Valuation Inflation

In the blog post announcing changes at SV Angel last week, the SV Angel partners wrote:

The amount of money raised in seed rounds has doubled and valuations have increased significantly.

I thought I’d go back over the last three USV funds and see what I could learn about the market from our experience.

Since raising our third early-stage fund in 2012, we have led or co-led 16 seed rounds, 31 Srs A rounds, and 8 Srs B rounds, for a total of 55 new USV portfolio companies over the last six years.

I put all of that data into a google sheet this morning and this is what I learned:

The average pre-money valuation for a seed round has gone from $5-10mm in the 2012 time frame to $10-15mm in the 2017 time frame and the average amount raised in seed rounds has gone from $2.5mm in the 2012 time frame to over $4mm in the 2017 time frame.

The average pre-money valuation for a Srs A round has gone from $10-15mm in the 2012 time frame to $22-$27mm in the 2017 time frame and the average amount raised in Srs A rounds has not changed very much. It still averages around $5-7mm.

We have not been leading or co-leading many Srs B rounds in the last three years so my data on that market is not good enough to come to any conclusions there.

USV invests in North America and Europe and our largest density is in NYC and the Bay Area. This data is averaged across all of those markets and so it could be off significantly for a specific market. We find the Bay Area to be the most expensive place to invest and Europe to be the least expensive.

I think the comment made by the SV Angel partners is correct, at least directionally so. What this means for returns for angel and early-stage investors remains to be seen. Right now the angel and VC sector is producing great returns, but those are driven off of investments made in the 2005-2010 era for the most part and we have yet to see what the returns for the 2010-2015 cohort will deliver and we are a long way from knowing how the 2015-2020 era will turn out.

#VC & Technology

Comments (Archived):

  1. Pointsandfigures

    I was surprised they were going to write such small checks. $25k-$100k. Doesn’t seem like they could get enough of an equity piece. I agree, the way companies are funded now doesn’t resemble five or ten years ago. Your old analyst Charlie O’ Donnell did a good blogpost a while back on the expected IRR of companies at higher than $8MM pre and lower than $8MM pre. http://www.thisisgoingtobeb…Discipline is the key to investing early and getting good return.

    1. JamesHRH

      Not sure Conway ever cared about returns, which is why everyone wanted to talk to him.

  2. Jim Miller

    Is this really a matter of inflation — a change in what investors think a particular company is worth — or a shift in what investors mean by “seed”, “Series A’, etc? That is, that investors have been moving downstream but keeping the same terminology, so that an investment (amount, % equity, etc.) that would have been called Series A five years ago is now called seed?

    1. Karan Khandpur

      Thought the same. With pre-seed as the new seed and valuations reflective of a previously higher round, its seems more like a terminology mismatch.It’d be interesting to know if the terms of the seed have significantly changed too, and if the focus now is on determining a valuation rather than using a convertible note and forcing that to later. There could be other dynamics at play here.

    2. JamesHRH

      SV Angel telling you so.They believe Angel checks are still $25K-$100K and they are going back to that level to re-establish what they do.

  3. jason wright

    The five-year plan model. I’ve seen that somewhere before.Reading between the lines of the SV Angel blog post, is this a recognition that crowd source funding is beginning to erode the market position of the VC industry?

  4. Marcos C.

    I think your 2009 post the Venture Math Problem with today’s numbers says it all…..

  5. Richard

    Comes down to valuation vs value.

  6. Semil Shah

    Tremendous cost inflation up & down The Bay Area. Cost of ___ is so high — living, wages, mobility. It is a different country.

