What is Happening in Life Sciences Valuations?
By: Colorado BioScience Association Date: 04/25/2022
Guest Post by Peter Adams, Executive Director, Rockies Venture Club
Anyone who has been watching valuations in life sciences deals over the past couple of years knows that median valuations in life sciences companies have skyrocketed, more than doubling in value from pre-pandemic. Average valuations are even bigger than the median since life sciences deals tend to have extra large deal sizes in the later stages that will drive average valuations well above the median.
The first thing you might notice is that the median deal size nearly tripled in that same period of time that post-money valuations doubled. Much more money is going into life sciences deals. Students of venture valuation know that the size of the investment round often directly impacts the post money valuation of the deal, both because the larger deal size adds to the pre-money valuation to create a larger post-money valuation, but also because pre-money valuations are rising too. When investment amounts rise, pre-money valuations tend to rise also, so that the company does not become over-diluted too early in their path to exit. Too much early dilution leaves little dry powder to companies to continue to raise capital to grow quickly, and it also can serve to demotivate founders who may find their ownership stake has diminished.
What is interesting is to look at the ratio of the post-money valuation to the deal size. Back in 2019, the ratio was almost 8.25 times, but as the numbers doubled and tripled in 2022, the ratio has dropped to about 6 times.
So, even though valuations have continued to rise, which would appear to be a bad thing for investors, it turns out that investors are buying a greater percentage of the company for each dollar invested. There are multiple causes for this shift including a “gentrification of capital” with money moving upstream to larger later stage deals that often have lower multiples than riskier early stage deals, or a more fluid investment environment that came about during the pandemic where everyone was investing via Zoom vs. in person, or it could be that there have been some good increases in exit valuations. I’m curious what others think.
Thank you to all that attended last week’s Colorado Life Sciences Night, hosted by Rockies Venture Club and Colorado BioScience Association.