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January 27, 2025 | Tom Ballard

INVESTOR OUTLOOK 2: Valuations looking back and forward

Our panel of investors from East Tennessee offer their insights.

Today’s Question: Some $4 trillion in value is locked up in venture capital-backed companies in the U.S. alone, according to the Q3 2024 US VC Valuations Report from PitchBook. That was the result of overinflated valuations set in 2020 and 2021 that burned many companies’ willingness to exit. Is this gridlock going to continue in 2025 and, if so, for how much longer? 

  1. Eric Dobson, Managing Partner at Community Equity Partners and Sheltowee Venture Fund II: From my perspective, no, but I live in a different microcosm than the Valley or New York. The LP’s (Limited Partners) will eventually push the GP’s (General Partners) to exit these companies and recycle their cash. Lower than projected performance could have a negative impact on venture capital (VC) because many large, monied families invested heavily in VC’s during that period. This could bode well for the IPO market, giving the LP’s liquidity and allowing the companies to continue growing into their valuations. In my part of the world, valuations were high during the same period, but do not appear to be impacting exit expectations. We have several portfolio companies in a position to exit well in 2025. Valuations continued to be high despite bad conditions in 2024. However, with the election over, the pundits are saying money that went to real estate the sidelines in 2023 and 2024 should come back into the market in 2025. There is reason for optimism for the private equity market in the coming year.
  2. Tony Lettich, Managing Director of The Angel Roundtable: We expect this gridlock to continue through 2025. However, we believe that with the transition to a “business friendly” administration, which has an objective of focusing on the improvement in the macro-economic environment, it will begin to moderate. Regardless, it will, in our opinion, be early 2026 before valuations are able to grow significantly toward the overinflated valuations set in 2020 and 2021.
  3. Travis Manasco, MD, Principal, Solas BioVentures: I see this playing out for another 12-18 months. Like an overinflated balloon, most companies with highly inflated valuations are likely to “pop.” What does that look like? The fortunate ones will manage to raise a “down round” in the private or public markets, while the less fortunate may be forced to shut down entirely. It’s important to note that many of these companies were formed and raised capital before the current artificial intelligence (AI) revolution. Giving a caveat that I am a biotech investor, I believe this shift has fundamentally upended many of their original value propositions. That said, a select few companies may grow into their valuations.
  4. Grady Vanderhoofven, Founder and Chief Executive Officer at Three Roots Capital: I expect the gridlock to begin to ease in 2025, for at least two reasons. First, while valuations have not returned to late 2020 – early 2022 levels, they have improved, which means some companies that have been waiting to exit likely will find buyers at acceptable valuations. Second, traditional VC investors cannot hold their portfolio companies indefinitely. The VC model compels VC capital managers to raise capital, deploy capital, seek exits to return capital, and repeat the cycle again. The cycle cannot be permanently on hold, and it can’t really function properly with an extended delay in any aspect to the cycle. The nature of the VC model compels VC-backed companies to exit, so capital can be recycled.
  5. Ken Woody, President, Innova Memphis: 2024 has been a challenging year for follow-on investments, even for companies performing very well. Typically for most start-up companies, the valuation may not have been too high, but the VCs invested in other companies with inflated valuations, so they don’t have available capital to invest in decent opportunities. This has resulted in many investors sitting on the sidelines waiting for a change before investing further into existing portfolio companies. Some of that reluctance may also have been due to the election, pending fed actions, and war concerns. Hopefully, this will change in early 2025.
  6. Brandon Bruce, Managing Partner, Market Square Ventures: There was a slight improvement in start-up exit activity in 2024 compared to the significant downturn in 2023. I would expect a year-over-year increase in the number and size of startup exits in 2025 versus 2024.

 



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