The recent public and private market fluctuations are giving everyone whiplash. 🤯
To get a sense of where things stand today and what the next couple of quarters behold, this week I spoke with a handful of VC colleagues ranging from Seed funds to Tier 1 multi-stage firms to traditional growth firms.
The TL;DR: today’s market represents a healthy cleansing of the ecosystem and a reset on the expectations for fundraising, valuations, and growth metrics needed to build a sustainable startup. This pullback will make way for breakout companies to face less competition for talent, customers, etc.
While many startups FOMO’d others by raising hefty rounds at inflated valuations, you can’t buy product market fit and those that didn’t properly define it from the start will struggle:
- At the early stage, many companies may be broken with too much money, too high a valuation, and no GTM or business model fleshed out.
- At the mid-stage, there’s an existential question of whether companies can maintain growth plans at a reduced burn (so that they have more time [and a chance] to grow into their valuation).
- And many late-stage companies will need to execute perfectly and conserve cash (for ~2 years) in hopes of having a chance to raise a “back to reality round,” which will be significantly down or flat, at best.
- Many companies from each category will outright fail. But those with long-term thinking founders will soon be rewarded.
🤔 What’s going on with VCs?
- They’re in portfolio triage mode. Many firms overdeployed (too much capital, too quickly, at too high prices) and now they’re scrambling to monitor portfolio companies’ replanning efforts, determining where reserves will be needed, and pushing some companies for a sale.
- They’re reviewing how portfolio companies performed in Q1 and keeping a close eye on how Q2 is shaping up.
- Specific Partners may be nervous or licking wounds given how bad their particular deals have fared.
- They’re looking for new market pricing signals.
Advice for Series B and C Raises
Wait to fundraise, if possible. It’s going to take a few months for growth VCs to understand the “new normal” for pricing. It’s still up in the air if a teens multiple on a NTM ARR basis will be the new norm!
However, if you must raise now, perfection is critical. Have your metrics and story in order, don’t miss a quarterly sales target mid-VC conversation, and be realistic about what public market multiples have done to valuations.
The positives of less FOMO rounds are that if you were in an overlooked space, but with killer efficiency metrics, now is your time to shine. VCs will be forced to look beyond glitz and glamor, and spend more time diligencing to hopefully build appreciation for your business and market.
Advice for Series A Raises
The window between Seeds and As was so compressed, that Series A leads were taking almost the same risk, but at skyrocket valuations in comparison to Seed VCs. This was unsustainable and now investors have slowed way down at this stage particularly.
The $15M — 20M Series As from the past couple years are reverting to $10M rounds at reduced valuations. Take this as a good thing and use the smaller rounds to enforce discipline in scaling your go-to-market and maintain optionality.
Advice for Seed Raises
Seed still seems business as usual for now - both in terms of pacing and pricing. As Series A compression starts to become more pronounced, it seems apparent that YC-style Seed valuations won’t make it.
At this stage, be deliberate in your go-to-market. While PLG has been all the rage, really analyze the type of customers you’re trying to monetize. Many SMBs are going to tighten their spending (or disappear outright), creating an opportunity to go upmarket where your startup’s cost savings / efficiency play could be well received by Fortune 500's relative to incumbent or homegrown solutions. Note that selling into big enterprise isn’t for everyone on day one, as it requires a more robust product offering to handle their scale and security needs. But given the expected environment, your product may fare better selling into big tech as a start then, as opposed to SMBs which will likely churn.
These next 12–24 months will be tough even for the best companies. However, startups that make the tough decisions today and act with a long-term view in fundraises will find themselves able to build an enduring business.
As proof it’s not all doom and gloom, and that solid businesses with fair valuations are doing well, I’m happy to share that in the last quarter, Work-Bench’s existing portfolio companies completed the following fundraises, all at markups:
- Two Series A
- Two Series B
- One Series C