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Did venture capitalists undervalue startups for decades?

Data indicate that the pace of startup value creation reached a fever pitch in 2021. According to venture capital data collected by PitchBook, prices spiked for startup equity across the maturity spectrum last year. The result of those rising prices was a huge gain in the pace at which paper wealth was generated.

The rising velocity of value creation may indicate that rich entry prices for early startup investments will math out as similar pricing dynamics play out in the later stage of company development.

PitchBook cites rising inflows of nontraditional capital to the startup market as part of the changing landscape for startup prices and the pace at which they create illiquid equity value. Larger venture capital funds are also a driving force behind the pricing dynamics uncovered by the data.


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The dynamic of rising prices accelerating value creation at once undercuts the viewpoint that startups are too expensive today — pricey early-stage companies do not appear to be struggling to raise later-stage capital, if markups are any indication of investor appetite for recently funded early-stage upstarts. More simply, it appears that the market has decided that startups are worth more than they once were, by a material multiple.

This prompts a simple question: Were startups dramatically undervalued in prior years and decades? The former, yes. The latter, maybe.

Caveats abound. Underneath the wave of capital flowing into startups in recent years — and especially the blowout 2021 calendar year for private-market investments — is an expectation that eventual exit prices will make preceding investments for startup equity math out to the positive. There’s some concern in the market today that it won’t.

We aren’t here to throw stones, but instead figure out why startup prices have risen so much and whether the huge gains are reasonable, insane or more a sign of a changing software market.

Up and to the right

A few venture maxims to get us started: Every deal that a venture capitalist invests in is fairly priced; every deal that a venture investor takes a stab at but loses is overpriced; any following investment into a portfolio company of a venture investor is a reasonable markup for value created.

When we apply those rules to the following charts, we can reach some very interesting conclusions:

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