Young LA startups saw their valuations increase in 2021
Valuations of startups are up everywhere, but no major city in the United States has seen the estimated value of early-stage startups increase this year like in Los Angeles, where transaction competition is at its height.
For budding LA startups, pre-money valuations were breathtaking in the first half of 2021, rising 116% from last year to a median of $ 65 million, according to a recent report Pitchbook report. Almost all startup hubs in the United States have seen increases over the same period, but the jump has been most pronounced in Los Angeles.
In the San Francisco Bay Area, for example, the median rose almost 43% over the same period to reach $ 50 million.
“Especially within hubs, such as LA, competition for transactions has increased dramatically in recent years, with the influx of new investors and more capital looking to invest in startups,” said Kyle Stanford, analyst. senior in VC of Pitchbook, author of the report. “Los Angeles alone has recorded strong fundraising numbers, bringing more local capital to the ecosystem, expanding opportunities for businesses in the region.”
Early stage median pre-monetary valuation ($ M) by ecosystemPitchbook
Calculating valuations is more of an art than a science, as start-ups are unlikely to have any significant income or profit. Instead, venture capitalists enter into funding deals based on an agreed valuation often determined by the credentials of a founding team, early progress (i.e. pull) and broader industry trends, including competition among investors to acquire stocks. The approach has led to frequent criticism that venture capital funds tend to be directed primarily towards a small circle of individuals with access to businesses.
For entrepreneurs able to raise funds, a dynamic market can increase deal sizes.
Median early stage transaction size ($ M) by ecosystemPitchbook
Over the summer, the booming competition resulted in larger cycles for startups operating at LA Tango, a workforce training startup, raised a Funding of $ 5.7 million in August. A month earlier, benefits company JOON announced a $ 2.3 million in seeds. While Tango has raised more than twice as much as JOON, both deals reflect the increase in early stage fundraising over the past decade. In 2010, the median seed deal in the United States was $ 500,000, according to Pitchbook. In the second quarter of 2021, the median reached $ 2.6 million.
Valuations are rising in all areas as VCs and hedge funds compete for the hottest deals amid access to cheap cash. But such founder-friendly market conditions – which are observable in Los Angeles and other startup hubs – present potential drawbacks for executives and employees, if a correction deflates high startup valuations before they hit. can cash in their shares.
“Excess” on the market today
The phenomenon Stanford describes is not limited to emerging companies: valuations of late-stage startups also skyrocketed in the first half of 2021. In Los Angeles, the pre-currency median valuation of these companies rose 138% to reach $ 175 million, according to the report. Pitchbook recorded the Bay Area’s highest late-stage median valuation at $ 275 million.
“Combined with its relative proximity to the Bay Area and its huge amount of venture capital, Los Angeles startups have capitalized on the excesses seen in the market today,” Stanford said. This trend is expected to continue, at least in the short term, added the author of the Pitchbook report. “Everything indicates that valuations will remain elevated in the second half of this year and possibly through 2022 or 2022.”
While now is a good time to fundraise, that could change. The “global startup funding frenzy“sparked some fears of another tech bubble.” It sounds a lot like 1999 to me, “London-based Hoxton Enterprises partner Hussein Kanji told CNBC earlier this year.
As a general rule, startups “should be aware that any correction may result in declines in the future, and declines are very painful, especially for common shareholders (founders, employees),” Stanford professor of finance. Ilya Strebulaev dot.LA said in an email. “For employees, an important question is the fair value of their stock options, which is not always easy to determine.
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