Off late a number of new startups are getting funded every week. This flourishing period of the startup market could attributed to low initial investment required to launch a startup, due to a rising number of investors and incubators. According to the research firm, PitchBook, the median valuations of startups backed by VCs are at an all time high in 10 years. The company analysed approximately 11,000 VC rounds of US based companies for the quarterly report.
In the third quarter of 2013, there were 981 investments totaling an amount of USD 8.1 Bn. The quarterly median pre-money valuations of companies were much higher during seed and series C funding rounds than other rounds of fundings, as compared to the past years. However, with USD 114 Mn through the first three quarters, Series D saw the highest valuation spike since 2009, with an increase of 114%.
The trend of a majority of VC deals occurring during the early stage continued in Q3, with approximately 50% of the total deals. Although the number of Seed/angel rounds continue to grow, they increased in size as a proportion to the total VC deals from 7.7% in 2008 to 30.0% through the first three quarters of this year.
According to the report the popular investment sectors of software, media and commercial
services, saw further increase in investments, followed by computer hardware and systems sector.
As per the above infographic, the Pre-money valuations for all series are at or near quarterly highs. The median pre-money valuation at the seed stage, for all the companies has risen by 62% from USD 3.2 Mn in 2010 to USD 5.2 Mn through the first three quarters of 2013. Whereas for series A it has risen by 23% at a valuation of USD 9.2 Mn.
And for other funding rounds, B, C and D(and others) the median valuation were 25.6, 75.4 and 132.1 USD Mn respectively. With Series D round valuation increasing by a whopping 112% in the 5 years.
The rising rate of VC investments is in line with the increase in valuations of seed rounds of funding. This is adding to the worsening of the ‘Series A Crunch’. The number of seed rounds is growing year by year since 2010. Due to this exponential growth of seed and angel rounds, early stage and later stage fundings are relatively decreasing in proportion to the total VC investments.
This makes it difficult for the startups to raise Series A round as investors look out for more companies still in seed stage.
And although the valuations and the amount of capital invested in Series A rounds have been increasing since 2009, increasing by 34% and 23%, respectively, there’s still more investment potential in seed round funding.
The usual funding scenario involves, the VC acquiring a major stake in the company it is funding to look over its operations. However that is changing now, the reports says that “From 2004 through the first three quarters of 2013, the median percentage of a company acquired fell from 40% to 29% for Series A financings and from 24% to 13% for Series D or later. In general, there appears to be a shift towards more entrepreneur-friendly term sheets”
This should come as a good news for the startup enthusiasts, who are looking for funding while retaining a good portion share in the company.
VC Exit Scenario
The report also talks about VC exits happening over the last few years. The type of exits are divided into three categories – Acquisitions, Buyout and IPO. Although following the usual trend acquisitions was the most common type of capital exit in Q3, the percentage of IPO exits in proportion to the total exits, has been increasing continuously since Q4 2012. ‘There were 60 VC-backed IPOs through the first three quarters of 2013, up from 50 in all of 2012 and 45 in 2011; and in 2Q and 3Q 2013, public offerings comprised 17.6% and 16.7% of all exits, respectively.’
Hence it was a strong quarter for IPOs. This could be attributed to the higher stock market valuations this year and the investors’ desire to hold on to shares longer as their portfolio company continues on its growth trajectory as a publicly traded company.
The median percentage growth in valuation from previous round to IPO has fallen below the overall trend. However for M&A exits, the valuations remain high, making it difficult to make large multiples on exit.
The number of funds closed in Q3 2013 have been the highest since Q1 2009. Although the number of funds is increasing, the deal size isn’t. Incubators, accelerators and angel groups, such as 500 Startups, FundersClub etc. raise small funds that deploy seed and early stage capital to dozens of companies each quarter. This way a number of companies are able to raise small scale investments mainly in seed round.
500 Startups, Y Combinator and TechStars were leading 3 Seed/Angel investors. Andreessen Horowitz, Google Ventures and SV angel were the leading 3 early stage investors. Whereas KPCB, Sequoia Capital and Intel Capital were leading the late stage investments.
Scenario for Indian Startups:
In India, approximately 50 investments took place in Q3 2013. These include the investments made by the above mentioned US based investors, 500 Startups, Y Combinator etc. And with VC funding making 78.63% of the total disclosed investments, the funding picture looks pretty good for Indian startups as well. Also, digital services sector was in demand in India as well. It looks like startups working in the data and software services sector could look forward to receiving funding from both national and international investors.
PitchBook is a research firm for Private Equity and Venture Capital. It offers the most comprehensive industry information available through its core product, the PitchBook Platform, as well as its daily newsletter and research reports.
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