Startup valuations are critical signals for investors when determining whether or not they should invest in a company. That’s because valuations are crucial indicators of a company’s projected success from its early stage to its growth stage and, ultimately, to its exit. During each stage, a company’s valuation reflects its progress. Ideally, if a company’s valuation has grown since its previous round of raising, investors assume that the company is performing better than before.
In this Chart of the Week, we looked at the percentage change in valuation in subsequent rounds for both Regulation Crowdfunding (Reg CF) and Regulation A (Reg A) startups. We examined just over 3,000 rounds and determined both the average and median valuation growth between each round. All Reg CF and Reg A rounds were bucketed by subsequent round numbers. We evaluated 265 companies between their first and second rounds, 50 companies between their second and third rounds, and 11 companies between their third and fourth rounds.
Our data shows that the growth rate of a company’s valuation is highest — by a drastic margin — between its first and second round of funding. The average valuation growth between a company’s first and second round is 142% and its median valuation growth is 55%.
In subsequent fundraising rounds, the valuation continues to increase but at a significantly slower rate. The average valuation growth between a company’s second and third round is 65%, and its median valuation growth is 40%. The average valuation growth between a company’s third and fourth round is 53%, and its median valuation growth is 36%.
Our data suggests that the dramatic valuation increase between a company’s first and second round is due to it operating in its early stages. At the earliest stages of a company’s life — typically before it has a fully developed product or any meaningful traction — investors are most uncertain about the odds of its success.
When a company raises its initial round, it is typically in its ideation, prototype, or research stage, depending on the industry in which it operates. Therefore, between the first and second round, some level of development or progress can be analyzed to then determine its potential. Once investors evaluate a company’s potential, it provides them with more assurance that the company will perform well and is worth investing more money into (or vice versa, if they find the company is not progressing). Therefore, the greatest acceleration in valuation is in a company’s infancy. Over time, although the valuations of companies continue to increase, they do so at a slower rate because they are approaching the actual market value.
Note: all data used for the Chart of the Week comes from the KingsCrowd database and represents a snapshot of the crowdfunding market.