If you were hoping (against hope) that the doom and gloom of 2022 would recede into the background in 2023, well, it hasn't happened yet. The first quarter of 2023 saw European startup valuations remain flat and VC dealmaking slow down even further, according to a new report by PitchBook.
Later-stage valuations have seen the biggest drop over the past 18 months — and are, analysts and investors say, highly unlikely to balloon again anytime soon.
Later stage valuations take the biggest hit
Average early-stage valuations (Series A to C) are down 23% from Q1 of last year while late-stage valuations (Series C+) have fared substantially worse, registering a year-on-year decline of 77%.
Venture growth stage (Series E+) saw a bump — largely due to one major deal that saw the German heavyweight solar startup Enpal raise €215m at a valuation of €2.2bn. Despite that, average venture growth valuations in Q1 2023 are only about a third of what they were in Q3 2021, their peak.
Nalin Patel, lead analyst at PitchBook and one of the authors of the report, says that the bumper valuations of 2021 and 2022 may be a thing of the past. “I think that that record year probably won't be eclipsed in the next few years,” he tells Sifted.
He says the combination of low interest rates and large sums of money being funnelled into the VC ecosystem will probably not happen again for the foreseeable future.
Early-stage funding holds strong
Average angel, seed and early-stage valuations have been robust — even inching upwards. The average angel valuation stood at €7m, while seed-stage startups were valued at €10m and early stage at €32m.
VC funding into European startups has continued to decline, reaching only €11.8bn in Q1 2023, down 32% on last quarter and 65% on Q1 last year.
Downrounds on the rise?
The percentage of startups raising at a higher valuation than their previous round — an upround — dropped in Q1 2023, to 71%.
The dreaded downround — where a company raises at less than its previous valuation — and flat rounds increased, up to 18% and 9% respectively.
Patel expected to see more downrounds. “That may just be a consequence of these companies reviewing their financials and valuations internally, and not actually disclosing it to the public,” he says.
He reckons that there are “dozens of companies” working with reduced valuations. Revolut, for instance, has faced writedowns by some of its investors to the tune of almost 50%.
Patel says that it's surprising that so far Klarna is the only VC-backed European giant to announce that it's taken a valuation haircut.
“I thought there would be more already. And that may just mean that they are really, really managing costs at the moment and focusing on extending runway. And we could see more downrounds announced later this year,” he says.
What will it take for things to change?
The rate of inflation is, of course, the key metric that the world has been focusing on — and it's vital for the VC and startup ecosystem as well.
“I think once inflation does get close to that 2% mark, we will then see monetary policy loosening a bit. That's going to then unlock capital and borrowing costs are going to flatline,” Patel says.