These days, it’s a safe bet that whenever we talk about valuations in this newsletter, it’s probably bad news. And indeed, much of the venture landscape is facing uncertainty and a challenging environment at the moment. But not every type of company has been suffering—and in fact, certain startups have seen strong valuation growth.
Seed-stage startups, those in the earliest stages in the fundraising journey, actually saw record valuation growth in 2022. Per a new report from PitchBook, median pre-money seed valuations grew nearly 17% to $10.5 million in 2022, breaking the previous yearly record and hitting the highest valuations since 2012. Meanwhile, on an annual basis, the median seed step-up valuation, meaning the increase between a company’s current valuation and its previous one, climbed to 1.9x from 1.79x. Feast your eyes on the rare up-and-to-the-right chart below:
It's proof of what we’ve all been hearing anecdotally for a while—that startups in the seed and early stages have largely been more insulated from the massive drawdowns we’ve seen in later-stage companies that were closer to the IPO phase. Indeed, the PitchBook analysts note that the rise of micro funds in recent years helped fuel these seed startups, as well as “investors shifting their focus toward startups in nascent stages of development, allowing more buffer time before the gate to exit reopens.” That exit window, or rather, lack thereof, is becoming increasingly worrying for VCs and LPs alike.
Plus, Vincent Harrison, a venture capital analyst at PitchBook and one of the authors of the report, made an interesting point: Seed-stage companies probably have and may continue to have a bit more leverage when it comes to deal terms given the investor-friendly market (read: more VC-friendly deal terms) for companies at the later stages is "much more pronounced" than for seed.
“I think that leverage combined with the fact that more investors are moving downstream can help buoy up seed-stage valuations,” Harrison told me.
However, it hasn’t been a straight shot up for seed valuations: On a quarterly basis, those median seed step-up valuations fluctuated. Q1 showed the highest median step-up valuations, at 2.5x, but, after a slump in Q2, they continued to tick up in the following quarters. Overall the PitchBook analysts note that those valuations were “on par” with 2021 and showed strength.
But 2023 is shaping up to be a tough year for venture-backed companies. As I’ve written about lately, VCs and analysts alike expect the markets to remain challenged in 2023, even for earlier stages. And in fact, VC funding into seed startups started to fall, particularly in the latter half of last year, as my colleague Jessica Mathews reported last month.
(I wrote a guide for founders on fundraising in 2023 that’s packed with a lot of good advice from some top investors.)
So what to expect in 2023? Harrison argues that because there’s still so much capital out there, and investors with money to spend are moving earlier in the cycle, “It's very possible that seed stage [valuations] could continue this growth. Now, will ’23 have, you know, record growth compared to ’22? I doubt it. But on a historical basis,” 2023 could still prove a “really strong year for seed stage deal size and valuations,” he argues.
Meanwhile, Grace Isford, a partner at Lux Capital, told me over text that “valuations across the board have dropped,” but in certain sectors like A.I., “I’ve seen that seed deal valuations could be as competitive as 2021.” Apart from those sectors, though, she says she’s seen seed valuations falling.
We’ll have to see which seeds end up growing into those valuations.
Investors in hot water over FTX: The FTX implosion was certainly embarrassing for VCs who shoveled millions of dollars into the firm and hyped its eccentric (and now, out-on-bail) founder Sam Bankman-Fried. But certain firms who backed the company are now in hot water after a class action lawsuit, filed this week, accused firms Sequoia Capital, Thoma Bravo, and Paradigm of touting the legitimacy of FTX to the public (Paradigm didn’t immediately comment to Bloomberg and Sequoia and Thoma Bravo didn’t immediately respond to the outlet’s requests for comment). As others like TechCrunch have observed, it could be a huge—and detrimental—moment for the venture community if the lawsuit proceeds to a trial or settlement. I’ll be watching this one closely.
Stripe’s cash burn: The beloved payments titan reportedly burned through over $500 million in cash in 2022, per The Information. That’s in stark contrast to the reported $400 million it made the year prior, and it also sheds light on the state of the closely-watched company as it is reportedly trying to raise new funds at what would be a steep discount from its last valuation.
One more thing: Term Sheet will be off on Monday for Presidents Day, but we’ll be back in your inbox starting Tuesday. Enjoy the long weekend!
Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.
