Pre-Seed, Seed, and Series A Valuations in the US Startup Ecosystem

Fundraising in 2023 was more competitive than in previous years, and in 2024, has raised the bar even higher for pre-seed startups often requiring them to generate revenue (which was previously a Seed stage requirement). There is a strong emphasis on proving the concept, developing the product, and gaining traction. Seed deal sizes have been hitting new highs, but the number of deals has increased; on average Seed stage startups raisearound $3.3 million despite the challenges. However, raising more money also means higher requirements.

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Pre-Seed and Seed Valuations

2023 pre-seed and seed valuations were $5.7 million and $12 million (pre-money), respectively. Valuations were at or near record highs, but the number of deals has dropped to levels last seen in 2020 and 2021. The decrease in the number of deals indicates that even though the value and capital raised are still high, fewer companies are managing to get funding. This points to a tougher environment for startups.

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Equity and Ownership Trends

In 2023, startups often had to give up more of their ownership stake to secure funding. In pre-seed deals, companies typically sold about 25% of their equity, which is significant considering their valuation, according to the US VC Valuations Report, 2023 annual of PitchBook Data, Inc.

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Impact of Outliers on Data

The presence of outlier investments significantly affects the average deal size. For instance, while the average seed round was around $5 million, the median seed round was closer to $3.3 million. It’s important to look at the median and average figures to understand the funding landscape clearly and to realize that a few outlier deals have tilted the picture for all other startup founders.

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Series A Deal Sizes: A Downward Trend

In 2023, the median deal size for Series A rounds decreased by nearly 17%. This means that startups are raising less money at this stage compared to previous years. Specifically, the average Series A deal in 2023 is around $15 million, with a median of $5 million. The median indicates that 50% of companies raised $5 million or less.

When comparing these figures to the previous years (2020-2022), the median deal size has remained relatively stable, hovering slightly above $5 million. However, the average deal size has seen a more dramatic decline. In 2021, Series A companies raised approximately $20 million on average, whereas now they are raising closer to $15 million. This drop is largely due to fewer outlier rounds in 2023, where the top 10% of companies raised $35 million compared to $45 million in 2021.

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Valuation Bottlenecks: Converging Seed and Series A Valuations

A crucial aspect of this shift is the narrowing gap between seed and Series A valuations. Series A valuations have hit a three-year low, with the median valuation at around $38.2 million. In contrast, seed round valuations have increased, reaching about $12 million. This convergence poses challenges for startups that need substantial funding post-seed rounds but find Series A rounds less lucrative than before.

The bottleneck created by falling Series A valuations and rising seed valuations is problematic. Startups that previously expected significant valuation jumps between rounds now face smaller increases. For instance, the median valuation step-up from one round to the next is only 1.68x, close to the lowest level since 2013 (1.45x). This means that startups are not seeing the expected growth in valuation that would normally attract further investment.

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Historical Context and Future Predictions

Despite the recent decreases, Series A valuations in 2023 are still about 50% higher than in 2020. Before COVID-19, median Series A valuations were around $25 million. The surge in valuations during 2021 and 2022 was an anomaly driven by an influx of capital and optimistic market conditions. The current decrease is a correction towards more sustainable levels.

The trend suggests that Series A valuations might continue to decline, potentially reaching or even falling below 2020 levels. If this happens, startups that raised at high valuations in 2023 may struggle to secure further funding without accepting down rounds, where they raise capital at a valuation lower than their previous round.

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Implications for Startups and Investors

For startups, the current landscape necessitates a recalibration of expectations. Founders must recognize that raising subsequent rounds at significantly higher valuations may be challenging. This is particularly crucial for startups that raised seed rounds at inflated valuations, as they now face the reality of tighter Series A rounds.

Understanding these valuation dynamics is essential for investors, particularly general partners (GPs) and fund managers. Investing at seed stages carries higher risks, and the expectation of substantial valuation increases at Series A must be tempered. The market correction serves as a reminder to evaluate startups based on sustainable growth and realistic valuation metrics.

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Future Outlook

The early-stage investment scene in 2024 is all about high valuations, tough fundraising competition, and greater equity demands. It is really important for founders to understand these trends and prepare for a tough yet potentially rewarding journey to raise funds. As we move through 2024 and beyond, staying informed and adaptable will be crucial for success in the venture capital ecosystem.

Source: 2023 ANNUAL US VC VALUATIONS REPORT, PitchBook Data, Inc.

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