Happy Memorial Day! Is there any better way to celebrate the day than to postulate on where venture capital (VC) valuations are heading for the remainder of 2018? Well, yes there is, but for the moment let’s think about valuations.
Where Valuations Have Been
First, here’s a look at Pitchbook’s recently released first quarter valuation report. Valuations ended 2017 on a high note, reaching a decade high in value. Interestingly, although deal value this past year surpassed the 2015 watermark year, the number of deals declined again in 2017, following a sharp drop-off in 2016.
Also interesting is the detail on angel/seed, early-stage VC, and late-stage VC activity. Late-stage VC and early-stage VC continued to grow moderately in 2017. The decline in the number of deals closed stemmed from investments in angel/seed rounds. Perhaps angel/seed round investments are a predictor of where investing is heading – although it would be hard to show this when doing some real data science on the correlation.
Source: Pitchbook
From which stage in the investing cycle is the valuation growth coming from? Here’s a look at valuations by stage of investment. Fascinatingly, a large portion of the valuation growth stems from late-stage VC, which expanded to $63.3 million median pre-money valuation in 2017 and, based on the first quarter of 2018, is on clip to reach a pre-money valuation of $75.0 million in 2018.
Valuation growth shows up at the early-stage and angel/seed stage as well. Early-stage VC median valuations are on track to grow to $27.5 million in 2018, after expanding to $20.0 million in 2017.
Angel/seed stage valuations are the laggard here. Median valuations for companies in this stage of their business is up to only $6.5 million, a moderate increase from the $6.3 million in 2017.
Source: Pitchbook
Shifting to one last point on where we are, the following is a look at the length of time between funding rounds. Fascinatingly, companies are expanding the length of time between funding rounds, what Pitchbook calls “cash runways”.
Angel/seed stage and early-stage companies generally went for additional funding about 1.1 years after a funding round. That has expanded to 1.5 (early-stage) and 1.4 (angel/seed) in the most recent data.
The picture is more pronounced for late-stage VC, with years between funding rounds expanding to 1.8 years.
Source: Pitchbook
Where Valuations Are Heading
With this background, where would you guess valuations are heading for the remainder of 2018? The safest guess is up, strongly. The economy is humming along. Taxes have been lowered. Wages are heading upwards. Now is the boom, and venture capital valuations always move up when the economy is booming.
Conclusion
Overall, the first quarter of 2018 Pitchbook valuation report provides a fascinating look at the state of valuations in the earlier stages of the investing world. Where things are heading for the remainder of 2018 is, of course, anyone’s guess, although most indications are that valuations are heading upwards for the remaining 7 months of the year.
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