According to analytics firm CB Insights, investors committed $144 billion to startups globally in the first quarter, down 19% from the previous quarter, the biggest percentage drop since the third quarter of 2012. The number of completed deals also fell, falling 5% compared to the fourth quarter to 8,835.
Meanwhile, valuation, a measure of the price investors pay for a stake in startups, has risen significantly in recent years as investors capitalize on new technology companies.
According to CB Insights, the average valuation of early-stage startups last quarter increased 21% compared to last year to $34 million. The average valuation of midstage startups rose 15% to $343 million for the same period.
“A lot more investors were chasing energy in the fourth quarter than in the first quarter,” said Anshu Prasad, co-founder and chief executive of transport logistics startup Leaf Logistics Inc. Mr Prasad said he started fundraising last summer.
Still, he said talks with investors around the valuation of his startup were hardly a turning point when the company closed a $37 million Series B deal in January. The funding is valued at $262 million, a 274% jump from the valuation the company received in 2019, when it last raised capital.
Investors said rising inflation and interest rates, as well as a fall in the public market, put pressure on the enterprise market. Rising interest rates have historically prompted investors to move capital from ventures to bonds because their yields have increased, giving investors higher payouts.
Investors attributed the continued rise in valuations to the mountain of so-called dry powder — raised capital that has yet to be invested — that venture firms have.
“So much capital has been raised in the early stages over the past 24 months and there are so many early stage funds across the board that the supply and demand balance between deals and capital still supports rising valuations,” Zach said. DeWitt, partner at venture firm Wing VC.
This dynamism comes as other segments of the enterprise market have gained momentum. Initial public offerings, one of the primary ways venture investors are paid for their investments, have almost come to a halt.
To be sure, even with the decline in funding during the first quarter, the period is still the fourth largest funding round on record and was up 7% compared to the same quarter in 2021.
Some investors anticipate that valuations will drop due to volatility in the public market versus the private market. There are often gaps in the influence of the public market on private-company dealmaking.
Already, late-stage startups, which are closest to the public market as they near an initial public offering, have fallen 4% in average valuation to $1.05 billion, according to CB Insights. So-called mega-round financing of at least $100 million, which usually happens in the later stages of investment, fell 30% in the first quarter to $74 billion.
“I feel [dropping valuations] The next beach will be killed. This is the next most logical area to be hit,” said Sojo Ventures Managing Director Spencer Faust.
While low valuations are often associated with market downturns, venture investors often welcome such declines because there are opportunities to invest in companies on more favorable terms. It could also sway startups’ expectations and make it easier to close follow-on rounds.
Startup valuations have been on a tear in recent years, driven by non-traditional venture investors, such as hedge funds and corporations, entering the asset class. For example, according to CB Insights, the median late-stage valuation has increased by 653% since 2018.
Lux Capital partner Bilal Zuberi says he expects startup prices to drop this year as more investors start seeing their portfolio companies experience valuation markdowns.
“This psychologically prompts funds to re-evaluate their entry prices,” Mr. Jubery said.
History points to an improvement in private-company valuations, said Ginger Chambless, managing director and head of research at JPMorgan Chase Commercial Banking, as part of a report by analytics firm Pitchbook Data Inc. and the National Venture Capital Association.
“Historically, there has been a one- to two-quarter lag between recovery in public markets and that of private markets,” Ms. Chambles said.