Navigating the VC Downturn: A Landscape of Stagnant Valuations and Subdued Dealmaking
Including Perspectives from Three VC Fund Managing Partners
The VC industry, now over a year into a downturn, sees valuations holding steady but investors remaining cautious. Valuations have declined across most stages since the 2021 peak, except for seed-stage startups, which have received support from large multistage investors. However, this support is fading, potentially leading to stagnant or lower valuations for young companies.
Early-stage pre-money valuations have stayed dreadful for five consecutive quarters due to more flat rounds and a favorable investor environment that discourages post-$ price hikes. Late-stage valuations have slightly increased, but this doesn't necessarily signal a broader recovery. Only the most promising startups secure funding, while all other entrants resort to cost-cutting.
For some additional insights, I asked managing partner from three outstanding venture funds:
"Founders should take a long-term view on valuations across funding rounds, rather than fixating on maximizing valuation in the present," advises Bob Mason, Managing Partner at Argon Ventures. "CEOs who were patient with valuation expectations in 2021 and 2022, avoiding inflated heights, now stand to raise more capital in coming years at steadily increasing valuations. This demonstrates sustainable momentum and growth. Chasing peak valuations now can actually backfire by hampering future fundraising. The most success comes from steady, realistic valuation growth over multiple financings."
"With rising interest rates offering lower-risk yields, venture capital is likely to remain constrained compared to recent years," observes Rob May, Managing Partner at the AI Operators Fund. "This will require startups to reach cash flow breakeven with less capital, shifting focus toward profitability and self-sufficiency rather than unsustainable growth. The funding environment still rewards strong companies, but the standards are higher. Startups must be lean and strategic in their fundraising and spending."
"The valuation pullback reflects a reversion to rational norms - a needed reminder of enduring investment principles," says Zach Sivertson of Mercato Partners. "Now more than ever, founders must build resilient teams focused on solid unit economics, prudent spending, and securing reasonable valuations. Efficiency and break-even cash flow grant flexibility to raise at opportune times, not when the market dictates. This period underscores focusing on fundamentals when euphoria fades."
Startups are delaying fundraising, particularly late-stage and venture growth companies with capital reserves from 2021. The time between funding rounds has increased in the venture growth stage as they await improved market conditions or catching up to previous valuations.
Investors — craving liquidity to mollify LPs and with hope raise new funds — are eager for portfolio companies to exit, but today’s exit values have diminished compared to exit values in recent years. Valuation step-ups during acquisitions or IPOs have hit near-decade lows, exemplified by Instacart and Klaviyo's IPOs at lower valuations than their last VC rounds. M&A price increases have also been modest, but some companies find attractive options in selling to corporate acquirers at relatively lower prices.
Source: Q3 2023 US VC Valuations Report*As of May 18, 2023
In conclusion, the VC landscape is marked by stagnant valuations and cautious dealmaking. Although there are signs of stability, investors remain wary, and startups delay fundraising. The challenge is to navigate this environment, extend your runway, while balancing the need for capital with the possibility of lower valuations and potentially reduced exit opportunities.