Have startup valuations fallen enough to feel sane again?

In recent years, the startup funding market has gone through multiple changes as venture capital firms shift their focus away from astronomical valuations. These days, questions among investors, startups, and industry watchers have shifted from “how high can startup valuations go?” to “have startup valuations fallen enough to feel sane again?”

The main drivers of the previous frenzy of high startup valuation were a lack of competition for attention from top investors and startups’ ability to raise rounds with scant information about their performance. However, the stock market crash of 2020 brought an end to this madness and as a result, venture capital firms became more cautious and selective in their investments.

It is difficult to say whether valuations have fallen enough to feel “sane again”. While the average venture capital post-money valuation of a startup may have dropped, this is not necessarily indicative of the whole market. Depending on the individual situation of different startups, investors may still be willing to approve extremely high valuations. Nevertheless, it is safe to say that there is undoubtedly more of a focus now on the “sensible” valuation of startups, particularly at a seed and series A level.

A key factor that could influence whether startup valuations have “fallen enough” to feel sane again is the continued impact of the COVID-19 pandemic. Undoubtedly, the pandemic has created a huge amount of economic uncertainty, with some businesses suffering more than others. This has led some investors to be more cautious in their investments, with a focus on mitigating their risks by investing in businesses with resilient business models and solid operations.

Overall, it can be said that, while startup valuations may have fallen from the peak of the funding frenzy, there is still room for further reductions in valuations. As the economic recovery progresses, and more uncertainty regarding the impact of the pandemic is removed, venture capital firms may become more comfortable with returning to higher valuations. Until then, there is still more work to be done to ensure that the startup market regains a sense of sanity.