PitchBook just released its 2016 VC Valuations Report, which summarizes the Venture Capital (VC) investment landscape for 2016. The report includes an overview of VC deal activity and valuations by stage. Here are a few trends in the venture financing landscape.
1. Alternative financing sources have changed the profile of early stage (particularly seed stage) start-ups. The median deal size and post-money valuations of seed stage start-ups have increased in one year from $1.0 million to $1.5 million, and $6.8 million to $8.0 million, respectively. The median seed stage post-money valuation was only $6.0 million in 2014. This run-up in valuation may be due in part to start-ups seeking seed financing at a later stage of development since alternative forms of early stage financing are more readily available compared to even five years ago. As of today, Kickstarter reported $2.9 billion in pledges to over 120,000 Kickstarter projects, compared to $529 million pledged to 22,000 projects in 2014. Although not all of the money is for start-up ventures, gone are the days when entrepreneurs had to rely solely on family and close friends for their initial capital.
Another contributing factor may be the increasing number of accelerators and incubators supporting start-ups. These organizations provide entrepreneurs with initial capital, overhead sharing, expertise, and networking opportunities that are critical in the early stages. Thus, the companies seeking seed financing are entering the space with a better-established business platform and employee base that is able to command higher valuations.
2. Liquidation participation has continued to trend downward across all stages of venture financing. Investors favor liquidation preferences by investors due to the increased payoff and reduced risk at exit. However, liquidation preferences introduce an overhang whereby if a future exit valuation (even in a bankruptcy scenario) is less than the liquidation preference, all other equity holders may receive nothing. Thus, the declining occurrence of liquidation preferences in venture deals is indicative of a more favorable financing environment for entrepreneurs.
3. Corporate backed investments command substantially higher valuations than non-corporate backed exits (i.e. VC or PE funds). The median post-money valuation of early stage (defined as Series B and prior) companies for corporate investors bore a 65% premium compared to non-corporate investors in 2016, slightly higher than the 63% premium in 2015. The premium generally reflects synergies the acquiring company may capture by integrating technologies or cross selling. The premium may also reflect a control premium, as corporate investors are likely to buy out the whole company rather than settle for an equity stake. However, corporate investors have to be wary of optimistic synergy projections, as the M&A landscape is littered with examples of hoped-for synergies that never materialized.
For more trends in venture capital financing and valuation trends by stage and industry, check out the full report.
Aronson LLC’s Financial Advisory Services practice assists clients in a variety of industries with numerous M&A-related activities, including pre-acquisition due diligence and post-acquisition purchase price allocation analyses, and impairment testing. For information about how Aronson can provide assistance in these areas, please contact Jimmy Zhou at 240.364.2698.