    1. Vasudev Ram

      That point- cost of living in the Bay Area – keeps coming up on HN, and still in those threads, many people say that it is still worth it to move there (if not already there) to work in tech, because even with the costs, the pay is still higher and savings possible still higher than in other places (in or out of the US, except maybe for Switzerland). Some others in those same threads counter that and say that due to things like lower property/food/school/eating-out prices, other/smaller cities and the hinterland are a lot better. Note: All of this is only w.r.t. to money and savings, not considering quality of life (which has many factors under it – proximity of recreation areas, restaurants, arts and culture, music, education, transport, etc.). Getting a new job more easily and quickly is another reason some people give for preferring SFBA.I guess that won’t change until more tech companies learn to work better remotely and be remote-first or remote-friendly.The book “Remote: Office Not Required” by Jason Fried & David Heinemeier Hansson (creator of Ruby on Rails, which a lot of startups use) is a good one on this area:

      1. LE

        As they say ‘you buried the lead’:Getting a new job more easily and quickly is another reason some people give for preferring SFBA.Silicon Valley (and to a lesser extent NYC (for tech) and the other usual suspects that are often touted here and elsewhere) are target rich environments for opportunity. You simply can’t rate all factor equivalent when one whopper like that clearly stands out.We almost certainly wouldn’t be discussing Ron Conway (SV Angel) if he hadn’t been planted in SV and done the investments there as a result of that location. This is not to say that opportunity doesn’t exist elsewhere but it’s simply not the same as a target rich environment (which for sure varies with the business you are in as well as the person. And of course some people simply aren’t going to be able to take advantage of opportunity even if they are surrounded by it).I can’t make this point strongly enough. Think Woz is the only brilliant guy who could have done for Steve Jobs what he did? Well he’s not. Think Marissa Mayer is just so clearly superior to 10,000 other women out there? Well she is not.…ntending to become a pediatric neurosurgeon,[27] Mayer took pre-med classes at Stanford University……She later switched her major from pediatric neuroscience to symbolic systems….After graduating from Stanford, Mayer received 14 job offers,[28] including a teaching job at Carnegie Mellon University[29] and a consulting job at McKinsey & Company.[21] She joined Google in 1999 as employee number 20Employee #20 at Google.This is not to take away in any way from what Marissa has done. And I am sure she would have done ‘well’ anywhere and in any place. Just not ‘as well’. She had the opportunity and took advantage of it because of where she went to school (Stanford) and where it was located (Silicon Valley) and it all factors in and of course betting on the right horse which worked out well. And that horse was at the racetrack in SV. Not in Cincinnati Ohio.There is no question there are some clearly superior people in SV. But there are also a large amount of high average or average people that have been able to have greater opportunity by being around the right situation and person at the right time. That came from just being in the right place as well. There are more of the right people in those places. (Also involves luck and being able to recognize the right opportunity that goes without saying). Don’t let anyone tell you different. Sure it’s possible w/o that and of course it has been done. But it’s a big advantage that well pays for the drawbacks.That point- cost of living in the Bay Area – keeps coming up on HNHN often gets it wrong on soft issues of nuance. It’s the same place that will tell you mathematically that not buying a car makes sense or renting vs. buy and all of that jazz etc.

        1. Vasudev Ram

          Thanks for the comment.> and it all factors in and of course betting on the right horse which worked out well. And that horse was at the racetrack in SV.Nice style of writing you have there :)I’ll think about the rest of it and then reply later if I have anything more to say.

        2. Pete Griffiths

          A riding tide lifts all ships.

    2. jason wright

      unreal estate

      1. Vasudev Ram

        Everything is unreal these days, which is why they have things like reality shows, so that people can get a feel of what real things are/were like.

        1. jason wright

          i’m real πŸ™‚

          1. Vasudev Ram

            wright πŸ™‚

    3. Alex Iskold

      Its hard to see how this would justify paying premium though as an investor?

      1. Semil Shah

        Never implied it was a justification

    4. PhilipSugar

      It’s so high because of these valuations. And that is why those not in tech or own their house resent people in tech so much.

  7. Richard

    technology macro cycles had many 2005 Venture Capitalists born on 3rd base and boasting about hitting triples.Not much different from the stock market investors of 1982 and 2008.

