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Venture capitalists are raising the valuations they are giving to new ventures at the strongest rate over the past decade, causing fear of overheating in the emerging technology venture market.
Private companies getting venture capital see their valuations double with each round of financing, the largest median increase since records began, according to PitchBook data.
Last year, by contrast, the median rise was a multiple of 1.5. The metric is obtained by dividing a company’s current valuation by the valuation it received in its previous round of financing.
The data point to a new reality in Silicon Valley, where few venture capitalists are willing to pass on a hot deal, even if it seems expensive by historical standards.
“We all struggled,” Keith Rabois, a partner at Founders Fund, wrote on Twitter in July. Founders Fund made early investments in companies including Airbnb, Stripe and SpaceX.
Along with a record year For funding, the expensive environment has raised new concerns about venture capital exuberance, which may have hampered the performance of an investment class achieved over the past decade.
Investors in new ventures increased the value of their share prices by an average of more than 26 percent in each of the first two quarters of this year, according to data from secondary market firm Zanbato. The yield on the S&P 500 index, including dividends, was 15.3 percent during the first half of the year.
“At the highest level, returns are driving increased investment in private markets,” said Nico Sand, CEO of Zanbato.
As valuations increased, the amounts that venture capitalists had to invest also increased to acquire significant ownership interests in desired businesses.
The size of the average Series A deal — usually the first significant round of financing a business, has grown more than a third to more than $ 10 million this year, according to PitchBook data.
Later rounds of funding became even bigger. Since the D series, median funding has increased by more than 80% to almost $ 110 million.
PitchBook calculates valuations based on data from companies and public sources, as well as corporate and regulatory applications. The data can be influenced by the tendency of successful businesses to report financial information more frequently than those who are struggling.
Venture capitalists pointed to the huge gains made by large technology companies and a series of public listings as evidence of a growing market for technology services, especially in areas such as business software and finance.
Part of the growth was spurred by the pandemic, which benefited new businesses in areas such as online shopping and collaboration. On the other hand, those in travel and sectors that rely on personal interaction have struggled or completely folded, such as the apartment rental company Stay Alfred, which collapsed in May 2020 when the crisis escalated.
Investors have granted some of the sharpest price increases to fintech companies, whose valuations are 2.4 times higher due to venture financing. E-commerce and business software companies in the US have also at least doubled in value every time they seek new funds.
Investors in venture capital firms said they noticed an increase in the so-called insider rounds, where one supporter leads several subsequent financing in an initial, and each time raises its valuation.
In January, venture capital firm Andreessen Horowitz led a round of funding valued the social audio app Clubhouse at about $ 1 billion. Three months later, the firm led another round of financing quadruple the valuation of the business, even if mobile data shows that fewer people are downloading the app.
Chainalysis, which sells software used to detect fraud with cryptocurrencies, also experienced a meteoric increase during the pandemic.
The company in New York has received four times new funding since July last year, when investors contributed a round of financing from the previous year.
In November, Lee Fixel’s Addition led an investment that gave Chainalyis a billion dollars worth. Four months later, another round of financing led by crypto-currency investor Paradigm valued it at more than $ 2 billion.
In a matter of three months, Coatue Management, a new investor, ruled that the value had risen even higher to $ 4.2 billion. Just a year earlier, investors had valued the business at less than $ 300 million.
The pandemic has a ‘differential impact’ on start-ups, which has increased the fate of those on the winning side of the transition to digital services, says Will Gornall, assistant professor of finance at the University of British Columbia.
“There should definitely be a case made that valuations have been inflated by inflows into the sector,” Gornall said. ‘There must also be a case made that there were real disruptions in the economy.