According to the 2023 U.S. VC Valuations Report prepared by Morgan Stanley for Pitchbook, while the start-up market has been on a downward trend in recent years, valuations at the pre-seed and seed stages have not yet fallen below the record highs seen in 2021. Early-stage valuations remain relatively stable, while late-stage valuations and IPO exit values have declined. Although valuations are dropping, early-stage investments are still relatively insulated. In 2024, the market is expected to face continued uncertainty, which could lead investors to become more cautious. As IPOs become harder to achieve, acquisitions may grow in popularity.

Despite the overall slowdown in pricing across the market, pre-seed and seed investment valuations continue to show resilience. The valuations of companies at these stages remain high even amid several years of downward pressure in the broader market. Start-ups now have to offer more equity to raise capital at early stages. Even though valuations are still elevated, investors are demanding larger stakes, and fewer investments are being made. This reflects the persistent risk associated with early-stage investments.

At the same time, the number of deals at these stages is falling. Following the surge in 2021, investors have become more cautious and are allocating less capital to pre-seed and seed rounds. The sharp increases in 2021 valuations may have influenced the high levels observed in 2023, but the long-term effects remain uncertain.

An interesting trend can be seen in early-stage investments. While valuations in seed rounds are rising, valuations in early-stage rounds are declining, creating a bottleneck. Although the average valuation has stayed relatively flat over recent quarters, the annual average of $38.2 million marks the lowest figure since 2020. Still, this number is over 50 percent higher than it was in 2020, indicating a difference in market context.

The fundraising environment in 2023 differs significantly from that of 2020. Fewer companies are raising capital to extend their runway compared to the initial months of the pandemic. As a result, many start-ups raised new rounds at similar valuations to their previous ones. The average valuation step-up has dropped to 1.68x, the lowest since 2013, when it stood at 1.54x. Likewise, the average annual valuation increase for companies that raised follow-on rounds has fallen. This figure reached $41.2 million in 2021 but dropped to just $12.5 million in 2023.

For early-stage companies, the main challenge ahead will be to continue growing without excessive dilution in an uncertain market environment.

When it comes to late-stage investments, both deal volume and valuations have declined. Investors are less inclined to invest in companies with high valuations. This makes it more difficult for late-stage start-ups to raise funding. At the same time, going public or getting acquired has become increasingly challenging. Overall, investor behavior is becoming more cautious.

Valuations for companies at the venture-growth stage reached their lowest levels since 2018 and recorded the sharpest decline among all stages in 2023. One key reason is that companies at this stage are closely linked to IPO markets and are directly exposed to the macroeconomic factors that have impacted the start-up ecosystem since mid-2022.

The poor performance of IPOs and the rising number of low-quality start-ups have caused investors to act more conservatively. These trends are expected to continue through 2024. Finding investment will likely remain difficult, and IPOs or acquisitions will continue to pose major challenges.

In summary, valuations in the venture capital market are generally falling, with the most significant drops occurring in late-stage rounds and IPO exits. However, pre-seed and seed valuations remain relatively resilient despite their high-risk nature. In these early rounds, investors are demanding larger equity stakes, resulting in lower capital deployment. Market uncertainty is expected to persist, prompting investors to stay cautious. This could create serious challenges for start-ups in the venture-growth stage. IPOs and acquisitions are also likely to remain difficult in both 2023 and 2024, and investors may increasingly look for opportunities at lower valuations than in previous years.

Source: https://pitchbook.com/news/reports/2023-annual-us-vc-valuations-report