- According to PitchBook data, median ratings for late startups have grown to record highs.
- Intense competition for business in the hottest startups has pushed up prices, investors told Insider.
- Investors are moving into younger startups and in terms of restructuring the leaves to deal with, they said.
- See more stories on the Insider activity page.
About a year ago, Ben Narasin, a partner at venture capital firm New Enterprise Associates, had just failed to get his venture into the AA round series of a business startup he had made an angel investment in.
It turned out, the founder had sent a note to Narasin at an old email address. But given his personal connection to the founder, Narasin thought he would have a nice shot at the next round of funding. So he waited.
That turned out to be a mistake. By the time Narasin turned back with the founder a few months later, the Serie B deal was already done. Another company had come up with an investment that valued the start-up at more than $ 1 billion – about 25 times higher than when Narasin initially invested – and the founder was ready to sign the term sheet that evening.
It’s a scenario that happens more and more, Narasin told Insider, as fierce competition for bids propels valuations to unprecedented heights. He compared the current fundraising environment to a missile.
“Right now, some of these races are like going out of the atmosphere and traveling to Mars,” he said.
Valuing a startup has always been an art rather than a science. But as conditions have made it easier for scale and expansion companies, the founders of the startup have used this to influence the case for higher ratings and convince VCs they could become the next knockout, billion-dollar business. . As a result, VCs had to throw their old game books out the window to launch their claim on the hottest business.
Insider spoke with six investors about their experiences understanding how to price companies in an environment where unicorns are becoming less mythical and more mundane.
“We’ve seen better companies.”
Ratings for U.S. startups at the end of the stage – those raising the C series or subsequent rounds – are set to record highs by the end of 2020, and have pushed only higher this year, according to PitchBook data.
The median pre-money valuation for a late-stage company went to $ 170 million in the first quarter of 2021, up from $ 120 million in the fourth quarter of 2020. The top 25% of start-ups late orders now have pre-cash valuations of $ 840 million or more.
In addition, unicorns, or companies with a valuation of $ 1 billion or more, are emerging at a faster rate. About 166 startups have reached that mark since the beginning of 2021, while the previous year it produced only 163, according to Crunchbase.
In the view of some investors, this trend towards balloon valuations is not necessarily a bad thing. David Tisch, co-director of Box Group, has voiced his concerns, believing them to save money among some investors.
“I don’t think it’s just a complaint,” he told Insider.
In many cases, other investors have told Insider, the higher dollar values that startups are commanding these days are justified. For one, it takes less time to scale up for some software companies, so supporters can get a return on their investments sooner. Because of the greater ease of reaching a vast customer base, companies have a greater market opportunity. In addition, the pandemic has helped bring more resilient startups to the forefront.
“All of these trends are huge tailwinds,” Joe Raczka, co-founder of VC York IE, told Insider. “We’ve seen better companies.”
But it’s not necessarily the quality of the companies just that is driving the ratings. Competition between firms is one of the biggest factors causing balloon valuations, investors said. As a result, companies can draw more favorable terms.
In addition, more experienced founders may be less constrained by other services that business firms provide, such as assistance with marketing or business development. This has allowed investors outside the world of venture capital to earn business in the hottest startups by offering amounts of liquidity, say several VCs.
Only a relatively small group of VC companies stand out for the non-financial support they offer to startups, so the size and terms of control often carry more weight, says Amy Nauiokas, founder and CEO of Anthemis, a fintech-venture venture. , he told Insider. But the catch is that startups face a higher bar for success, he added.
“There will be pressure, especially if the company offers nothing but money and expects a financial return,” he said.
How investors adapt
Given the intense efforts to enter the more lucrative businesses of the next phase, some companies are moving to invest in younger companies. Even Tiger Global Management, the hedge fund with a prolific record of late in supporting unicorns, has little to make a seed investment.
Focusing on companies in the early stages has another benefit: their ratings are always relatively modest. According to PitchBook data, ratings for the top companies – angel and seed start-ups – have really declined by 2020, and have remained stable until this year.
In the first quarter of 2021, the median pre-money valuation was $ 5 million for angel-backed startups and $ 7 million for companies in the seed phase, according to PitchBook.
Other investors have put in protection to compensate for the growth of valuations. In the months following the pandemic, David Blumberg, CEO of Blumberg Capital, negotiated mandates on several sheets of his company’s mandate. The mandates, set for a period of 30 months, allow the company to put in additional capital at a predetermined price.
In the event that the funding environment cools significantly the next time their portfolio companies need to raise money, the mandates give them the opportunity to provide additional support without financial penalties, Blumberg told Insider.
In fact, many investors have told Insider that they expect the frustration in venture capital to end.
For example, Natalie Hwang, co-founder of Apeira Capital, which includes investment activities shorting startups that the company believes are overrated, seeks in public markets – where technological stocks have recently cooled – as a harbinger.
Until then, investors will have to decide if they are willing to go head-to-head with a growing group of deep-pocketed financiers.
“If you’re incredibly disciplined about valuation, it’s a difficult market to play in now,” Tisch said.