  8. JimHirshfield

    Are the startups farther along as businesses now at series seed than they were in 2012?

    1. Jordan Thaeler

      “Angel” rounds take 6-figure MRR with > 500% YoY organic growth. Where’s the risk?

  9. Fraser

    Wild. I believe that raising less, at a realistic valuation, is in the entrepreneurs best interest. Celebrating total capital raised and high valuations is a disappointing trend of the past 10 years. It’s harming more founders and startups than is generally recognized.

  10. William Mougayar

    I was lamenting a tangential point today on my blog, pertaining to blockchain companies valuations. http://startupmanagement.or

  11. Jordan Thaeler

    Rational investing is a calculation of risk. Commenting on the nominal titles of rounds and their associated capital placements without discussing the level of risk being exchanged is a lopsided argument. It would be more useful to note the levels of risk at each stage; Series A is really just a growth equity vehicle while Seed is now “venture”.

  12. Poor Fred is singing the blues

    Windfall profits that have brought in competition which in turn has squeezed margins. Understandably this has got Fred singing the blues. The Internet’s Wild Wild West days are quickly coming to an end. Cowboys like Fred don’t like that.Investing in Internet startups is now essentially an ordinary business. Large players with deep pockets will push small players like Union Square Ventures out of the market either by absorbing them or simply offering better terms to investors and entrepreneurs.This has tempted guys like Fred to shill for quasi-fraudulent “investments” like Bitcoin.

    1. fredwilson

      wow. you have completely figured me out. well done.

      1. Chimpwithcans

        I’m sure he knows you really well to boot….what a muppet comment.

    2. JamesHRH

      Tough call here – your ignorance or your jealousy?Ignorance by a nose down the back stretch.

    3. jason wright

      large players with deep pockets….but isn’t this the emerging age of the crowd sourced syndication?

  13. Frank W. Miller

    Since the percentage of the companies that the VC is taking have stayed relatively flat, I’d just call this inflation. Worse that real estate here in Denver I might add…

  14. JaredMermey

    How do you normalize that type of analysis for your crypto investments? Is it even worth trying as it’s a different animal?

  15. Alex Iskold

    I learned this from Brad & you and seen this many times – raising too much capital at too high of a valuation is not great for either founders or investors. Semil points to cost of living in the Bay Area, in my mind you can’t pay up as an investor because of that. You have to then invest elsewhere. Early stage companies aren’t worth some magical 5x of what they are actually worth, and what makes sense to invest at to get a return. My hunch is we will see lower returns for the investments that were inflated, there won’t be the same multiple waiting on the other side.

    1. JamesHRH

      Almost all the ‘in the know’ money is there. Brad and Fred are still outliers – name the other top flight VCs in Boulder & NYC?

  16. PhilipSugar

    I have said this a million times. There are people that will say that this is just Fred trying to lower valuations which screws the founders.I always take the Entrepreneurs viewpoint. Your valuation where you are not putting cash into your pocket means jack shit. Seriously jack shit. It’s just a number on a piece of paper.If you take too much money spend it and things don’t work out perfectly (and that happens for maybe 10 companies a year, maybe) you are screwed.You then have a choice: Close and get zero with one hundred percent certainty.Realize that now you are not valued on the dream you are valued on MAU, MRR, GM, etc.You will not be around after a down round, if somehow you manage to get that.Why? Because VC’s are evil??? No!Foremost You, that’s right the person in the mirror did not deliver.And any investor knows that you are going to be bitter after taking anti-dilution terms no matter what you say.If your company just needed a bit more time which you could have had if you raised at a lower valuation didn’t overspend and get a second non down round, you are the one who got screwed.Because if and when it sells, you will feel the “pain train” There will be management carve-outs, big options grants to be paid, warrants that come due, and other preferred terms negotiated by people that didn’t really care that much at the time.You will cry to me “they stole my company” and I will laugh.