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Early-stage VC valuations see their first decline in 10 quarters

August 11, 2022, 1:05 PM UTC

Hi Term Sheet Readers! Lucy Brewster here, filling in for Jessica.

We knew the second quarter wasn’t going to be pretty. But now we’re finding out just how much damage has occurred as the party abruptly came to a halt in Silicon Valley

Data released this morning by PitchBook confirms that early-stage VC valuations saw a sharp decline in the second quarter, and unicorn public exits nearly went extinct in the first half of 2022. Yet the VC space is not in hibernation—and some counterintuitive data suggests positive economic outcomes for some start-ups. 

According to PitchBook’s second quarter venture capital valuations report, quarter-over-quarter median early-stage valuations saw their first decline in ten quarters. According to PitchBook VC analyst Max Navas, valuations may be decreasing because of investor pushback at the negotiating table. Now that startups are no longer embracing the ‘growth at all costs’ mentality many had last year, investors no longer expect jumps in valuation in subsequent rounds of funding. “In today’s market investors are focused on capital efficiency and making sure their upside potential remains strong,” Navas explained.

Yet while valuations may be falling in the early-stage category, deal values are increasing. The early-stage median deal size in the second quarter of 2022 was $11.9 million—a 19% increase from the $10 million median deal size in this year’s first quarter. Why are these metrics going in different directions? “One of the primary reasons early-stage VC deal sizes are going up is the need to maintain sufficient runway to weather the current economic downturn,” Navas said. Raising more capital now means avoiding the possibility of reentering an even harsher fundraising climate if market conditions worsen.

Late-stage VC valuations show the reverse—deal values have declined slightly while valuations have increased. Because of looming exits, these startups are feeling the heat to justify lofty valuations in the turbulent economic climate and investors are less likely to commit to late-stage funding if there could be a delayed IPO. In the first half of 2022, the median deal size was $14 million, a 7.1% decrease from the $15 million median for the full year of 2021. Yet surprisingly the pre-money valuation for late-stage deals in the first half of 2022 increased 10% from last year—from $100 million to $110 million.

One recent casualty of the harsh VC funding environment is Haus, the Sonoma-based buzzy liquor brand. On Monday, cofounder Helena Price Hambrecht announced in a series of tweets that the company lost its Series A funding. Alcohol producer Constellation Brands backed out of leading the startup’s $10 million Series A last minute, citing “timing” as the reason. Haus is taking a voluntary 30-day Assignment for Benefit of Creditors period while the company seeks a new owner.

So who are these startups that are finding success? Of the industries PitchBook pulled data from, biotech and pharma saw the largest early-stage VC median deal value increase this year—from $25 million in 2021 to $35 million so far in 2022. Fintech saw seed and early-stage median valuations rise—early stage valuations jumped from $60 million in 2021 to $76 million so far this year, while seed saw a $15 million valuation figure compared to $10 million last year. Late staged median values dropped in both enterprise tech and consumer tech. 

Seed valuations have also been strong in the second quarter—perhaps showing the best performance amid the economic downturn. The median pre-money valuation for seed in 2022 reached $12 million, an increase of 33.3% since 2021’s full-year median of $9 million. Yet this doesn’t mean seeds have magically evaded the investor uncertainty–they’re just lagging behind, and analysts project that seeds may feel the heat later this year.

Unicorns, on the other hand, stumbled hard in 2022. During the first half of the year, there have only been 20 unicorn exits, while in 2021 there were over 102. Of those that have successfully exited, valuations have dropped across public listings and acquisitions. The top-quartile public listing during this second quarter closed at a $338.3 million valuation, which is 72.2% lower than the high of $1.2 billion in the first quarter of this year. Due to the lack of IPOs, there is a shortage of liquidity for unicorns that are nearing or hit their valuation threshold, meaning many startups could be in a squeeze to extend their runway. What’s the implication? “One of the most significant trickle-down effects resulting from the lack of liquidity among unicorns is the ability for VCs to return capital to their limited partnerships in a timely manner,” explained Navas. 

The upshot, according to the analysts at PitchBook? “We expect to see more down rounds and a significant increase in protectionist terms if the current economic climate continues or worsens over the next 12 months—especially if the anecdotal evidence around canceled funding conversations from investors and startups is true,” the report stated.

Lucy Brewster
Twitter: @lucyrbrewster
Email: lucille.brewster@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.

Correction, August 12, 2022: A previous version of this article misstated that Yes Energy acquired Line Power. The correct name of the company is Live Power.

VENTURE DEALS

- Nightfall AI, a San Francisco-based cloud data loss prevention platform, raised $40 million in Series B funding. WestBridge Capital led the round and was joined by investors including Next Play Capital, Bain Capital Ventures, Venrock, Pear VC, Paul Rudd, Drew Brees, and Josh Childress

- Patchwork Health, a London-based health care workforce platform, raised £20 million ($24.5 million) in Series B funding. Perwyn led the round and was joined by investors including Praetura Ventures, KHP Ventures, Monzo founder Tom Blomfield, and Social Chain co-founder Dominic McGregor.

- Modern Life, a New York-based life insurance brokerage company for advisors, raised $15 million in seed funding. Thrive Capital led the round and was joined by other angels.  

- Salvo Health, a New York-based virtual health clinic focusing on chronic gut conditions, raised $10.5 million in seed funding. Threshold Ventures led the round and was joined by investors including Torch Capital and Felicis.

- Stark, a New York-based accessibility software company, raised $6 million in seed funding. Uncork Capital led the round and was joined by investors including Darling Ventures, Indicator Ventures, and other angels. 

- Cupixel, a Boston-based augmented reality and artificial intelligence art experience company,  raised $5 million in seed funding led by JOANN

- Mesh Security, a Tel Aviv-based cybersecurity company, raised $4.5 million in seed funding led by Booster Ventures

- Auddy, a London-based podcast platform, raised $3 million in funding. Pembroke VCT led the round and was joined by investors including Haatch Ventures and Brick Capital Ventures.

PRIVATE EQUITY

- Cisco Investments acquired a minority stake in AppOmni, a San Francisco-based SaaS security provider. Financial terms were not disclosed. 

- Next in Natural acquired Lavva, a New York-based plant-based yogurt company. Financial terms were not disclosed. 

- Partners Group acquired a majority stake in Foundation Risk Partners, a Daytona Beach, Fla.-based specialist insurance broker, from Warburg Pincus. Warburg Pincus will retain a minority stake in the company.

- SAM, a Peak Rock Capital portfolio company, acquired Linewise Aerial, a Calgary, Canada-based aerial inspection and mapping firm. Financial terms were not disclosed. 

- SFW Capital Partners acquired a majority stake in Sannova Analytical, a Somerset, N.J.-based contract research organization. Financial terms were not disclosed. 

EXITS

- Mitsui Sumitomo Insurance Company agreed to acquire Transverse Insurance Group, a Warren, N.J.-based insurance company, from Virgo Investment Group. Financial terms were not disclosed.  

OTHER

- Devon Energy agreed to acquire Validus Energy, a Denver-based oil and gas exploration and production company, for about $1.8 billion. 

- Yes Energy acquired Live Power, a Boulder, Colo.-based generation and transmission flow data provider. Financial terms were not disclosed. 

PEOPLE

- Coatue Management, a New York-based investment firm, hired Nathan Urquhart as president, according to Bloomberg. Formerly, he was a partner and head of investor relations at Carlyle Group. Carlyle has promoted David McCann to interim global head of investor relations.

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