When Will Valuations Bottom Out? Lessons From Past Downturns

Source: Katie Rhead

To help startups put their financing plans in context, we wanted to develop a sense for how long the current downturn in VC funding might last and how far valuations could fall. Nobody can predict the future, of course, but just because we can’t predict the future doesn’t mean that we shouldn’t learn from the past. In this instance, we wanted to see what insights past downturns might have regarding two specific questions:

· How long were past downturns (and what does this imply for this one)?

· How quickly do venture valuations reflect changes in public market valuations?

Our analysis suggests that it could be several more quarters until we reach the bottom of this downturn and that it could take several more years until we return to the highs of 2021. We also found that venture valuations closely track public market valuations and that they typically adjust within one to two quarters. To predict when venture valuations will have bottomed out, one need look no further than the NASDAQ Composite index as a leading indicator.

How long could this downturn last?

To learn from past downturns, we used Pitchbook, Inc. data to analyze how a various metrics including valuations, round sizes, and number of financings correlated with metrics in the public markets and the broader economy. We looked at data going back to 1995 to include data around both the popping of the Internet bubble in 2000–2001 and the Global Financial Crisis (GFC) in 2008–2009.

The data (Read more...)