'We are in uncharted territory.' Startups should expect valuations to crater 30% as COVID-19's bite deepens
- Startup valuations at Series A are likely to compress by between 22% and 33% in the second quarter of 2020 due to the coronavirus pandemic, new analysis shows.
- US figures from Eddie Ackerman, head of financial analysis at Thomvest Ventures, indicate that pre-money startup valuations will drop, based on analysis of companies during the global financial crisis in 2008.
- "We are in 'uncharted territory' right now during the corona crisis," Ackerman said. "The amount of wealth destruction in such a short amount of time is unprecedented."
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Startups should lower their expectations on valuations over the next quarter, as the COVID-19 pandemic bites.
That's according to analysis by Thomvest Ventures head of financial analysis Eddie Ackerman, who looked at valuation drops in 2008 to draw his conclusions.
He estimated that US startup valuations at Series A would compress between 22% and 33% through the second quarter of 2020 due to the coronavirus pandemic.
Ackerman analyzed more than 3,000 data points on Pitchbook on funding for VC-backed startups in the period from the third quarter of 2008 to the first quarter of 2009. He used this as a proxy to estimate the forthcoming drop in startup valuations in 2020.
"We are in 'uncharted territory' right now during the corona crisis," Ackerman said. "The amount of wealth destruction in such a short amount of time is unprecedented."
Ackerman's data is less clear on startups at a Series B stage, but broadly predicts a similar dip in valuations.
It's possible 2020 won't look precisely like 2008 but, Ackerman said, a valuation drop seems likely. Investors in Europe are already fleeing deals, indicating the longtime favorable market for founders is at an end. Instead, investors are spending more time on internal issues and their existing portfolio companies.
Despite a 14% increase in the total amount of funding in the first three months of 2020 on compared to Q4 2019, the number of deals slipped 9%, a third successive quarter of decline, according to PwC CB Insights MoneyTree Report Q1 2020.
The reason for the increase in funding overall in the US is a result of increasingly large financings taking place, at a later stage. The number of $100 million-plus rounds increased to 58 in Q1 2020, a 50% uptick to the prior quarter. These large financings made up 45% of total funding in the quarter, according to CB Insights data.
The upshot is, larger winners are still able to scoop up funding but activity is slowing down for the smaller startups.
It's a sign that at the early-stage investors are likely to engage on more competitive terms.
"We expect the momentum that catapulted European VC deal activity to record levels will abate in 2020 as VC investors become more frugal in response to the pandemic-induced crisis," they wrote. "Deal terms are likely to turn in favor of investors as rounds become riskier."
Back to the future?
Green shoots could yet emerge.
By Q1 of 2009, less than six months after Lehman Brothers collapsed, VC-backed startup funding rounds increased and investor appetite for richer priced deals re-emerged, according to Ackerman. The fact that later-stage funding appears to have held steady despite the possibility of a coronavirus downturn should be encouraging for the wider market going forward.
On this occasion, provisions for small businesses have been made more available in the form of the Paycheck Protection Programme (PPP) in the US and CBILs in the UK alongside various government-backed schemes in the rest of Europe.
"Here's to hoping it's a faster and more robust recovery than what we saw during the Great Recession," Ackerman added.
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