Hey, I'm Dan! I'm the CEO of Plus and a venture partner at Madrona. I write the DL, a newsletter about tech in the Pacific Northwest

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How COVID-19 Will Impact Startup Valuations

Last week, I shared some opinions on what’s going to happen to the startup market over the next few quarters. But this week, I thought I’d get some data instead of just speculating (breaking all sorts of VC rules 🙃).

Here are some observations on venture deals looking at VC-backed deals before and after the 2000 dot-com crash and the 2008 global financial crisis.

🌱 Early Stage Deals and Valuations

The charts above show the number of Seed and Series A deals (blue bars), as well as their median post-money valuations (red lines), in the years before and after the 2000 and 2008 stock market crashes.

Maybe unsurprisingly, the dot-com crash had a much more significant impact on startup fundraising than the global financial crisis. For example, the number of seed deals increased in both 2009 and 2010, and Series A valuations did not decrease significantly post-2008.

Otherwise, it looks like historically, there has been a 25-30% drop in the number of early stage deals after an economic downtown, and median valuations decrease 10-20% per year for several years post-crisis.

🚀 Later Stage Deals and Valuations

Later stage startups are more sensitive to the public markets because investors use public companies as comparables to set valuations, and that’s reflected in the historical data for Series C and D rounds.

In 2001, the median valuation for later stage rounds dropped 50%, and it continued dropping over 20% in 2002. The number of later stage deals also dropped by 20-40% (seems like a 30% decline in deal count is a magic number for some reason).

The 2008 crash had a smaller impact on Series C and D deals. There was still a 25% decline in median valuations in the following year, but valuations recovered within two years to pre-crisis levels.

🦄 TL;DR: So What About 2020?

  • This crash was not driven by inflated tech valuations (tech stocks have actually outperformed the market), so it will probably look more like 2008 than 2000
  • It will get harder to fundraise - there will probably be a 20-30% decline in the number of deals that get done at all stages
  • Valuations will probably decrease for the next year, with a bigger impact on later stage startups, and a smaller decline for Seed and A rounds
  • The recovery will largely be based on what happens to public tech stocks. Right now things look like they are stabilizing, but we still don’t know the full magnitude of COVID-19’s economic impact

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