Venture investors conflicted over rising valuations of emerging technology startups

PitchBook, the premier data provider for private and public equity markets, today released the findings from a new survey conducted in partnership with Web Summit, the world’s largest technology event according to the Financial Times. The survey,  PitchBook-Web Summit Venture Investor Survey, examines venture capital (VC) investment preferences in emerging technologies like AI, mobility, fintech, blockchain and more, alongside investor sentiment of the current economic climate. According to the findings, VCs are most bullish on AI/ML but have concerns over rising valuations and the rate at which unprofitable technology companies have entered the public markets.

The survey was administered to 264 VC investors at Web Summit and Venture, an invite-only event at the conference gathering leaders from funds like Seedcamp, Blackstone, Union Square Ventures, Lightspeed Venture Partners, Earlybird and more.

“It’s not necessarily surprising VC investors responding to our survey are still prioritizing growth over profitability, given the very nature of venture capital; however, their view that rising valuations are overall negative for the venture industry is a noteworthy shift,” said Steve Bendt, VP of Marketing at PitchBook. “High levels of capital availability and a preference for larger deals across all stages has helped fuel rapid growth and rising valuations. And according to PitchBook data, larger deals and valuations are likely to persist, meaning we have yet to see the full impact of the growth over profitability trend.”

“It’s interesting to see that even with the current questions regarding non-profitable startups, investors are still set on growth as the most important measure. Without any major market correction between private market valuations and public ones, it will continue to drive up the price they’re going to have to pay to invest in early-stage startup,” said Paddy Cosgrave, CEO and founder of Web Summit.

To download this data graphic to learn more about the key findings below, click here.

Opportunity
Venture investment in technology sectors has consistently increased over the last 10 years, making up nearly 40% of total VC investment so far in 2019. Nearly 70% of survey respondents agree investment will continue growing as there is an overabundance of quality investment targets within these sectors. Of the emerging technology sectors attracting venture investment, AI/ML (28%), healthtech (16%) and fintech (13%) were identified by respondents as the categories with the greatest disruption potential over the next five to 10 years. When evaluating investment opportunities in these sectors, almost one third (31%) of respondents cited executive team pedigree as the most important criterion, followed by business model (27%) and disruption potential (23%).

Profitability
Interestingly, only 19% of respondents cited path to profitability as a criterion when evaluating investment opportunities in emerging technology sectors. In fact, 72% strongly agreed or agreed that growth must come before profit for VC-backed emerging technology companies. At the same time, 86% of respondents were very concerned or somewhat concerned about the rate at which unprofitable technology firms have been going public – an outcome of the current environment of easy fundraising to offset high cash burn. According to PitchBook data, nearly 90% of VC-backed IPOs in 2019 were unprofitable at the time of IPO.

Threats
The looming global recession was top of mind for VC investors, with more than half (61%) preparing their fund for a global downturn. However, more broadly, rising valuations were cited as the greatest threat facing the VC-backed emerging technology industry (53%), followed by geopolitical events and regulatory challenges (34%) and competition from corporates and PE investors (13%). Over 86% of respondents agree or strongly agree that growing deals sizes and valuations, especially of emerging technology companies, are negative overall for the venture industry. So far in 2019, median early-stage valuation step-ups have reached 2.14x – a decade high. Download the data graphic here.