PitchBook News - Valuations can be deceiving

Data can mislead without proper context.

That is somewhat the basis for the use of mosaic analysis. A single datapoint can't be a trend and can't showcase the true state of a financial market.

Simply looking at a few datapoints on US VC valuations may lead to the belief that the market has begun its return to strength.

The median seed valuation in Q1 was the highest of any quarter. Early- and late-stage valuations also neared the highs seen a few years ago (the late-stage median of $70.1 million was the second-highest ever).

At face value, those are great signs. With further context, they don't shift to negative signals, but their luster dims.

As the venture market has slogged through capital availability issues, exit challenges, and a general caution from all parties, times between rounds have increased. Companies have raised an increasing number of rounds at the same valuations as before and have been pressured with more investor-friendly deal terms.

An important contextual datapoint to the top-line valuation is relative velocity of value creation (RVVC), which generates an annualized growth rate for companies that closed a round. For those high-valuation deals in Q1, the valuations were growing at some of the slowest rates we have seen in the past decade.

 

Valuations are up, but time between rounds is key context.