Startup valuations have rebounded in mid-2024, possibly signaling a bullish market for new startups. However, analysts say that observed market growth could be misleading. Per seed VCs, startups should adopt a growth mindset.
Startup Valuations Rebound in 2024
2023 saw a noted downturn in startup valuations, but the first half of 2024 has demonstrated a strong rebound, as reported by Digital Marketing News. This could signal renewed enthusiasm for investments in U.S. companies.
New technology innovations, economic policies, and a favorable market environment could influence this upturn. Prospective Federal rate cuts have instilled more optimism in venture capital investments. A new crop of AI-based startups has garnered attention in the fintech sector, and the stock market has remained robust.
Per Experts, High Valuations May Be Misleading
While recent boosts in startup valuations appear to signal a turning tide for fundraising opportunities, some experts say the numbers could be misleading.
Kyle Stanford of PitchBook, a leading market research firm, told Venture Smarter that high valuations in the data should be treated with caution. While valuations have increased, deal volume remains sluggish, and many startups have resorted to unpriced rounds or delayed fundraising.
“It’s a good market right now if you are a strong company, but if you’re struggling to hit growth targets you had set out before the pandemic, it’s a really hard market,” Stanford states.
Stephanie Choo from Portage Ventures notes that many growth startups are experiencing results from the cost-cutting measures taken during the leaner times in the past few years. This has allowed them to surpass previous valuations.
Caution Advised for Taking High Valuations
Some experts have advised that the past few years of venture capital have been a cautionary tale about pursuing the highest early valuations possible.
As reported by Tech Crunch, Elizabeth Yin, co-founder of Hustle Fund, spoke onstage at TechCrunch Disrupt 2024 on the problems of high valuations. “I think we’ve all kind of seen the negative impact of having a valuation too high from the last, call it, three years,” Yin stated.
When startups rush to raise money in a bull market, they can struggle to provide a provable business. This can lead to difficulties meeting goals in later fundraising rounds, causing promising startups to fizzle out before they can demonstrate growth.
Yin advised that early valuations “shouldn’t be anything really crazy that you don’t think you can grow into realistically with your traction, because it always catches up with you.”
Because the bar is bound to be “higher for the next round,” Yin proposed a general rule that business growth should justify double, or even triple, the previous valuation for each early round.
Failed Growth Could Harm Employees
Another adverse effect of not reaching growth goals after a high valuation is the possibility for a startup to edge out valuable employees, as noted by VC Renata Quintini, co-founder of Renegade Partners.
Most startups require stock options for employees, which can make up a significant portion of the employee’s salary. If the company fails to grow, the stock will not take off, and a stock that diminishes in value over time could depreciate the employee’s salary.
“If that gap doesn’t close, you’re actually disincentivizing the people that joined you early on,” Quintini states.
Growth Mindset Advised Amid Venture Capital Turnaround
Recent rebounds in startup valuations signal a renewed interest in venture capital. Market data demonstrates that deal valuations in the first half of 2024 hit new highs. However, analysts caution that deal volumes remain sluggish.
As venture-backed companies explore more fundraising opportunities, experts advise a growth mindset emphasizing meeting goals for each valuation round. With a growing economy and booming AI sector, startup opportunities may remain robust throughout 2024.
