Mike: What differences in valuations do you find in Chicago vs. LA/NYC/SF?
Chicago is an interesting proxy for where we are in the venture cycle. Because of its distance from the coasts, it is the last to get liquidity in the up cycle and the first to lose it during down drafts. As coastal firms find valuations rising in their markets, they increasingly look outside the proverbial "1-2 hour" travel ring. Over the past two years, Chicago has seen increased coastal activity, characterized by higher valuations and larger venture rounds. These include investments like GrubHub, Groupon, Braintree and Sigma Mu. In talking with counter parts in the Valley, nearly all are concerned about the high (some would say irrational) prices being paid for rounds there. They also mention an increased appetite for looking at other regions where valuations are lower. Several have opened up offices in NYC, resulting in price appreciation in this market starting about two years ago. In the past year, Los Angeles, which is only a 47 minute plane ride, has also seen valuations and round sizes grow significantly, including an array of nine figure pre-$ financings. Chicago has seen some appreciation in more established companies but not nearly the expansion witnessed in the other three markets.
For example, in Chicago, seed rounds are likely to come in $2-4m pre-$. Los Angeles tends to hover around $5-6m these days (often capped convertible notes) and the Valley hits $7-10m with significantly higher levels for established teams. However, for established, ramping businesses in hot spaces, valuations have begun to even out (at high valuations) as coastal players are willing to travel if they can get larger amounts invested (say $10-25m) into a deal. As long as the exit markets hold (IPO and M&A), firms will travel and will pay up for later stage deals for fear of missing the next breakout company.
That said, the venture industry fluctuates between fear and greed during the cycle. In 2001 and 2007/8, the public markets pulled back, fear set in and firms were less interested in traveling outside their region nor aggressively pricing to incorporate potential future upside (versus current performance and outlook). While the next downturn will reduce pricing in Chicago, the ecosystem here has evolved and is more robust to weather a storm. There are more serial entrepreneurs, larger local funds and local infrastructure for companies. Later stage rounds will drop the most in valuation as will the number of seed deals but early valuations will likely move more modestly.
So, Chicago remains an increasingly robust venture market, attracting capital from across the US. Valuations have been rising but nearly at the rate of other markets. Once the exit markets stagnate, pricing will drop across all markets but, again, Chicago's valuations will decline more modestly than the others.
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