From 2012 to 2015, following Facebook's IPO, early stage startup valuations soared to unsustainable levels, and are now returning back to normal
I tweeted out this article from Techcrunch in the middle of last week: … And the response from the Twittersphere was a desire to hear my views on it.
Context & Ripple Effects
Fred Wilson's argument closes a loop that opened with Facebook's 2012 IPO: the listing minted a generation of seed investors chasing consumer-network effects, and by H1 2015 AngelList's average startup valuation had peaked at $4.9M before sliding to $4.2M by Q4 — its lowest since 2012, per AngelList's own funding data.
The correction Wilson describes shows up in deal counts too: worldwide early-stage rounds fell from roughly 13.3K in 2014 to about 5.9K this year, with mobile app and SaaS startups hit hardest (TechCrunch's round-count data). The delayed-IPO dynamic that kept companies private at high marks was flagged back in 2015 as the mechanism inflating private valuations (the delayed-IPO analysis).
First-order effects
- Seed-stage founders in mobile app and SaaS — the categories where round volume collapsed most — face fewer term sheets and must price against the $4.2M AngelList average rather than the 2015 peak.
- Angels and micro-VCs who entered during the 2012–2015 surge see mark-to-market losses on portfolios priced for a continuation of Facebook-style outcomes.
Second-order effects
- With early-stage supply shrinking, surviving funds concentrate capital in fewer, larger checks, pushing marginal founders toward revenue-based or non-VC funding.
- Later-stage investors gain leverage: the same normalization logic resurfaces whenever public tech stocks wobble, as venture firms did again when renegotiating deals amid poor IPO performance in the 2022 pullback.
Third-order effects
- If the cycle repeats — public listings reprice, private marks follow, deal counts compress — each trough resets the baseline lower, structurally favoring capital-efficient startups over growth-at-any-cost ones.
- The recurring gap between peak private valuations and eventual public pricing keeps pressure on regulators and exchanges to scrutinize how long companies stay private at inflated marks.
The trend: Venture funding moves in sentiment-driven waves keyed to landmark public listings like Facebook's IPO, with each froth-and-correction cycle leaving a lower floor for early-stage valuations.