In the past few quarters, we’ve seen an interesting trend in the venture capital exit markets.
This trend is that there’s a growing number of deals where the exit value is less than the most recent round of post-money valuation.
Some say it might be a disturbing trend – after all, how could it be good when valuations are dipping lower than what investors bought in earlier? Others are less convinced, seeing the recent movements as just a healthy “reversion to the mean” in the valuation world.
The Data
What exactly are they looking at? Here’s one view of the data, provided by Pitchbook. The figure shows the number of companies with an exit value less than the prior financing round’s post-money valuation. The measure has been on an upward trend since bottoming at 15 in 2008. Pitchbook’s most recent count is at 37 for 2016 (2 so far in 2017 through March 1, 2017).
Source: Pitchbook
The Positive Spin on the Trend
Some analysts spin the trend in exit valuations as simply a healthy reversion to normal valuation. Some point to charts like the following, which show that in recent years there’s been a fairly healthy rise in post-money valuations. This can’t go on forever, and, some analysts argue, a small cooling right now is better for the long-term valuation picture.
Source: Pitchbook
The “Negative” Spin on the Trend
A competing interpretation of the valuation trend is that the cooling is only the tip of the iceberg of what’s ahead. Analysts with this view generally see valuations as not just a little out of whack, but in “bubble” territory.
Some may point to charts like the following, which show a potentially disturbing trend in the use of debt in early-stage financing rounds. The use of debt in early-stage financing rounds has the potential to be damaging to the future health of a company.
Overall, if the early indications for 2017 are anywhere correct, the use of debt-based financing may cool off in 2017 compared to 2016, although the actual amount of debt-based financing is still quite high by historical standards.
Source: Pitchbook
Conclusion
Overall, recent data suggests some cooling in the venture capital financing market. An interesting trend that’s emerged recently is that there’s a growing number of companies with an exit valuation lower than their most recently completed post-money financing round.
Whether this trend is a signal of bad things to come for the industry, or just a healthy cooling off, is a matter of intense debate among venture capital investors, economists, owners of early stage companies, and the various other interested parties.
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