After a decade of strong performance, early-stage and growth companies have faced significant challenges since early 2022. These challenges include rising interest rates, reduced exit activity, and falling valuations.
To illustrate the shift from a bull to a bear market for VC-backed companies, consider the following two charts. The first shows that the post-IPO performance for venture-backed companies has dropped by 49.1% since November 2021—ouch! The second chart compares the post-IPO performance of venture-backed companies to that of the S&P 500 between 2010 and November 2021.
In summary, the exuberance that once fueled high-flying, venture-backed companies came to an abrupt halt as many investors moved away from investing in early-stage growth assets.
However, after two-and-a-half years of a prolonged downturn, there are signs that VC dealmaking is beginning to rotate, suggesting that brighter days may be on the horizon for early-stage and growth companies navigating the inherently volatile space. Below are three charts illustrating how VC dealmaking may be starting to turn the corner.
What it means: Venture deals typically feature terms that range from being "investor-friendly" to "startup-friendly." This includes provisions like anti-dilution clauses, participating preferred stock, cumulative dividends, and redemption rights in financing terms.
Why it matters: When investors hold more leverage than startups, it typically signals that capital markets are tight, and competition for deals is low. Conversely, when the pendulum shifts toward startup-friendly terms, it indicates increased competition and easier access to capital. The chart above shows that startup-friendly terms are making a comeback, suggesting that VC dealmaking is heating up and becoming more competitive.
2. The Capital Demand-to-Supply Ratio Has Declined Sharply
What it means: Capital is the lifeblood of most startups. When capital is in short supply, startups struggle to fund operations and growth.
Why it matters: Over the past two and a half years, the capital demand-to-supply ratio reached its highest point since the Great Recession, making it difficult for startups to access the funding they needed. However, the ratio has sharply declined over the past year, suggesting that capital markets are beginning to open up again for capital-hungry startups.
3. The Median Valuation Step-Up Between Rounds is Trending Up
What it means: Startups aim to hit product and revenue milestones that allow them to raise additional capital at higher valuations, facilitating growth and expansion. A declining valuation step-up between funding rounds typically signals a cooling of capital markets and/or business performance.
Why it matters: In recent years, valuation step-ups reverted to historical averages, reflecting the broader slowdown in VC activity. However, since early 2024, valuation step-ups—particularly among early-stage companies—have surged. This trend is likely driven by factors such as renewed investor confidence, improved market conditions, a broader recovery in tech, and anticipation of a lower interest rate environment benefiting growth companies.
While it’s too early to declare that venture capital as a whole is back in a bull market, the data suggests that dealmaking is beginning to turn a corner. This is good news for the innovation economy, as early-stage companies look to partner with investors who can help fuel the next wave of growth.
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