Startup Valuations Surge in 3Q, But Data Hints at Pullback

A study by Fenwick & West of 175 financing rounds found that valuations rose a median 51% in the third quarter, a robust rate but the lowest in a year.
Fenwick & West

Startup valuations continued to rise at a torrid pace in the third quarter, though there were potential signs the venture-capital tide may have started to turn, according to new data.

Fenwick & West today published its latest quarterly report digging inside the terms of venture funding deals for Silicon Valley companies. Despite public-market volatility starting in August, not to mention a paucity of tech IPOs, valuations kept on rising.

The study found that 86% of 175 financing rounds observed by Fenwick during the quarter valued the companies at a higher level than in previous rounds. Just 4% of valuations fell, leading to the widest spread between “up rounds” and “down rounds” since Fenwick began calculating this

since 2002.

The median increase in valuations was 51%, a healthy clip but down from 74% in the second quarter and the lowest percentage in one year. It remains to be seen whether this is the start of a larger trend, though there is mounting evidence that investors are beginning to push back on the more outlandish valuations in later-stage companies.

Used-car seller Beepi, for example, asked for more than $2 billion earlier this year but in August settled for a $500 million valuation, a person familiar with the matter previously told the Journal. Likewise, local-services site Thumbtack ended up with a $1.3 billion valuation in September, short of the $2 billion-plus it was said to have sought. And e-commerce startup Jet.com is trying to finish off a round valuing itself at $1.55 billion, down from the $3 billion figure it had hoped to secure as recently as August.

Meanwhile, the multibillion-dollar valuations of companies such as Snapchat Inc., Zenefits Inc. and Dropbox Inc. have come into question after mutual funds such as Fidelity Investments and BlackRock Inc. have significantly reduced their estimated values.

Which private companies are the most highly valued? Explore the Billion Dollar Startup Club.
The Wall Street Journal

In Fenwick’s study, there was also a small uptick in “senior liquidation preferences,” a provision that protects investors by allowing them to get paid back their money first before any other shareholder. Senior liquidation preferences were found in 35% of fundings in the quarter, up from 29% in the second period and the highest level in more than two years.

However, the study didn’t show that onerous terms have begun to creep in, suggesting entrepreneurs still retained much of the negotiating leverage. For example, none of the fundings included “ratchets,” which typically cause a startup to pay a penalty in shares if an IPO price doesn’t meet a specified threshold. Square Inc. notably is on the hook to price its upcoming IPO at a 20% higher level than what investors paid last year in a funding round, or it will have to give those investors shares.

Earlier this month, another law firm, Cooley LP, released aggregate data for 140 deals it worked on in the third quarter, noting a similarly high percentage of “up rounds” (90%). It also showed that valuations for later-stage companies — Series D rounds or higher — rocketed to a median of $400 million in the quarter, more than double the level one year earlier.