PitchBook News - How low can valuations go?

As capital availability shrinks, later-stage companies have struggled the most, and they face more challenges when it comes to raising capital and exits. However, previous periods of market stress show such players often have the economies of scale (plus management tenure) to weather downturns.

Amid liquidity constraints, survival not only becomes a question of scale but capital efficiency. The requirement to rationalize cost bases, cash burn rate, and stretch funding runways will be greater for larger companies.

Those with balance sheet firepower will also be best placed to capitalize on depressed asset values through M&A, seen recently in various buy-and-build strategies. Exit activity, therefore, continues to grow toward acquisitions over public listings, with the latter showing little sign of revival.

The overall outlook is uncertain, resulting in a reluctance to deploy capital. The depth and persistence of valuation declines will become clearer as more data is available throughout the year. However, it is a waiting game some parties are cashing out of, as nontraditional investors continue to exit these higher-return but riskier illiquid markets.

With pressures expected to persist through the year, investor attention is likely to turn to core portfolio areas. Key questions remain on how much further a correction to expect and who emerges as winners and losers.

For more on the above, download our free European VC Valuations Report or reach out with any questions.