. But many investors, armed with billions in dry powder, instead shifted their attention to early stages, helping buoy valuations at seed, Series A, and Series B. AngelList’s data shows cracks in those early-stage valuations emerged in the second half of 2022. Even seed round valuations began to fall by the fourth quarter. “Surprisingly, by volume and tenor venture activity in Q4 was nearly identical to the second quarter of 2020, when COVID first hit startups and everyone was panicking,” Abe Othman, head of data science at AngelList and report co-author, wrote in an email. “At the time, that was the worst quarter for venture since we started tracking in 2016. Of course, that quarter was followed by a quick recovery and then an investment frenzy, but this time feels different. I believe it would take a jovial temperament — perhaps verging on delusion — to anticipate the same rebound happening over the next several quarters.” While the dip in the second half of 2022 is worrying, it doesn’t seem akin to anything like dot-com bust-level turbulence. The majority of startups are still raising at premiums to their last rounds of funding and pre-seed valuations don’t even seem to have been affected yet by the downturn. Median Quarterly Valuations By Stage on AngelList Source: AngelList Source: AngelList The poor second-half of 2022 performance could be an omen of another tough year for startups. The tech stock-heavy NASDAQ Composite peaked at 16,057.44 on Nov. 19, 2021. Presently, the NASDAQ is down 30.9% from that all-time high. Some cash-burning tech stocks have fallen much more than that. If you believe that startups will experience a relatively similar valuation compression and that valuations have been adjusting from the latest stages first and trickling down, then there seems to be room for early-stage startup valuations to continue to fall this year. Still, the report gives plenty of reasons for hope.