Valuations start to stabilize in H1 while market remains strong

After years of climbing rapidly, valuation growth started to cool down in the first half of 2019, in a market that remains incredibly active.

A PitchBook report published on Aug. 19 showed that numbers from H1 2019 point to a stabilization of valuations. This slowdown comes as the market’s deal count has also been on the decline.

However, this shouldn’t be looked at as a sign of an overall market slowdown, according to John Rafferty, a partner at Morrison Foerster who works with startups across all stages of growth.

“With venture-backed companies, if you are going to talk about it being any kind of slowdown, it’s a slowdown in growth,” Rafferty said. “It still feels like one of the busiest periods for startup companies in terms of financing and liquidity transactions.”

startup lawyer
John Rafferty, a partner at Morrison Foerster.

Angel and seed-stage startups have seen the slowest growth, with combined valuation growth of 7.1 percent so far in 2019, compared to the 13 percent that was recorded in 2018. This cooldown could be partially attributed to the average time that companies stay in this stage, which is up 10.9 percent since 2018.

“These early-stage financings are occurring later in the company’s life, but still in the early part. It’s taking a year or even more before that seed financing actually occurs,” Rafferty said. “Investors are being a little pickier and doing a little more diligence. They want to see more proof that the company has the potential to succeed.”

Rafferty said that the valuation cooldown in the later-stage market could be partially attributed to the “unicorn phenomenon” that is making some investors hesitant about going into a deal at a higher multiple.

“There is still a lot of them and a lot of energy around them, but there have been mixed results,” Rafferty said. “These large companies are still getting high valuations, but not every one of them has been a home run, which puts a little more pressure on the valuations.”

PitchBook found that later-stage companies increased their valuations by 15.7 percent, on average, so far this year, which is less than half the 37.8 percent growth seen during 2018.

The report also highlights that despite cooling valuations, step-up multiples remain robust across various stages. Medium-stage step-up multiples reached 2.0x in H1 for the first time in over a decade.

Rafferty said that the significant step-up multiples coupled with much more reasonable valuations shows smooth sailing ahead for the market.

“It’s still a very active market with lots of interest from investors and lots of companies are getting funding,” Rafferty said. “From an overall feeling about the industry it’s still very healthy.”