Founders have been going through a big reality check for several months now: What they thought their startup was worth, or could be worth, is very different from what venture investors are willing to pay for it right now. And the more data we get, the more that trend has played out: Valuations for even early-stage companies kept plummeting in Q1, while flat and down rounds are creeping higher.
Per a recent PitchBook report, the median pre-money valuation for early-stage startups in the U.S. sunk to $38.2 million in the first quarter, down 5.7% from the prior quarter and a whopping 63% below Q1 of 2022, as general partners turned more cautious amid the liquidity crunch, the PitchBook authors noted.
And, unsurprisingly, flat and down rounds—where startups raise new funding at a lower valuation than their previous round—are on the rise. The proportion of flat and down rounds as part of all completed rounds rose for the fourth consecutive quarter, to 15.4% of all rounds in Q1, with down rounds making up 7.5%—about 2.7 percentage points higher than Q1 of last year, according to PitchBook.
There’s also been chatter in recent weeks of a looming wave of more down rounds as cash-strapped startups that have so far held out are forced to raise more money. “When you look at the data, I'm surprised that that number isn't higher given the irrational exuberance we had experienced,” Beth Ferreira, a partner at FirstMark, told me last week. She thinks “there's a lot more on the horizon.”
We may indeed see those soon: Ferreira says that they “definitely see more companies testing the waters, like, 'Oh, I'm gonna go out and raise in the fall,' but [they're] having a few conversations now,” she said, adding that “I think the hope is that, you know, someone bites and funds earlier versus later.”
To be sure, a down round isn’t the end of the world, and we’ve even seen some of the most venerable private companies take it on the chin (I’m thinking of Stripe, of course, which raised a whopping $6.5 billion in March at a $50 billion valuation—a massive drop from their last valuation of $95 billion in 2021). In fact, some VCs like Brian Ascher of Venrock told me earlier this year that a Stripe down round could actually be a good thing for startups to see: “Being willing to take money at lower prices is just reality, and there should be a strong preference to take a clean deal at a lower price than increase your own risk by doing unnatural acts to maintain your valuation by having all sorts of structure and terms around you that tend to bite you at the exact wrong time when things go bad,” he told me back in January.
It’s clear that the environment isn’t getting a lot better for startups just yet—and those running out of time to raise more money are likely having those difficult conversations more and more.
See you tomorrow,
Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
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