Investors are betting bigger on Chicago startups, but local valuations are millions of dollars behind what investors say startups on the coasts are worth, a new report shows.
PitchBook Data, a Seattle-based private equity and venture capital research firm, says median startup valuations across the country are on the rise for early- and late-stage companies, with investors seeking ever-higher returns and startups delaying exits.
Valuations based on early- and late-stage investments grew in recent years in Chicago, though its numbers lag behind startup hubs in the San Francisco area, Los Angeles, New York and Boston. Chicago ranks No. 6 in both early- and late-stage valuations, according to the report.
In 2014, the report said, early-stage Chicago startups had a median valuation of $12.5 million, up from $6 million in 2010. The national medians for early-stage startups were $18.2 million in 2014 and $9.9 million in 2010.
Median late-stage valuations in Chicago rose to $74.1 million in 2014, up from $52.8 million in 2013 and $60.7 million in 2010. Compare that to national medians: $95.1 million in 2014, $80.4 in 2013 and $49 million in 2010.
More Top Picks Work Boot
“For the most part it looks like it’s almost following the same trend lines that a lot of other metro areas are, just on a smaller scale,” said Alex Lykken, a PitchBook editor who wrote the report. Lykken analyzed 20,000 startup valuations from the PitchBook database for the report.
PitchBook researchers analyzed Chicago even though they didn’t see it as a venture capital hub, Lykken said. The city’s ecosystem is less developed than other areas such as New York and Los Angeles, which he said are sometimes considered “the next Silicon Valley.” Lykken said it would take another five to 10 years of developing Chicago’s startup and venture capital networks to earn it a spot in that conversation.
Chicago valuations were higher than national medians in 2007 and 2008 for early-stage deals and in 2006, 2010 and 2011 for late-stage deals.
In 2011, Chicago’s median valuation was $165.4 million, more than twice the national figure, which PitchBook analysts say may be a result of a smaller pool of valuations that included Groupon, GrubHub, Mu Sigma and other high-value companies. The following year, the city’s median valuation crashed to $37 million.
Lykken said valuations indicate investor sentiment for a market. He said they show which companies and sectors investors expect to be worth the most three to five years from now.
Valuations are a better gauge “than the amount of money or amount of deals investors are putting in,” Lykken said. “It’s where they’re placing their bets.”
The report showed the Bay Area as the leader in early- and late-stage valuations ($23 million and $139 million, respectively), with Los Angeles a close second in early-stage ($22 million) and Seattle second in late-stage valuations ($109 million).
With its No. 6 ranking for both early- and late-stage valuations, Chicago tops Austin and Denver/Boulder on both lists.
Lykken said investors in Chicago startups may have more realistic valuations compared to what may seem like “pie in the sky” assessments on the West Coast. He also said investors are feeding on existing optimism in Silicon Valley, which drives up the numbers.