PitchBook tracks and writes about a variety of data points in the venture capital industry, from the money companies collect to the fundraising activities of venture capital funds.But perhaps no dataset has attracted as much interest as our readers Start-up valuation across the risk life cycle and in different departments.
To outsiders, startup valuations may seem like a mystery. While many investors will tell you that valuing a company is both an art and a science, they are often able to explain why a particular valuation is reasonable and fair.
But in recent weeks, many venture capitalists, especially those investing in late-stage companies, have said they no longer know how to measure enterprise value in private markets.
(Courtesy of Red Dot Ventures)
“You don’t know what the price is when you’ve got so much volatility in the open market [of a company] One week from now.It’s hard to figure out,” said Tomasz Tunguz, his managing director Red Dot Ventures He also writes a blog focused on SaaS metrics and valuation.
The S&P 500 recently tumbled into bear market territory, global supply constraints that emerged during the pandemic are still raging, the Russian invasion of Ukraine is still dragging on, and the Federal Reserve has announced aggressive rate hikes to rein in inflation at the highest levels since the 1980s.
Amid all this volatility and uncertainty, however, one thing is clear: If a startup has raised money in the past year or so, it may now be valued well below the valuation it received in its last funding round. value.
For example, the median valuation of a public software company has fallen from 12 times forward revenue to 5 times or less since peaking last fall, a drop of nearly 60%, according to one estimate. Anderson Horowitzof publications in the future. Valuations in other sectors also fell.
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As startups are growing faster than their public counterparts and competition to get into these companies during the pandemic is more intense than ever, Investors are willing to pay often exorbitant prices acquire shares in these businesses.
“Valuations went from 10 times forward ARR to 20 times forward ARR, and then we went through 50 times forward ARR, then 100 times, then 400 times the hottest companies,” Tunguz said, referring to the allocation to Evolution of the valuation multiple of annualized revenue. “There’s definitely a ‘how high can we go?’ feeling.”
But now, investors and founders have to consider their recent excesses. According to the a16z article, if the relevant public company falls by 60%, there is a good chance that the valuation of the startup will fall by just as much.
At this point, we don’t know where the valuation will fall. Volatility in stocks must subside before VCs and founders accept the reset in market prices.
With financings taking up to six weeks to close, some of the financings we’re seeing now were negotiated and signed in March.
For now, deals have slowed, and rumors of withdrawing or renegotiating term sheets have swirled around Silicon Valley amid the recent stock market correction.
Software stocks could fall 50% to 60%, Tunguz estimates, but remain above historical valuation levels. In addition to higher interest rates, headwinds for the tech sector include cuts in software spending and the possibility that the Fed’s balance sheet assets sold as part of quantitative tightening will be relatively attractive compared to stocks.
Trying to raise capital during times of market volatility can be very difficult. That’s why most VCs advise startups to prioritize reducing capital burn over revenue growth.
VC-backed companies that have yet to achieve rapid sales growth and risk running out of cash in less than a year may have to raise a round of capital from exiting investors or be forced to lay off staff or make other cost cuts, Tunguz said. . Some may even be forced to sell the business. He estimates that about a third of startups will now find themselves in this situation.
On the other hand, startups with years of cash on their balance sheets or fast-growing revenue are better able to survive and ultimately attract new investment at relatively favorable valuations.
While some VCs have compared the current mood in Silicon Valley to the days of the dot-com bust, most investors I spoke with didn’t expect the downturn to be as severe for tech companies as it was in the early 2000s.
“I don’t think you’re going to see extinction events, meteorites hitting dinosaurs, like we’ve seen in the internet age. I just think you’re going to see a lot of companies have a massive slowdown in their growth rates, and there’s going to be a greater focus on efficiency, “Tunguz said.
Although no one knows how long the current downturn will last. It could be six months or a few years.
“We’ll see another significant growth after that, will technology boom again? Absolutely!” Tunguz said.
Featured image by Sesame/Getty Images
