Industry Analysts have been tracking the US venture capital industry since the 1980s, reporting quarterly on industry performance. We compared their reported quarterly pre-money valuations across the major venture capital investment classes (i.e. investee company maturity stages) since the early 1990s (including during several periods of considerable fluctuations to public market values) to the NASDAQ performance. A few observations can be made:
- There is a very close tracking between changes in NASDAQ values and changes in Later Stage pre-money values, a reflection that these companies are “near” IPO status. Valuation methods for public companies and Later Stage companies are similar.
- As well, the further distanced company maturity is from IPO status, the less dependency there seems to be on changes to NASDAQ values. Seed Stage pre-money values seem to be influenced by NASDAQ activity very little. Valuation methods for early stage companies are different from traditional methods used for public companies.
- As compared to Series B and Later Stage pre-money valuation trends, the pre-money valuations for Seed Stage and Series A Stage are relatively flat. Valuation methods for these very early stage companies result in a narrow band of valuation possibilities, regardless of external factors (e.g. market sentiment, economic performance).
Takeaway: Valuation Approach Should Reflect Maturity Stage
There are a myriad of valuation approaches that can be employed to determine what a company is “worth.” The choice of methodology should reflect the maturity stage of the company. Classical private company valuation methodologies are well suited to more mature companies that have sales, profits, and material assets. Seed Stage companies have none of that. Instead, they offer potential, balanced by considerable risk. Valuation assessments at this stage ought to reflect these challenges. Hence, different valuation approaches are used for different maturity stages.
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