Have Startup Valuations Finally Peaked?
US early-stage valuations are still largely uninvestable
I love startup investing. One day I'd like do it for a living.
There’s something special about betting on hungry young founders swinging for the fences. I’ve now invested in over 130 private companies since 2014, and I expect those investments to return a healthy multiple over the next decade. A few favorites include Cleartax, Shipbob, Deel, Cabify, Density, and MUD\WTR.
But over the past few years US valuations have gotten absolutely silly. Deals that were priced at $3-5 million when I first started are often $30 million today.
In January of this year, I recall seeing the tweet below about AngelList’s “best year ever”, and thinking how the company’s co-founder Naval Ravikant may have gotten heartburn over it.
AngelList is where I made the majority of my startup equity investments since 2014. It’s a fantastic platform, but prices today are basically uninvestable. 34% YoY growth in avg seed prices is a decidedly bad and unsustainable thing.
Real-Time Valuation Data
In May, AngelList launched real-time valuation tracking. Here’s what it looks like for seed-stage startups from 12/2021 to today.
50th percentile seed-stage valuations are still around $25 million. That’s about 3-5x too high to make venture math work. If you’re investing at seed stage, you need an average valuation of around $5-10 million to have a good chance at making big returns over 10 years. Those deals are still out there, but they tend to be subpar founders led by subpar VCs, or are essentially inaccessible for most of us.
There is simply too much venture capital chasing too few good founders. This is typical late-stage bubble stuff.
The recent fall in prices is more visible in Series A rounds.
It’s key to realize that deal prices reported today were likely agreed upon months ago. There’s a big lag. Prices are still way, way too high and will continue to be for at least a few months. I do expect a huge dropoff at some point in the near future, but there’s still a ton of VC cash yet to be deployed. So it may take a while.
However it is noteworthy that the amount of capital being deployed on AngelList is currently ramping lower.
At this point you may have a better chance of finding good startup deals on equity crowdfunding platforms like Republic and Wefunder. It takes a lot of filtering, but can be worth it, especially if prices start to fall sharply.
Most startups on crowdfunding platforms are still significantly overpriced, but not compared to deals adjacent to the overly-fat VC world. Look for deals in the Midwest and small towns with good traction and sustainable models. Those will be much more likely to show a return than investing alongside VCs at $100M seed valuations, in my view.
As much as I love the asset class, now is not a time to invest heavily in startups/venture in the U.S. That time will come, however, so my goal today is to preserve as much wealth as possible until it does.