Startup Valuation Delta® Q1 2024

In the Q4 2023 Valuation Delta report, we commented on the remarkable stability around the $5 million mark for pre-seed companies. Obviously, it was then destined to change in Q1 2024.

For the first time since Q1 of last year, we see a real dip in valuations, with a 10% fall in the median. This is likely due to a number of factors (continued pressure on VCs to correct from 2021, AI absorbing more of the available capital, seasonality) which we will explore in more detail further on. Strangely, this is paired with a 56% increase in the funding target of startups at this stage, which may indicate that there are concerns for the fundraising market further into 2024.

This global average also disguises some of the regional variability. While Europe is the only region in Q1 2024 not to have recorded a fall in valuation, this may reflect results in the previous quarter where it was the only region not to see an increase. We can speculates that Europe’s more conservative attitudes towards venture capital might have seen caution take hold earlier than elsewhere, in which case we should expect a modest recovery when we analyse Q2 2024.

It’s clear that the brief era of stability is over, and founders are right to be anticipating a difficult 2024 by increasing funding targets to delay further raises.

Previously, we’ve seen the ‘whiplash’ influence on startup valuations with the initial crash in 2022, though recovery was swift and the only lasting impact has been for later stage companies that are more exposed to economic factors and the difficult exit market. The impact on pre-seed companies was primarily related to the ‘fear factor’, with an initial collapse followed by an increase as conditions selected for the strongest startups, and then a relatively swift return to the median. This time, the tightening of purse-strings in VC may be significant enough that it is having a real impact even at the earliest stages.

Here are a few of the major factors which will be influencing valuations and fundraising trends in that case:

Economic Climate: Rising interest rates, inflation, and recession fears can definitely impact pre-seed funding.

• Capital Availability: As interest rates rise, borrowing becomes more expensive and safer asset classes become more attractive, potentially impacting the amount of capital available for venture capital firms. Data from Pitchbook indicates that 2023 was the worst year for VC fundraising since 2016, and 2024 isn’t looking much better so far. This will lead VCs to be even more selective in their investments, lowering valuations generally.
• Valuation Multiples: Rising inflation can erode the value of future cash flows, which are a key factor in company valuations. This will lead to lower valuation multiples for pre-seed companies, compounding the more risk-averse and pessimistic attitude from pre-seed investors who will be more critical of optimistic projections without prior traction.

Seasonal Adjustments: It’s not unusual to see a dip in valuations in Q1, as more experienced founders tend to time their fundraising for the more active fundraising windows (April to June, September to November). This is likely to be exacerbating the other concerns, listed above, making Q1 a perfect storm for underwhelming results.

The comparative data on pre-seed valuations and fundraising by region highlights the United States ($5,800,500) and Europe ($5,110,100) as leaders in both categories, showcasing the strength of their startup ecosystems, access to venture capital, and investor confidence. The high valuation medians in these regions are likely a reflection of the maturity of their markets, larger funding pools, and the prevalence of high-growth industries like tech and biotech. The Middle East ($3,826,300) and Southeast Asia ($3,660,100) maintain a surprising proximity and healthy ranges, as both regions continue to develop and strengthen independent venture ecosystems.

Latin America ($2,031,900) seems to have been hit especially hard by capital scarcity. We’ve also seen in previous quarters (most notably in Q2 2022) that when investors in established markets like the US and Europe face headwinds, this translates to slower investments in emerging markets, as it is often US or European investors that are leading some of the larger rounds in these regions. In difficult environments, they shift focus back to ‘safer’ domestic markets.

In the pre-seed funding landscape, industry-specific dynamics profoundly influence valuation. The Software & IT sector boasts strong valuations ($4,541,100), underpinned by the scalability and continuous demand for technological advancements. Renewable Energy has logged the highest median valuation ($5,928,800), highlighting the sector’s potential for lucrative returns amid the global shift towards sustainability, though this is tempered by high capital requirements and market risks. In contrast, the Food & Beverage industry records the lowest median valuations ($2,319,100), likely a reflection of lower scalability and greater vulnerability to consumer preferences and commodity prices.

The Health & Medicine industry leads in the 75th percentile valuation ($9,533,500), possibly due to the high stakes associated with medical innovation and the intensive investment in biotechnology and healthcare research. The Finance sector, bolstered by the rise of fintech, shows healthy valuations at the top end ($7,316,300), indicative of the transformative impact of digital technologies in traditional finance. Factors such as scalability, regulatory environments, innovation, market demands, and investment cycles create a complex tapestry that explains the variance in pre-seed valuations across these diverse industries.