PitchBook recently published its Q3 2022 reports for its European Venture, and European and US Valuations. Several interesting insights show how the impact that rising interest rates, declining public equities, and increased global political uncertainty are having on the venture capital market and the divergence between Europe and the United States.
First and most significantly, both the European and US exit markets have been significantly impacted by declining public equities, particularly technology stocks. For example, the NASDAQ Composite has fallen from a record high of 16,057 on 19th November 2021 to just over 11,000 as of 13th January 2023. Public listings of VC-backed companies have not been immune to the market slowdown.
In the US, the median public listing exit valuation declined to USD 338M (the lowest level in three years), and the average initial public offering (IPO) has fallen below USD 2B for the first time since 2018. As a result, there were only 43 and 39 IPOs in the US and Europe throughout 2022 (Q1 to Q3), respectively, as companies that previously raised at record-high valuations look to stay private longer by raising additional capital or exiting via acquisition to avoid the less appealing public market valuations.
This declining VC exit landscape has impacted late-stage VC valuations. In Europe, the median late-stage valuation declined for the second consecutive quarter from its peak of EUR 19.7M in Q1-22 to EUR 11.9M in Q3-22 (a 39% decline). Moreover, there have been reported lay-offs at several high-profile late-stage companies, as these companies (some of the fastest growing companies of the recent boom) are unable to maintain the same growth rate given they are unable to raise vast amounts of capital at record-high valuations. Hence, some of the companies that have grown the most over the past 2-3 years are now looking to efficiently deploy capital (likely to extend runways to avoid a down round) instead of growth atall costs and cut costs. Similarly, in the US, the median late-stage valuation in Q3-22 fell to USD 71M from USD 100M in Q1-22 (29% decline).
There is also some disparity between the European and US VC markets for early-stage deals. Namely, early-stage valuations in Europe have continued to increase YoY; specifically, the median early-stage valuation in Europe was EUR 8M in Q3-22, up from EUR 6M in Q3-21. By contrast, the median early-stage pre-money valuation in the US was USD 45M in Q3-22, compared with USD 60M in Q1-22.
One point to consider is the difference in absolute valuations between Europe and the US early-stage deals. That is, perhaps we would expect to see the higher valuations in the US being impacted first as the strengthening of the US dollar relative to the GBP and EUR throughout 2022 may have resulted in USD-denominated funds increasing investment exposure in EUR (supporting European valuation) in search of relatively less expensive investments in comparison to the US.
Finally, in contrast to the above trends, pre-money valuations and deal sizes for Angel and Seed stage deals in both Europe and the US have continued to increase throughout 2022; however, the extent of the growth is far greater in Seed rounds compared with Angel rounds. The reason for this is because of the following:
- Angel and Seed stage companies are several years away from exit (i.e. public markets and, hence, public market volatility);
- Investments in novel concepts at early stages (with limited financial information) are more tied to the long-term potential, the team, future market size, etc. rather than monthly financial metrics; and
- The reason for the Seed stage valuations growing at a faster rate than Angel stage valuations is because there has been significant fundraising by small funds during the last few years of the booming VC market (there is more than USD 73B in dry powder in funds with AUM under USD 250M as of Jun-22), which will predominantly be deployed in early-stage deals, such as Seed stage.
Overall, it appears the period of low interest rates and cheap money since the 2007-08 Financial Crisis has come to an end. In combination with increasing global economic and political uncertainty, this has resulted in declining public equities, which has started toimpact late-stage VC and feed into early-stage VC in the US.
Whether this materialises into more severe declines in valuations in the US and Europe, potentially impacting Seed and Angel rounds, will depend on the global economy, interest rates, and public equities throughout 2023 and 2024. The global economic outlook is looking increasingly bleak, with the World Bank recently revising its 2023 global economic growth forecast down to 1.7% in Jan-23 from its forecast of 3.0% in Jun-22 (Global Economic Prospects --January 2023 (worldbank.org)).
Regardless, we would expect to see early-stage venture deals maintain the recent level of activity as investors look for long-term synergies and returns. At Btomorrow Ventures, for instance, we are more interested in the long-term strategic alignment with BAT and are less focused on short-term fluctuations; thus, we remain committed to supporting our portfolio companies and new investments that are aligned with our investment strategy.