"Deals that could get done at more reasonable valuations don't happen, as founders and existing investors don't want to take the hit. "
It feels like every startup right now is trying to raise _just enough_ at their last valuation to ride out the uncertainty in the market. What is not said (or not even considered) is that certainty could include a definitive down move 📉
And on the other side, the more exclamations I hear about "now is the best time to be investing!" The more I think there's still more room for valuations to fall.
To me it's another version of last year's public market investor shouting about buying the dip.
Really interesting. What does “valuation” represent in this context? Is it the median across all series? Does the analysis hold when you break it out between series?
Nnamdi - thanks for the incredible analysis, and have been a long-time fan of your posts. The last few pieces have made it clear (and I have long felt this way) that there is far too much capital chasing too few assets, many of whom (I believe) do not have standalone unit economics to scale into companies that can challenge incumbents. The pain here seems most acute for Series B+ companies (per your previous posts), which is all the more exacerbated by venture's over-sensitivity to interest rates in the last decade (no financial model would ever suggest that a 25 bps difference in the discount rate should attract the inflows / outflows that VC funding seems to to have).
In light of this - is there a pathway to accelerated acquisition or significant minority stakes earlier on in the process, perhaps at the Series A / B stage? Of course, this all hinges on the supposition that venture firms are excellent at creating new IP, processes, and tools that have the potential to disrupt industries, but are too subscale to do so on their own (in other words, the path to standalone product-market fit is challenging). I don't quite know how you measure this with data, but the development of acquisition vehicles / strategic investment vehicles at earlier stages might be an interesting idea for entrepreneurs to de-risk returns while allowing existing players to benefit earlier from new technologies.
I think that another reason of this 5:2 instead of 3:2 ratio is that there is so much dry powder waiting to be allocated in the next years (GPs HAVE to allocate this money, they will not loose their mgmt fees) that valuations have not been corrected in the same 3:2 ratio because they "know" there is available capital that is waiting to be allocated, they "don't believe" the funding will keep declining.
Nice read indeed! My only concern is with the selection bias you mention - it doesn't seem fair to account for prices that deals didn't happen at because they are clearly not the right prices, else those deals would have been done. These out-of-market prices could be anything and If accounted for then the resulting mean/median prices will be highly unreliable, in my view. I do M&A consulting and have seen lowball offers that are clear outliers.
Incredible analysis.
Amazing analysis. Thank you, sr. Original.
Me when a new Nnamdi article comes out: 😁😁😁
And after reading it: 🤯🤯🤯
This really resonated
"Deals that could get done at more reasonable valuations don't happen, as founders and existing investors don't want to take the hit. "
It feels like every startup right now is trying to raise _just enough_ at their last valuation to ride out the uncertainty in the market. What is not said (or not even considered) is that certainty could include a definitive down move 📉
And on the other side, the more exclamations I hear about "now is the best time to be investing!" The more I think there's still more room for valuations to fall.
To me it's another version of last year's public market investor shouting about buying the dip.
Really interesting. What does “valuation” represent in this context? Is it the median across all series? Does the analysis hold when you break it out between series?
Nnamdi - thanks for the incredible analysis, and have been a long-time fan of your posts. The last few pieces have made it clear (and I have long felt this way) that there is far too much capital chasing too few assets, many of whom (I believe) do not have standalone unit economics to scale into companies that can challenge incumbents. The pain here seems most acute for Series B+ companies (per your previous posts), which is all the more exacerbated by venture's over-sensitivity to interest rates in the last decade (no financial model would ever suggest that a 25 bps difference in the discount rate should attract the inflows / outflows that VC funding seems to to have).
In light of this - is there a pathway to accelerated acquisition or significant minority stakes earlier on in the process, perhaps at the Series A / B stage? Of course, this all hinges on the supposition that venture firms are excellent at creating new IP, processes, and tools that have the potential to disrupt industries, but are too subscale to do so on their own (in other words, the path to standalone product-market fit is challenging). I don't quite know how you measure this with data, but the development of acquisition vehicles / strategic investment vehicles at earlier stages might be an interesting idea for entrepreneurs to de-risk returns while allowing existing players to benefit earlier from new technologies.
I think that another reason of this 5:2 instead of 3:2 ratio is that there is so much dry powder waiting to be allocated in the next years (GPs HAVE to allocate this money, they will not loose their mgmt fees) that valuations have not been corrected in the same 3:2 ratio because they "know" there is available capital that is waiting to be allocated, they "don't believe" the funding will keep declining.
Nice read indeed! My only concern is with the selection bias you mention - it doesn't seem fair to account for prices that deals didn't happen at because they are clearly not the right prices, else those deals would have been done. These out-of-market prices could be anything and If accounted for then the resulting mean/median prices will be highly unreliable, in my view. I do M&A consulting and have seen lowball offers that are clear outliers.