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"Many of the investors who bet on start-ups at record valuations over the past few years now find themselves trapped in a gilded cage." It is one of the main conclusions that can be drawn after a year marked by a strong correction in the valuations of technology companies, which has intensified in a period of high global uncertainty.
The perfect storm of rising interest rates, market turmoil and stagnant IPOs had a significant impact on the technology sector in 2022.
The fall in valuations registered in the last year leaves as a result a trip back in time several years, before many of them began to inflate, according to the latest report published by CB Insights.
The study, which analyzes the situation of start-up valuations at the end of the fourth quarter of 2022, reveals that companies have experienced a return to normality after a period of skyrocketing valuations.
Although this adjustment is not perceived in the seed phase, it does mark a trend that is detected with special intensity in those companies that close rounds in the most advanced stages, from Series B onwards.
In particular, the median of the valuations of the start-ups -that is, the central value of all the operations ordered from lowest to highest- in mature phases suffered a significant reduction in the last quarter of the year. This drop reached 50% compared to the same period in 2021 in the case of Series C operations, while it rose to 39% in Series B.
The big exception is start-ups that are in the seed phase or that obtain financing from business angels, which exhibited surprising resistance. Its valuation not only did not fall in the last year, but it even stood 3% above the levels it had registered in the fourth quarter of 2021.
For their part, investors in the most advanced stages moved to enforce their preferential liquidation clauses, which give them priority when it comes to recovering their investment.
In the United States, 44% of Series D and subsequent transactions closed in 2022 negotiated tiered or seniority payment structures, above the average of the previous two years. The volume of deals reached in these later phases decreased by 36% year-on-year worldwide, with figures similar to 2019 and 2020.
This is a logical trend in a scenario in which market uncertainty has spooked investors, who are striving to limit their risk exposure. To do this, they participate in fewer rounds than before and seek greater protection in the agreements.
Although the effects of this phenomenon are global, European start-ups are also seeing how funds are taking extreme precautions. Venture capital investment fell 15.9% in 2022, according to the latest data from Pitchbook. The companies received a total investment of 91,600 million euros last year, compared to the record of 108,900 million that had been registered the previous year. Then, the sector was able to break all records, breaking the barrier of 100,000 million euros for the first time.
