Startup Valuation Delta® Q2 2024

In the Q1 2024 Valuation Delta report, we highlighted a 10% dip below the relative stable trend at around $5,000,000 for the median pre-seed valuation. At the time, we suggested that combination of capital constraints (the tougher environment for VCs raising funds) and economic conditions (inflation hitting future cashflow value and reducing multiples). Coming out of Q2, we can see a continuation of that trend, with valuations basically flat with Q1.

On the surface, Q2 doesn’t appear to have produced any optimism for the market, with cash raised by venture capital firms reaching a new low — as reported by Juniper Square.  This coincides with the previously red-hot sector of Generative AI also seeing a decline in fundraising activity, with both Crunchbase and Pitchbook showing a fall in both deals closed and volume of capital. So as we jump into the data for this past quarter, it is with the context of even greater capital constraints and diminished excitement for the promise of AI.

However, there is a silver lining: with AI absorbing less of the available capital, VC interest appears to be returning to traditionally performant sectors like finance and health. This should also result in greater geographical diversification, as startups outside of the major hubs for AI are able to return to the table. So while there is no rebound of valuations in this quarter, there are positive signals for what lies ahead — with a more rational market suggesting stable growth and continued recovery.

Another observation is the fall in the target fundraise at pre-seed. Typically, lower capital requirements are a sign of either scarcity or confidence.

• On one hand, consider the peak of $733,440 in Q2 2022 which coincides with a low for valuations. In that moment, with the fear and uncertainty related to inflation and interest rate rises, founders were willing to take significantly more dilution than normal in order to raise the capital they need to survive.
• On the other hand, in Q4 2023 as valuations seemed to enjoy continued three quarters of stability and recovery, the median capital requirement fell to $630,120. This was a result of founders feeling confident in their ability to raise capital later, in a more rational market — recovered from Q2 2022 — and so were able to prioritise lowering dilution in order to raise only what they needed.

In Q1 2024, the median capital requirement had jumped up to $985,575, the highest on record. This could be a combination of momentum in the AI market as well as some fear about the state of the venture market and capital constraint. The Q2 fall to $685,100 shows those concerns haven’t entirely been eliminated, but perhaps a recognition that things are looking at bit more stable for H2 2024.

This also aligns with coverage of Y Combinator startups raising smaller rounds, for which a factor is the recognition that raising too much can have a negative influence on startup development. This follows on from the logic that startups should be running leaner than in the low interest rate era, especially with the potential for AI to further reduce their headcount — something that is already visible at Series A.

“Small teams with limited resources can only work on the most essential things.” – Charles Hudson

Overall, while 2024 had a rocky start, with record company closures reported by Carta, it does seem like there is cause for hope in H2 — reflecting optimism at the start of the year, with 89% of investors stating that they expected to close as many or more deals across 2024 than the year prior, in a poll by Affinity.

While the United States remains the top region for median ($5,977,500) and top quartile ($9,973,500) valuation at pre-seed, the Middle East has once again passed Europe and moved into second place. This is driven in part by a significant fall in the median valuation in Europe ($3,924,800) as well as a more modest rise in the Middle East ($4794,500) — more on those changes later.

Latin America ($2,603,300) and Africa ($2,692,400) present relatively low valuations (though a recovery from Q1), which relate to a more painful climb-back after the excesses caused by foreign capital investment in the period from 2019 to 2021, as well as domestic economic struggles. While other ecosystems have been able to rebound sooner thanks to robust domestic fundraising ecosystems, Latin American startups became heavily reliant on US venture capital, while Africa startups had also attracted significant investment from Europe. Southeast Asia ($3,767,300), now occupying the middle ground with Europe, has shown a similar stability to the United States — which bodes well for startups and investors in that region.

Reflecting caution, and the protracted uncertainty in the fundraising ecosystem, startups in Latin America are looking at relatively modest pre-seed rounds ($250,000) with a conservative level of dilution (8.8%). While African startups are a little more ambitious ($500,000), and willing to take more dilution (16%) there is also a concern for capital constraint as top quartile rounds are only marginally higher ($660,000). Both Europe and the US, as more developed ecosystems with a bit more optimism influencing decisions, see top quartile rounds stretching out towards the $2,000,000 mark, though Europe is taking more dilution (17%) for that capital compared to the US (14.3%) — which is again a better parallel with Southeast Asia (14.5%).

Most obvious in Q2 is the growth of valuations in the Finance sector, which was roughly on par with Software & IT in our Q1 analysis. It’s also interesting to note the compression of funding targets, with higher median round sizes (with the exception of Health & Medicine, which holds steady at $1.62M) as well as lower top quartile targets.

Analysis reveals significant differences in implied dilution across sectors. As may be expected, Health & Medicine startups face the highest median dilution (20.3%), due to high capital requirements and the unique risk posed by clinical trials and regulatory approval. Software & IT takes the least dilution based on the median figures (11.8%), reflecting strong valuations in a sector that is capable of running very lean. The Renewable Energy (15.1%) and Finance (15.7%) sectors present moderate dilution levels, indicating that while both may find greater efficiencies in this environment, they also have to reckon with higher capex or opex than pure software startups. Finally, the Food & Beverage sector, a lesser-favoured sector for VCs in recent years, has weaker valuations competing with inflation-hit production costs, yielding the second-highest implied dilution (17.4%).

While much of this could have been anticipated based on recent trends, it certainly seems to highlight the drive for startups to find efficiencies where they can, with round size more directly correlated with necessity, rather than the scope of their growth-at-all-costs ambitions.