On September 22nd, 2022 you’ll be upgraded to the latest version of Equidam with updated valuation parameters. This may result, on average, in a slight valuation increase.

What’s changing

1 | Average valuations used in the Scorecard Method and maximum valuations used in the Checklist Method

We base our estimates on real transactions by country since November 1st, 2017. Whenever we were not able to find a significant amount of real pre-money valuations in a given country, we broadened our perspective to the closest larger geographic entity (namely, continental region and continent). You can refer to the table at this link to see how they will change for your country specifically.

2 | Discount rate components used in the two DCF methods

Most of the parameters determining the discount rate have been updated to reflect the most recent market situation in terms of systemic and industry-specific risk. You will be able to see these parameters in your valuation reports.

General comments on the effect of the changes

Last year, startups raised funding at record rates. This year, on the other hand, global funding has slowed down. From an investor’s point of view, it is a better environment as prices decreased and funding rounds became less competitive, allowing time for due diligence and for getting to know the founders. From an entrepreneur’s perspective, raising funds has become more and more challenging. So, are the valuations down this year

Perhaps unsurprisingly, the answer is no, or maybe, even better, not yet.

As a result, the easy money from venture capital activity is quickly fading in an inflation-induced high interest-rate environment and private investors are reluctant to sign big checks due to volatile macroeconomic conditions and market turmoil. 

Digging further into the change of interest rates, we can observe that 2022 registered a global increase in risk-free rate as a result of central banks’ rising interest. Indeed, the Fed has already raised interest four times in 2022 and other central banks have followed suit. A first consequence of this high inflationary market is that most asset managers will likely favor investments that are less likely than startups. To better understand this inflationary market and explain why VCs are currently investing less in startups, we should go back in time, when the central banks started to lower interest rates. With low interest rates, investors needed to find higher returns and therefore took more risks by investing in startups. However, when interest rates rise, investors will likely find returns that outperform inflation in safer asset classes. A second consequence is the pressure on business and consumer spending that comes with rising inflation. For entrepreneurs, this results in slower revenue growth. We were expecting this shock at the beginning of the Covid pandemic, but almost the exact reverse happened. There was sudden and rapid spending on tech and software. Eventually, funders’ priorities are now shifting from growth to cash preservation.

Fintech startups, which saw a significant valuation growth in 2021, are forced to lower their valuations as global equity markets are pressing companies to raise money at a discount. This leaves consumers and investors wondering what will happen next. Many private investors are forced to take a hard look at the startups they are investing in, with some becoming more cautious of backing ideas that are years away from turning any profit. Furthermore, companies looking at seed-stage funding are being re-evaluated according to Reuters

Eventually, as we will see in our following articles, pre-money valuations remained strong despite an uncertain geopolitical and economic environment. However, there are early indications in Q2 2022 of down rounds and reduced valuations and we also expect that the severe downturn of publicly traded tech companies will be reflected into the private market.  

Please don’t hesitate to let us know in case you have any questions. Thanks for using Equidam!

The Equidam Team