AngelList published their Q2 2023 report of The State of U.S. Early-Stage Venture & Startups a couple of weeks ago. As expected, things got worse. In Q2 2023, AL saw the lowest rate of startup dealmaking (activity rate) in the history of their dataset dating back to 2013 and the second lowest positivity rate for the deals that did happen. As shown in the graph above, early stage investing went from highest high in July 2021 to lowest low in July 2023. But this is hardly surprising. The irrational exuberance in 2021 contributes to the current depressed environment. Startups that raised money in 2021 at insane valuations have to face the new reality of going out of business, staying put or accepting lower valuation (if they are still able to raise). The highest high is the main reason for the lowest low and this is exactly why investing is hard. When people all pile into the same investments due to past performance, chances are they are going to lose money in the end. Was I immune to this madness? Not really. But I manage risks well enough to not dig myself too big a hole. The money I lost was all the profits I realized at first.
Startup valuations also declined across the board in Q2 2023. Median valuations for startups on AngelList showed material declines over the previous quarter. Median pre-seed valuations declined by 20% to $8M, seed-stage valuations declined by 11.1% to $16M, Series A valuations declined by 20.1% to $45.5M, and Series B valuations declined by 33.3% to $100M. Pre-seed valuations are finally below $10M. IMO, this is a healthy development. It’s hard for investors to make positive returns on pre-seed companies with $10M+ valuations given the risks they are taking.
In the blog post announcing their Q2 report, the AngelList team made the following interesting comment:
The lack of fundraising activity combined with declining valuations leads us to believe that we’re close to the “bottom” of the market, and that early-stage venture performance won’t get much worse in 2023.
Basically, AL is saying it’s already so bad. It’s unlikely to get worse. I believe it if the US economy does end up having a soft landing. But if the landing is hard, I do think things can still get worse. My understanding is that there’s a lack of liquidity among private investors. IPOs and M&As are largely non-existent this year. The LPs don’t have money from exits to fund new opportunities. The public market has been performing well due to big tech. People are expecting the IPOs and M&As will soon come back. But that is a very optimistic view. Bag holders of long-term debt and commercial real estate mortgages are silently bleeding. Consumers are depleting their bank balances and the cost of borrowing is super high these days. I am cautiously optimistic but I am mentally prepared for a hard landing down the road.