larger deals in sounder companies. The split in quality of companies that had received funding in previous years is being exposed, and the companies able to hit higher benchmarks are reaping the benefits. The past few years had cultivated an ecosystem that prioritized growth over other fundamentals, but that industry mindset seems to be shifting.

VC Valuations

Investors contend at fragmented seed stage

Seed valuations and trends

By far the largest fall in deal count this year has happened at the seed stage, as investors show significant restraint after several years of exuberant investment—more than 11,000 angel/seed deals had been completed between 2014 and 2015. The slow pace of investment hasn’t had much an effect on valuations, however, as seed-stage median premoney valuations are up within nearly all industries. The seed stage is very competitive currently, owing much to the rise in the number of institutional investors and funds targeting the stage in recent years. The specialization of such funds, and accompanying industry insight and business acumen, have allowed seeds to move further into a startup’s lifecycle, making the “seed is the new Series A” cliche all the more true. Often referred to as micro VCs, these seed firms are now an integral part of this new venture lifecycle. As early-stage investors seek out startups with more traction and better unit economics, micro VCs have been tasked with readying their portfolio companies to hit these more taxing benchmarks set by later investors.

VC Valuations

Seeds are very often not the first institutional money to reach a startup now, whereas in the past a seed might enter soon after a startup raised a small sum from family or angels, the rise of accelerators and pre-seed investors has pushed traditional seed investments down the lifecycle. All in all, the median seed investment size rose to $1.5 million through August 1, 2016—up $500,000 from the 2015 median—while the median seed valuation hit $5.9 million, a jump of $2 million from 2012.

VC Valuations

VC Valuations

Series A financings remain a crossroads

Series A valuations and trends

VC Valuations

The Series A narrative is similar to that of the seed stage. The growth in seed activity has also partially pushed Series A deals into a time range that was previously held by early Series B deals, generating heightened expectations. Through the first eight months of 2016, Series A pre-money valuations have held at a median of just over $14 million, which, while technically showing no growth over 2015, is $2 million higher than in 2014 and almost double the median Series A valuation attained five years ago. For all intents and purposes, the Series A stage has come to a crossroads.

VC Valuations

As investors in the stage slow down the overall investment pace, since the number of companies receiving seeds hit an all-time high in 2014 and 2015, they will need to decide how to proceed with startups that haven’t yet had enough time to hit the key performance indicators (KPIs) they are looking for. Record seed activity should lead to more Series A deals being completed, however, a certain Series A bottleneck has evolved, though not due to a lack of capital available to be deployed. Investors are more unwilling to invest in unproven businesses, setting high goals for revenues and other KPIs that for many startups are unattainable early in their business cycle. In many cases, the timeline to reach these expectations has simply lengthened. Those that have been able to secure a Series A follow-on round were rewarded handsomely, however. Through the start of August 2016, 59 Series A rounds of $20 million or more have been closed in the US, 16 of which generated pre-money valuations of at least $50 million.

VC Valuations

VC Valuations

More competition for still significant sums

Series B valuations and trends

VC Valuations

Amidst a venture environment pervaded with robust amounts of capital and public market comparables’ hitting near historic highs, in recent years we have seen Series B round sizes reach considerable heights. After raising more than $88 billion in 2014 and 2015, investors entered 2016 equipped with large vehicles; however, in wake of recent volatility in the global markets, investors slowed activity quite considerably. VCs prudently searched for companies that either offered the financial strength to further their product development and expansion in upcoming quarters—common objectives at the Series B stage—or presented a prospective liquidity opportunity. Early-stage pharma and biotech companies offered potential for the liquidity sought by VCs, and were compensated with financings over 36% larger in size than the year before; however, founders had to give up significantly more equity as a result.

VC Valuations

Since pharma and biotech comprised the majority of IPOs this year, the greater proportions doled out to VC firms coupled with less-diluted equity pools means investors could reap more benefits in upcoming quarters if they have not already. Regardless of the excess capital pharma and biotech have raised, valuations have declined, with the only immune sector being commercial services, which experienced a valuation uptick of 27% from 2015. This is in part attributable to sector-wide integration of workplace automation technologies, providing commercial businesses with the opportunity to cut expenditures in capacities such as client resource management, human resources, and marketing. As evidenced by the uptick in median percentage acquired from 28.6% to 34.4% in pharma and biotech and 20.8% to 22.0% in software, the competition for VC dollars is intensifying. Founders in certain segments pursuing Series B financing should prepare to spend more time justifying rounds and valuations of such size, and brace for more balanced negotiations, as opposed to the overtly founder-friendly climate that reigned in the past.

VC Valuations

VC Valuations

The inflection point may shift downward for some

Series C valuations and trends

VC Valuations

Beginning the year, the private markets began to see valuations plateau in early-stage tranches— though such recalibration is just beginning to infiltrate the Series C stage. Since the end of 2015, volatility in financial markets has left many wondering whether outside pricing pressure and overstretched valuations are finally coming home to roost, and perhaps subject to fall even further as macroeconomic factors weigh on global markets. In response, many founders were obliged to evaluate whether they had the infrastructure to withstand a potential economic downturn. The greater majority of players that recommenced campaigning for Series C funds were in the software sector, given the currently prevalent composition of late-stage startups. As evidenced by the 30.9% increase in deal size across all sectors, investors have still been hungry for quality opportunities and did not shy away from deploying capital into companies which displayed impressive growth metrics backed by actual revenues;

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