Trickle down valuations

The topic du-jour amongst venture investors, limited partners and entrepreneurs alike is whether valuation declines have fully trickled down the capital stack following the ’22 tech market reset. While it is widely publicized that deal counts and round sizes are significantly down from their ‘21/’22 peaks (especially at the later stage), valuation analysis is harder to find. So, I dusted off Pitchbook and Excel….

Most analyses I’ve seen read something like the following chart with precipitous late-stage valuation declines (>50%!) dominating the scale. For early-stage entrepreneurs and investors, analysis at this scale doesn’t tell us much, nor answer the question of whether these late-stage changes have or will “trickle down”.

If instead, you index each series to its maximum, you learn a lot more. See below. Series C and D valuations are down by half or more, A&B are down but less, and seed is even still rising. However, the normalization shows something more – a clear three to four quarter lag from changes in the late-stage (C&D) to mid-stage (A&B). The question is whether this same lag will mean a peak in seed valuations about now given we are three to four quarters past the A&B peak.

In the Midwest market where we focus, we are anecdotally seeing seed price declines of ~25%. We are also seeing the re-emergence of “post-seed” opportunities after a period of several years where any company with a whiff of progress would go straight to A from seed. (Post-seed is not characterized in the Pitchbook data and might, in fact, confound the seed trend in a way that inflates Seed valuations)

While the supposition that a similar lag in peaks will occur in Seed is a nice “story”, it’s hard to buy into it without some economic basis. To find that, we can look at how the typical “markup” between round types has fared, comparing, for example, Series A pre-money medians to Seed post-money medians from 18 months prior. The trends surfaced are remarkable.

Prior to the COVID tech boom, markups from Seed-to-A and A-to-B (early-stage) ran stably around 2.5x while late-stage markups ran between 1.5 and 2x. Then they all exploded during the covid boom. Late-stage markups have since crashed, approaching 1x, (e.g. a flat round). These have overcorrected and will likely adjust back up as their denominators (post-money valuations at t-18 months) moderate. Series A-to-B has also overcorrected somewhat, indicating that Series A valuations should continue to shift down, which in turn will put pressure on Seed. In short, we think it’s coming, though we don’t expect the same level of adjustment as at the late-stage, which had a much greater runup in markup ratio than did Seed, A and B.

Notes on data: All data is from Pitchbook for the US only. Valuations are median valuations. “Markup” is between post-money medians for the earlier series at t=-18 months and pre-money medians for the later series at t=0 months.