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January 18, 2024 | Tom Ballard

INVESTOR OUTLOOK 4 | What about valuations going forward?

Most believe they will continue to drop, but others note it is sector dependent and one believes they might rise in 2024.

Today’s question as posed to our experts is: “Valuations reached unbelievable levels in 2022 and early 2023 before more realistic thinking took hold. What do you forecast for 2024 and beyond? Will lower valuations prevail or will there be an upward trend over the next 12 to 24 months?”

Tony Lettich, Managing Director, The Angel Roundtable: We believe that, in general, the downward trajectory of valuations will continue in the first half of 2024, bringing with it pain for start-ups seeking funding and existing investors alike, especially those not meeting targeted milestones.   We expect the declines to decelerate as we approach the second half, and that they will begin to stabilize at that time. We anticipate valuations will flatten at 2016 – 2017 levels in the second half and DO NOT expect to see an upward trend of any significance develop in 2024 -2025.

It is our opinion that during 2023, valuations in the generative artificial intelligence (AI) sector were the exception to the overall trend in valuations noted above, due to the momentum created with the roll-out of Chat GPT. While valuation momentum in AI will moderate, we expect the sectors’ valuations to remain slightly higher than those in the market in general due to the momentum created by the potential breadth and opportunity for disruption it will bring to the macroeconomic environment.

Grady Vanderhoofven, President and Chief Executive Officer, Three Roots Capital: I believe valuations may begin to increase in 2024. I believe 2021 was the year in which the most venture capital ever was invested, and the most recent peak of valuations was actually early 2022. The decrease in valuations occurred later in 2022 for early stage companies than for later stage companies because the early stage companies were further removed from the decline in the public markets. Valuations in general have been declining since 2022. I believe any increase in valuations initially will not be spread across all companies at all stages. I believe the most compelling companies that have the greatest likelihood of producing liquidity (e.g., exits) will benefit from increasing valuations first. Companies that are struggling to survive likely will continue to experience downward pressure on their valuations.

Ken Woody, President and Partner, Innova Memphis: Valuations have dropped from their high levels, but it’s really dependent on sector and stage. We’ve seen deals that seem way too high, then a strategic steps in and buys them at even higher levels. It’s all over the board, but in general valuations are getting more reasonable.

David Adair, Co-Founder and Managing Director, Solas BioVentures: The biotech sector has fallen dramatically (60 percent plus) from its high-water mark. We believe these muted valuations will continue through the first half of 2024 and possibly into 2025. Up rounds are reserved for the select few companies that are outperforming. Solas anticipates that most companies will have flat rounds at best (the 2023 up round) but will still consider a capital raise successful if it is a down round and the discount is 25 percent or less.

Gene Bressler, Chairman of the Upper Cumberland Investment Alliance: Lower valuations will prevail, while there is a great deal of capital sitting undeployed and a quick tipping point could occur with money rushing in. My view this is not likely till the Fed policy loosens up and creates a more risk on scenario.

Eric Dobson, Managing Partner, Community Equity Partners LLC and Sheltowee Venture Fund II: A correction was due, and it happened. Normally, down-rounds would be the death of a young company, but they became so prevalent that the stigma was released. Valuations are going to continue to drop in my opinion. The SSBCI (State Small Business Credit Initiative) is hitting the streets now. It will accelerate in 2024 due to programmatic requirements. All SSBCI investments require a 1:1 private capital match. So, companies that have been approved by Launch Tennessee are going to be in fierce competition to get investors to commit limited capital resources, which sounds like a strong buyer’s market to me. The SSBCI program, known as “InvestTN,” offers entrepreneurs great opportunity. However, it fails to incentivize investors in meaningful ways. My advice to companies seeking private capital to match SSBCI capital is be prepared to compromise on terms.

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