Bloomberg Línea — US startup valuations have fallen but still remain higher than two years ago, with US startups’ valuations having increased at almost all stages of investment in Q2 2022 compared to the same period last year, although compared to the first quarter of this year, valuations have fallen at most stages, according to data from CB Insights.
“We knew this cycle would come, the multiples of valuations in recent years were not sustainable. On the stock markets, the correction happens in real-time, but in the private market it takes a little longer. That’s why companies are delaying funding, raising venture debt, but it’s a matter of time before we see this correction in the private markets,” said Eric Acher, co-founder and CEO of Monashees, at a Latin American Private Equity Association (LAVCA) event on Thursday.
According to Acher, Monashees has reduced investment a little during this cycle, but “not by much”.
“If you stop investing in a cycle, you can lose a vintage [a good crop of companies that do well],” he said.
Carolina Strobel, a partner at Redpoint Eventures and Antler, a Singapore-based venture capital firm, says that one of the reasons why valuations haven’t dropped as much for early-stage in Latin America may have to do with large-growth investment firms going early-stage.
In Brazil, she says the market is in “wait-and-see mode” because of the proximity of the elections. “Even though valuations have not yet been affected in the early stages, we expect to see this correction in the first quarter of 2023, once funds start evaluating their portfolio”, Strobel said.
Information from LAVCA confirms that in Latin America there has been a slowdown in investment in late-stage startups, but for seed rounds and early-stage, the total invested is still higher than in the first half of 2021.
“Unfortunately 95% of late-stage capital comes from global investors. That creates a bit of risk. Between 2010 and 2015 we had a shortage of capital and several companies went bankrupt because they didn’t have access to money. We need more local growth investors,” said Acher.
What about Latin America?
Carlos Ramos de la Vega, venture capital director for LAVCA, has a positive outlook. According to the association’s data, 2022 is already the second strongest year for venture capital investment in the region.
“Investors still have conviction about what is happening in the region,” he said, during the presentation of investment data for the first half of the year. Even so, the amount invested is 19% less than in the first half of 2021.
In this scenario, founders and investors are doubling down on venture debt, where funding can be raised without diluting the company.
“Brazil is still the biggest slice of the pie in terms of dollars invested. But Mexico has been excelling in logistics and e-commerce,” Vega said.
In Colombia, meanwhile, investments have been directed at proptech and enterprise software. According to LAVCA data, Uruguay has overtaken Peru in terms of dollars raised, while the round invested in the country’s first unicorn Kushki was the entire amount invested in Ecuador in the first half of the year.
“We also have companies setting up offices in the region, global players that are coming to Latin America and attracting clients,” Vega pointed out.
Fintech, enterprise software, and e-commerce are the top three investment sectors in Latin America this year, according to LAVCA. “But we certainly see opportunities to double down on healthtech and cleantech. We have seen the growth of models focused on mental health,” Vega said.
For now, there have not yet been a large number of known down rounds (new rounds with a lower valuation than the previous round), apart from Klarna, which raised investment from Sequoia at a valuation almost seven times lower: from $45.6 billion to $6.7 billion.
In the United States, there were 81 down rounds, according to Pitchbook data through early August.
In Brazil, Zak, a management platform for restaurants, which had raised a $15 million Series A with Tiger Global in November 2021, recently raised again with Tiger. But now in a down round, which saved the company’s operations and breathed life into keeping it afloat after a check the startup hoped to have received earlier this year didn’t materialize. The amount of the transaction was not disclosed.
“Everyone will raise a down round. It’s a matter of time,” said one founder who preferred not to be identified.
Late-stage deal volume in the US fell 17% in Q2 2022 as investors became more demanding and “risk-free” for larger rounds, according to CB Insights.
CB Insights data also shows that for late-stage transactions that do happen, investors are increasingly negotiating higher protection terms in the event of down rounds.
The percentage of Series C, D, and E+ transactions in the US that require prioritized payments for new investors increased to 41.4% in Q2 2022, an increase of 8.3 percentage points over all of 2021. This means that for late-stage startups that go fundraising, a new investor would have a greater right to their money.
Valuations by stage
According to CB Insights, for seed and angel rounds in the US, valuations are 8% higher in Q2 compared to Q1, 41% higher than 2021, and 81% higher than 2020.
For Series A, they are 14% lower in Q2 compared to Q1 this year, but still 15% higher than 2021 and 66% higher than 2020.
In Series B, meanwhile, valuations are 16% lower compared to the first quarter, 5% higher compared to the same period in 2021, and 89% higher than in 2020.
In Series C, valuations fell 10% in the second quarter compared to the first three months of this year. Relative to 2021, however, they grew 6% and were up 116% relative 2020.
In Series D, valuations are up 12% in Q2 compared to Q1 this year, 24% higher compared to 2021, and 157% higher than 2020.
Valuations for Series E rounds onwards are down 2% in Q2 compared to Q1, down 9% compared to 2021, but up to 35% higher than they were in 2020.