Why Has Startup Valuation Shot Up Over The Last Decade?

By Author: Chulani De Silva
Total Articles: 33
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Startup valuation, like most aspects of the business world, is a combination of science and art! In a sense, valuation is the prediction of where the startup will go. Thus, this becomes crucial when seeking startup funding or looking for a new technology or business co-founder. Past years have set new records for the global startup ecosystem. Numerous startups raised substantial amounts of cash with remarkable values, sometimes reaching billions of dollars or more. Furthermore, many startups in platforms like EquityMatch.co have been able to raise many funds while increasing their startup valuation in the past few years.

The median pre-money value for seed rounds has risen from $5 million to $7 million in the last five years. When series A and B round valuations are considered, the increase in median pre-money valuation is much more pronounced. This is because the median A-round valuation was more than doubled between 2013 and 2018 (Entrepreneur Council, 2018). As a result, it is clear that valuations have enormously risen!

The recent surge in Startup Valuations

Why might startup companies suddenly become ...
... more valuable in general? Some may believe that it is because technology infrastructure providers such as Amazon Web Services and GitHub can significantly cut startup or overhead costs. However, another hypothesis would be the increase is because the companies are learning faster and/or spending more time between fundraising rounds. Yet, let us now explore the reasons for the increase in startup valuations over the past decade based on statistics!

Global Market Growing on Valuations

This surge can be explained by the quantity of liquidity in the market to finance startups. The number of VC funds continues to grow, and they have significant financial resources. In general, startups want to remain in the private sector. In fact, the number of publicly traded corporations in the United States (US) fell by 27% between 2000 and 2020. Furthermore, by utilizing VC funds, entrepreneurs can acquire larger financing more quickly. Thus, when compared to publicly traded corporations, this allows them to retain more control over their operation.
On the other hand, investment fund competition increased, resulting in a valuation boom, particularly in Europe. For a long time, the Old Continent was unable to compete with the US and China in terms of capital spent. It has, however, begun to catch up with them. Non-European investment funds, accustomed to large fundraisings, have strengthened their hold on Europe and are now forcing average ticket prices higher. Despite the numerous valuation methods available, effectively valuing an early-stage firm is frequently difficult.

Booming of investments across various Startups

If a startup has obtained a large amount of capital, it indicates that investors believe in its potential and are willing to spend additional money on the company! This is one of the reasons global investments in startups increased. When considering the year 2021, 596 new unicorns were born around the world. This equates to more than ten new unicorns every week (Cervatius, 2022).

The past year saw a significant number of investments in VC Startups indicating the interest of investors. During the last decade, European VC investments increased from €7.6 billion in 2011 to €42.8 billion, representing an average annual growth rate of nearly 20% (Gabbert et al., 2020). According to Crunchbase, VC startup investments between 2020 and 2021 in Europe more than doubled (Teare, 2022). Furthermore, the European VC industry has undoubtedly developed, and the number of substantial VC transactions is now higher than ever. According to Pitchbook Data research, the influx of cash increased the valuations of VC rounds in later stages.

It is also important to note that startups with a strong potential for growth have significantly started growing and numerous investors have expressed interest in and made investments. This is because investors anticipate that companies with strong growth potential will create more income in the future. For instance, McKinsey estimated that worldwide digital healthcare will have an 8% annual growth rate from 2019 through 2024 prior to the Covid-19 pandemic. However, the pandemic has accelerated global health tech growth while increasing startup valuations. The first half of 2020 saw unprecedented levels of digital health activity, including $5.4 billion in venture funding (Cohen et al., 2020).

In conclusion, in finance, a valuation is defined as "the analytical process of determining the current (or predicted) worth of an asset or a startup." The significance of valuation in a startup's financing rounds cannot be overstated. This is because it has a big impact on the growth of the company and the ownership stakes. Furthermore, the significant growth in investments and startup valuations over the last decade has occurred for a variety of reasons. Yet, many startups and investors on platforms such as EquityMatch.co have been tracking these trends in order to better understand them. Furthermore, startups are clearly taking use of today's improved development infrastructure and can do things that increase their value!