## The Venture Slump and the Shift Towards Growth
In recent years, venture-backed companies have faced significant challenges in raising funding at valuations that exceeded their previous levels. However, there are signs that the worst of the downturn may be behind us, according to investors like IVP general partner Tom Loverro. Loverro suggests that startups that have survived should now shift from cash preservation mode to investing in growth.
This sentiment is supported by data from PitchBook, which shows that valuations for all but seed-stage companies dropped in 2023 compared to the previous year. However, during the first half of 2024, prices for new deals of US-based companies not only recovered but reached an all-time high for median early- and late-stage deals. This indicates a positive trend in the fundraising environment.
## The Rise of High Valuations for Fintech Companies
While fintech has been out of favor with investors since the start of the downturn, there has been an increase in the number of companies that can raise capital at higher valuations since the beginning of the year. This is exemplified by UK challenger bank Monzo, which achieved a valuation of over $5 billion in May 2024, a nearly 15% increase from its valuation in early 2022.
According to Stephanie Choo, a partner at fintech-focused Portage Ventures, many startups have achieved growth and surpassed their previous valuations by cutting spending over the last two years. This indicates that strategic cost management has been a key factor in their success.
## Optimistic Outlook for Startups
Samir Kaji, founder of Allocate, shares the optimism that valuations and the fundraising environment have improved for startups in 2024. He believes that the capital markets are slowly recovering and there will be capital available for startups that can achieve real growth and demonstrate strong fundamentals.
However, it’s important to note that the “all-time” high valuations mentioned earlier may be somewhat misleading. Kyle Stanford, lead US venture capital analyst at PitchBook, explains that deal volume is still sluggish. There were fewer companies that raised a new round with a known valuation in the first half of 2024 compared to a typical six-month period.
Stanford adds that PitchBook’s valuation data set primarily consists of strong companies that were able to grow into their previous valuations. Startups that couldn’t secure funding at a higher valuation might not be included in this data. Many of these startups took alternative routes such as unpriced rounds through convertible notes or delayed raising capital altogether.
## Valuations Improving for Stronger Companies
While the market remains challenging for struggling startups, there is optimism for stronger companies. Samir Kaji acknowledges that startups are still divided into “haves” and “have-nots,” but he believes that the group of companies capable of raising at higher valuations has grown larger in 2024.
Several factors contribute to the improvement in valuations for stronger companies. There is renewed optimism regarding inflation being under control, and the possibility of the US Federal Reserve cutting interest rates soon. The stock market has also seen significant growth, which influences private investors’ outlook. Furthermore, a substantial portion of companies that raised funding in 2024 are in the AI sector, known for receiving higher valuations compared to other sectors.
In conclusion, while the venture slump posed challenges for startups in recent years, there are positive signs of recovery and growth in the fundraising environment. Strategic cost management and a focus on achieving real growth and strong fundamentals have been key factors for startups that have surpassed their previous valuations. While deal volume remains sluggish, there is optimism for stronger companies, especially those in the AI sector, as market conditions improve.