You need to get farther, faster.
In a nutshell, that's what the new stats out of Pitchbook mean to venture-backed entrepreneurs. Pitchbook says that the median valuation of a company raising its second round of venture financing has now hit a stunning $41 million, compared to $19 million just five years ago.
This second round of venture capital is commonly known as the B round. Fast-growth entrepreneurs who believe they need venture capital generally start with the so-called seed round of financing, which usually comes from angel investors, incubators, or dedicated seed funds. The next slug of money, known as the A round, is more likely to come from traditional venture investors, as is the round after that, known as the B round. And the growth in the valuation of companies at their B rounds is outpacing, by a wide margin, that of valuations in earlier rounds. (If a company continues to raise money after that, in financings known, predictably, as C and D rounds, they’ll probably also be dealing with strategic investors and mutual funds).
What does a $41 million valuation represent, compared to $19 million? If the answer seems like a simple, "Yay! We're worth more!" take a look at this analysis by Sarah Lacy, of Pando Daily. Lacy points out what should seem obvious: getting to a $19 million valuation is hard enough. At $19 million, she says, "You are showing revenues, you are beyond product market fit, and you have to at least be able to articulate a case why you could be a market leader in a market that means something." But $19 million isn’t so high, she says, that it's impossible to grow dramatically between the Series B and the Series C, should you want or need that next round.
At $41 million, it's a whole different negotiation. You're not just competing with other companies also claiming a $41 million valuation—and remember, $41 million is the median. Your B round investment is competing with A round investments, which, to a venture capitalist, are only a third the size."Clearly, it's going well enough for the prices to be that high," Lacy writes. "But it's not a round I'd want to be pitching right now."
Obviously, most entrepreneurs are not about to be put off by this. The power of, "Yay, we're worth more!" is just too strong. I met with one entrepreneur recently that said their company was valued at more than $10 million on their seed round. I was a bit dubious, but on the other hand, the company had done a ton of really tough work, and execution, around non-glamorous parts of the business like supply chain, novel income streams, and government partnerships. The founder had the big huge plans that VCs love. Maybe ten-million-plus at the seed round wasn't completely crazy.
Then we spoke about the company's upcoming A round, for which they were seeking a $50 million valuation. (For reference, Pitchbook says the median A round values a company at $15 million.) This is a company that’s easy to root for, so I wanted to know why, exactly, they thought they could support the $50 million valuation. The answer was a bit deflating: The company had a seed round valuation more than $10 million, so a $50 million valuation at the A round was totally reasonable.
This is not what I hoped to hear. I wanted to hear about strategy, execution and growth. I wanted to hear about more of the creative, down-in-the-trenches work that got the company to its seed round. And maybe it's all there, and maybe I just asked the question poorly. And I do understand that if you're hunting down venture capital, you need to be aware of how that market works, and how today's expectations are likely to affect your company's valuation. But that's a far cry from relying on the logic of a market that may not have any.