PitchBook News - IPOs stall and valuations fall

This uncertainty has handcuffed new IPOs, especially for more highly valued businesses, as no US VC-backed company valued at over $1 billion has launched and completed an IPO so far in 2022.

This is critical given that nearly 90% of all VC exit value over the last two years has come from public listings, mostly by multibillion-dollar late-stage companies.

If this drought persists, there may be cause for concern around VC's ability to return capital while avoiding suboptimal exits. This could have serious knock-on effects for the rest of the VC market.

Late-stage startups are the closest private companies to the public markets, so it seems logical that this is where we've already seen a tempering of valuations.

For US deals closed in Q1 this year, we've seen a near 30% drop in the average late-stage valuation from 2021's highs. This contrasts with early-stage and seed deals, which were priced around the same levels.

 

Late-stage VC valuations began their pullback in Q1.

In the next few quarters, we expect to see a greater effect in the late stage and eventually a trickling down to earlier stages.

For new deals, exit valuation assumptions will be priced at today's market levels, and anecdotal evidence suggests investors are being considerably more prudent in the due diligence process.

The depth of the revaluation seems to be stabilizing, but if there are any further unexpected shocks to what the market has priced in, we believe the valuation decreases will deepen.

Well-positioned startups should be able to utilize the record levels of capital investment over the last two years to extend runways and avoid pricing new equity into the current climate.

The greater question will be whether marginal demand from LPs and nontraditional investors will continue to flow now that the economic outlook has changed and a rising interest-rate environment disincentivizes investment in growth businesses.

We believe that many nontraditional investors like corporate VCs will maintain their presence in the space, but some investors and LPs with significant public equity exposure may be more inclined to pause new commitments or investments until there's more certainty in the market.

At the moment, many of these outcomes are more likely in the worst-case scenario and we still expect VC investment to be robust throughout 2022.

However, we also expect more prudence in terms of capital deployment from both investors and startups, as all parties involved weigh how long a downturn might be in effect.

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