Startup valuations have quietly rebounded to record highs. Some investors say the crisis is over.

Startup valuations have quietly rebounded to record highs. Some investors say the crisis is over.
Startup valuations have quietly rebounded to record highs. Some investors say the crisis is over.

Generative AI companies aside, the past two years have been relatively difficult for venture-funded companies. Very few startups managed to raise funds at prices that exceeded their previous valuations.

Now, roughly two years after the venture capital bust began in early 2022, some investors, like IVP general partner Tom Loverro, say the worst of the recession is behind us and startups that survived should shift from cash preservation mode to spending money on growth.

These aren’t entirely empty words. According to PitchBook data, valuations for all but the earliest-stage companies fell in 2023 compared with the previous year. But during the first six months of 2024, the prices investors were willing to pay for new deals from U.S.-based companies not only rebounded, but hit an all-time high for the average early- and late-stage deal, according to the latest data report from PitchBook and the National Venture Capital Association.

“Valuations for companies that are getting term sheets have been high,” said Stephanie Choo, a partner at Portage Ventures, a firm focused on financial technology.

While fintechs have fallen out of favour with investors since the start of the recession, Choo said the number of companies able to raise capital at higher valuations has increased since the start of the year. He pointed to British bank Monzo, which was valued at more than $5 billion in May, up nearly 15% from the $4.5 billion it was valued at by investors at the start of 2022.

Over the past two years, many startups have cut spending, helping them grow and, in some cases, exceed their previous valuations, Choo said.

Samir Kaji, founder of Allocate, a startup that enables households and wealth advisors to invest in venture capital funds, is also optimistic that valuations and the fundraising environment have improved for startups this year. “Things are much more optimistic than I have seen since the beginning of 2022,” he said. “Capital markets are slowly recovering, and if current growth and fundamentals can be achieved, there will be capital to go around.” [your startup].”

But those “historical” valuations are somewhat misleading, said Kyle Stanford, senior U.S. venture capital analyst at PitchBook. That’s because deal volume remains sluggish. There were fewer companies raising a new round at a known valuation in the first half of 2024 than is typical for a six-month period.

PitchBook’s valuation dataset is comprised primarily of strong companies that were able to grow to their previous valuations, but startups that were unable to raise funding at a higher valuation may have been left out of this data. Many of them opted for unpriced rounds via convertible bonds, insider funding rounds, or delayed raising capital altogether, Stanford explained.

“It’s a good market right now if you’re a strong company, but if you’re struggling to hit the growth targets you had set before the pandemic, it’s a really tough market,” he said.

Kaji echoed this sentiment, but his take was a bit more optimistic. He said that while startups are still divided between “haves” and “have-nots,” the pool of companies that can potentially raise funds at higher valuations has grown in 2024.

Startup valuations are improving for the strongest companies for several reasons.

There is renewed optimism that inflation is under control and the US Federal Reserve may soon cut interest rates. In addition, the stock market has seen a significant rally this year, which has influenced the outlook for private investors. Finally, a significant portion of companies raising funds in 2024 include AI companies, and AI startups receive significantly higher valuations than other sectors, Stanford said.

 
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