Why U.S. VC Valuations are Exploding

August 31, 2021

It’s a relatively sanguine question with explosive consequences – Why are U.S. venture capital (VC) valuations exploding? The answer lies in a complex cocktail of money, value creation, and expected future valuations. Let’s take a look.

Some Background

Before looking at some explanations behind the explosion in U.S. VC valuations, we need some background. The following figure looks at median angel valuations through June 2021 by quarter. Amazingly, the average median angel valuations in the second quarter of 2021, according to private equity data provider Pitchbook, reached $15.9 million, well above any prior valuation. Part of this rise in valuation stems from growing valuations at the high of the angel universe. Interestingly, the 75th percentile of pre-money angel valuations has generally plateaued, stuck at around $10 million for around a year.

Source: Pitchbook

Seed valuations continue to grow

Moving to seed valuations, the following is Pitchbook’s take on seed valuations since 2011. As one might expect, pre-money seed valuations continue expanding, with the 75th percentile up to $13.7 million through the second quarter of 2021. The average pre-money seed valuation reached $11.2 million at the end of June 2021, while the median reached $8.0 million and the 25th percentile rose to $5.0 million.

Source: Pitchbook

Angels continue to acquire a steady stake in early-stage companies

Perhaps a more interesting view than the previous two charts, the following figure is the percentage of early-stage companies acquired at the angel stage by quartile. Interestingly, the 75th percentile declined to 21.0%, while the average dropped to 15.2%, the median stood at 15.0%, and the 25th percentile held steady at 7.9%. The American early-stage company continues to be in healthy territory.

Source: Pitchbook

And larger deals continue taking larger stakes

Perhaps the most interesting chart in the Pitchbook report is the percentage of companies acquired at seed stage by quartile. Interestingly, for the 75th percentile of companies, 37.7% of companies have been acquired. That is reasonably higher than the median at 31.6% and the median at 30.8%. The 25th percentile value stood at 23.2% at the end of the second quarter of 2021.

Source: Pitchbook

Why is all this happening?

The obvious question at this point is – Why is all this happening? Well, one part of the explanation lies in deal competition. The following figure has equity stakes across quartiles. Clearly, the declining share of equity stakes through June 2021 stems from increased competition. For the 75th percentile of companies, the equity stakes to VCs dropped to 33.3%, while the average declined to 27.2% and the median declined to 24.6%. Lastly, the 25th percentile declined slightly to 18.1%.

Source: Pitchbook

Another part of the answer lies in the momentum of step-ups. The following figure looks at the 4-quarter median valuation step-up from the first quarter of 2016 to the second quarter of 2021. Overall, the step up has grown from less than 2.5x to almost 3.5x. It may not seem like much, but that 1.0x increase is a lot of money.

Source: Pitchbook

Summing Up

Overall, U.S. VC valuations continue to expand at incredibly healthy paces. The current year may turn out to be the greatest on record.

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