It is well known that the pandemic caused a sharp rise in the price of tech stocks, which also boosted late-stage startup valuations significantly. This trend benefited startups in many industries, including biotech and e-commerce. In addition to receiving record funding, the number of unicorns increased significantly in 2021 to 959, a 69% increase over the previous year. However, according to recent reports, the valuations of late-stage companies are falling as inflation soars and economic uncertainty reigns. PitchBook reports that median pre-money valuations for seed stage companies in Q2 were $12.2 million, maintaining a relatively high level. A hot trend of the year is double-digit valuations at the early stages of company formation.
As investment in these companies has fared better than at any other stage during the economic slowdown, seed-stage deal counts have continued to rise. Institutional investors who previously focused on late-stage ventures are investing in businesses that are still in the early stages of development today. The likelihood of exponential growth is one factor that keeps early-stage startup investment appealing to many investors. Investors want to seize the chance they get to buy a stake at a fair price and then sell it at a profit in future funding rounds or when the company decides to go public. Furthermore, they are concerned about investing in companies with inflated valuations in a weak equity market. According to Crunchbase, the average Series A round has grown from less than $6 million a decade ago to more than $18 million in 2021. The pressure on late-stage startups to justify high valuations and deal sizes has increased because of rising inflation, geopolitical unrest, and equity market volatility. As a result, the median deal size in H1 was $14 million, down 7.1% from the median deal size of $15 million in 2021.
Higher seed-stage valuations can also be attributed to an increase in nontraditional seed-stage investors and a growing number of micro-funds. Investors focus on early-stage startups because they are the only companies whose valuations remain stable in both private and public markets. While capital markets are known for attracting later-stage companies, early-stage exchanges such as the TSXV are home to many promising early-stage businesses that have not been tainted by inflated valuations and unrealistic earnings multiples. Here are the top five early-stage stocks to consider:
1. NurExone Biologic Ltd.
NurExone Biologic (TSXV: NRX) is an Israeli biotech company developing a novel drug delivery platform targeted at the many patients who suffer traumatic spinal cord injuries (SCI) each year. The company’s non-invasive ExoTherapy uses proprietary exosomes as biologically-guided nanocarriers to deliver specialized therapeutic compounds to target areas, Exosome-based technologies have recently been recognized by experts as a desirable platform for biomedical applications such as targeted drug delivery, gene therapy, cancer diagnosis and therapy, vaccine development, and tissue regeneration. NurExone’s first exosome-based therapy, ExoPTEN, has the potential for recovery of motor functionality after acute spine injuries, bringing patients relief and improved quality of life. Two of Israel’s leading universities, Tel Aviv University and Technion, Israel’s Institute of Technology, performed pre-clinical studies of the ExoTherapy on rats that, remarkably, showed spinal cord nerve regeneration despite complete spinal cord lesions. NurExone is the process of translating the treatment to humans, and the company holds an exclusive worldwide license from the Technion and Tel Aviv University for the development and commercialization of the technology.
2. Else Nutrition Holdings Inc.
Else Nutrition is an Israeli clean-labeled plant-based food and nutrition company. The company makes all-natural, dairy-free, soy-free foods and beverages for infants, toddlers, children, and adults that are free from hormones, antibiotics, gluten, and other potentially harmful ingredients. Else Nutrition is expanding its distribution network and sales channels to increase its global and U.S. market share. The company is addressing the presence of heavy metals in infant food products, pushing the industry toward safer infant nutrition solutions, and its Super Cereal for Babies received the Clean Label Project Purity Award. The company has entered two new markets, Canada and China, and has established a strong position in the infant formula market. Else nutrition has benefitted from the shortage in infant nutrition in the United States. Moreover, according to Bloomberg, Else is positioned well to enjoy the growing plant-based industry, which is set to hit $162 billion in the next decade.
3. Sernova Corp.
Sernova is a Canadian clinical-stage regenerative medicine technology company founded in 2006. The company creates products to treat chronic diseases such as insulin-dependent diabetes, thyroid disease, and blood disorders like hemophilia A. The company is focused on developing and commercializing its proprietary technologies, such as immune-protected therapeutic cells and Cell Pouch implantable device technologies. Sernova recently announced Phase 1/2 clinical trial results that support the potential of its proprietary Cell Pouch System to provide a “functional cure” for insulin-dependent diabetes. Sernova and Evotec announced a global strategic partnership in May to develop an implantable off-the-shelf (iPSC) beta cell replacement therapy and provide Sernova with an unlimited supply of insulin-producing cells to treat millions of patients with insulin-dependent diabetes (type 1 and type 2).
4. Bitfarms Ltd.
Bitfarms, a Canadian Bitcoin mining company founded in 2017, operates vertically integrated mining operations with on-site technical support, proprietary data analytics, and company-owned electrical engineering and installation services. The company runs Bitcoin blockchain computing centers across the world. Bitfarms operates a diverse production platform, with seven industrial-scale facilities in Québec, one in Washington state, and one in Paraguay. These facilities are powered by environmentally friendly hydropower solutions and are protected by long-term power contracts. Bitfarms became the first Bitcoin self-mining company to begin trading on the TSX-V in July 2019. On February 24, 2022, the TSX-V named the company a Venture 50 Winner, and on April 8, Bitfarms was promoted from the TSX-V to the TSX.
5. Valeo Pharma Inc.
Valeo Pharma, founded in 2003, is a Canadian specialty pharmaceutical company that acquires, licenses, and sells pharmaceutical products focusing on Respirology, Neurodegenerative Diseases, Oncology, and other specialty products. The company recently signed a Commercialization and Supply Agreement with Novartis Pharmaceuticals Canada Inc. and Kaléo Inc. for the Canadian commercialization rights to innovative ophthalmic therapies (XIIDRA and SIMBRINZA) as an auto-injector (ALLERJECT) for the treatment of severe allergic reactions.
Given the rise in later-stage venture valuations and the volatility of the equity markets, investors are increasingly interested in investing in early-stage companies at more attractive valuations. Investing in high-growth businesses early could lead to multi-bagger returns for long-term-oriented investors.