How Long Can Pre-Money Valuations Stay This High?

Pre-money valuations are currently sitting at a decade long high according to Pitchbook’s VC Valuations and Trends Report. The question here is: how long can these types of valuations hold up?  Are the valuations in line with trend expectations or are they lofty?

The following figure has Pitchbook’s history of VC valuations by stage (average valuation). The figure shows a large jump in 2013 for Series D or later valuations, increasing from around $95 million in 2012 to about $114 million through the first three quarters of 2013, or an increase of about 20 percent.

In terms of the earlier stage valuations, the figure shows Series C valuations up to about $58 million from about $54 million in 2012 (about 8 percent), Series B valuations up to about $26 million from $24 million in 2012, Series A valuations up to about $9 million from $7.5 million in the prior year, and Seed Series up about $700K over the prior year.

Looking at the data from a different dimension, the following figure shows how strong growth in valuations has been from a 2008 baseline. On top of the valuation growth pyramid are Series C valuations, up about 133 percent since 2009, followed by Series D or later valuations, up about 128 percent since bottoming in 2009. Earlier stage valuations haven’t been left out of the party.  Valuations for Series B stage companies are up 51 percent since 2009, while valuations for Series A stage companies are up about 25 percent.

Is the strong growth lofty or real?

Here is a look at the same data with a linear trend line added. Interestingly, the figure only shows two series types as highly valued above trend.  The two series are Series D or later valuations, with valuations about $20 million above what a linear trend line would indicate and Series C valuations at about $10 million above trend.

The other three series types are floating in the plus or minus $1 million range from trend.

What’s pushing the later stage valuations so much higher?  Will we see a reversion to trend? If you’re a statistician or financial economist, you probably answer the question with a yes. If you’re a professional in the private equity or venture capital industry, you’re probably much less likely to say that firms in your industry are overvaluing their investments.  After all, you know more about the businesses being invested in than statistics will indicate.

Overall, pre-money valuations are at a decade long high for later stage venture capital investments.  Whether the valuations are lofty, of course, depends partially on your view of how investment valuations work.  We’ll see in the next year or so whether valuations make a turn towards the mean or if the mean is instead bumped higher.