Early-stage startups have never been more valuable, at least on paper. Private-equity research firm Pitchbook reports that the value of venture-backed US startups has soared to new highs since their low point after the 2008 financial crisis. During the first half of 2017, the median seed-stage valuation, for companies raising their first round of financing, hit a new record of $6.2 million, nearly double what it was in 2010. Early-stage and late-stage startup valuations reached new highs as well—$20 million and $65 million respectively.
While a frothy market has propelled some companies to unsustainable valuations, it’s still a bit premature to cry bubble. A few fundamentals are at work. They include a still-recovering US economy, the entrance of tech companies into older industries (such as car-making, where new tech firms are increasingly making both the cars and the software that runs them), and record-smashing hauls by venture capitalists willing to keep companies afloat as they chase IPOs. Pitchbook reports that VCs have raised more capital over the past four years ($129 billion) than in any comparable period on record. As long as this capital remains abundant, startups are likely to put off their reckoning on the public markets.
Startup lifecycles are extending as well. The median age of companies raising seed capital has risen from 1.6 years to 2.4 years, a 50% jump over 2010. As companies raise bigger rounds, startups can opt to exit at later date. The median age of exit is now almost 6 years, up from 4.8 in 2006, and the average time between financing rounds now stands at 1.5 years.
It’s not all good news, though. Despite the free-flowing cash, the number and value of venture investments is down about 20% in 2017, as more investors tighten their investment criteria, and hedge funds and institutional investors close their pocketbooks. Some companies are also finding that their heady valuations are putting investors or acquirers off. In 2016, 45 startups exited for less money than they raised in their previous round of financing, the highest number in a decade.
But Pitchbook there look like being fewer such “downrounds” this year. That suggests either that fewer companies are in dire straits, or that they’re delaying fundraising rounds that might might diminish their valuations.
