The startup investment market has changed. From the hottest year in early-stage venture capital history to a time of pessimism, how did we get to where we are today?
The following summary of TechCrunch coverage seeks to answer that question. We start with a series of historical stories starting last December, going through the beginning of the year until we reach the latest data from the VC ecosystem. Then we end with stories that have some advice. It sounds good ? Let’s go.
How we got to today
The shift in the market began last year, when stock prices plummeted, leading TechCrunch to wonder if the ground was shifting under startups’ feet.
The era of ultra-rich software valuations may be over (December 2021)
After the venture capitalist goat rodeo of 2021 – companies were raising two or even three times a year – it came as a surprise when public markets started to turn bearish while the private market was still in bullish mode. Our question ended up being answered with a resounding yes over time.
By January, it was clear that something had changed. Now our question was how fast and where the damage would land. Startups can operate outside the bounds of public market sentiment, but the wider the gap, the less likely such different centers of gravity can hold.
Alex Wilhelm reviewed data from Kruze Consulting to understand how startup growth rates were changing and what venture capitalists expected in terms of revenue performance before lifting a particular round. The essential? Things in January were still very hot. We include this particular entry to remind ourselves that while the pullback is clear, even during the market correction there were signals pointing the other way.
3 views: How should founders prepare for a drop in startup valuations and investor interest? (January 2022)
TechCrunch set to work to understand how the startup fundraising market was changing. Data for the first quarter of 2022 ended up being somewhat fine, but the damage accumulates more as the quarter progresses. In January, it was still hot, even though the rumblings of uh oh were starting to accumulate.
This is not a startup calculation, this is a re-correction (February 2022)
Back in February, our own Natasha Mascarenhas was already beginning to name the market shift, relying on the phrase “recorrection.” It was a witty way of noting that we were going through a correction of a correction. First, startups hit the brakes when COVID landed and the economy froze; then, as 2020 and 2021 progressed, they corrected their stance toward peak burn and peak growth. By the second month of the year, it was clear that a new behavioral adjustment was making its way through the market.
So how much have things changed?
We have a lot on this topic, so we picked and picked a little. The following should provide a good overview of our recent work to understand exactly where startups and their backers stand today.
It’s the pivotal season for young shoots (March 2022)
Layoffs can be one of the clearest signals that a startup is under duress, but it’s not the only one. In this article, Natasha discusses how early-stage startups are pivoting — before the cuts — to be more cash-efficient, revenue-focused, and risk-averse.
Natasha wrote about the mixed messages in the startup world right now: early-stage investors are getting more disciplined and cash-rich, but at the same time early stage investors are getting there sooner. Investors push founders to be skinny, but at the same time offer them $10,000 to take the PTO for a week and try their hand at entrepreneurship. The article examines how shifting priorities could force emerging fund managers to change strategy (or fragment their path to failure).
How much has late-stage venture capital slowed down? (April 2022)
The changing pace of the market is no joke – so TechCrunch has been busy trying to sort through the commentary data, seeking to draw a more accurate picture of the new normal. The bottom line is that late-stage trading is going through a seismic shift, while the other levels in the starter series are a bit more stable, if not quite healthy.
Part of the market shift regarding the value of startups and their recently publicized brethren is the fact that many concerns received earnings multiples that did not match their actual earnings profile. By this we mean that some software companies were rated as SaaS companies, even though they weren’t. Watching these companies unravel billions in valuation has been a lesson that during hot spells many companies will get a valuation that is actually a bad fit. It’s just to notice that early this is the hardest part of the investment game.
We have seen new highs reached over the past few years and now valuations are falling. Alex Wilhelm looked at Carta data to see where. Boot cycles decreased by approximately 5% from Q4 2021 to Q1 2022. Series A and B decreased by approximately 25% and 8%, respectively, from Q3 2021 to Q1 2022.
Finally, a few notes on what to do in this changed world.
If it came down to this, would you pay to play? Now they are back as the economy begins to change and investors are once again faced with this question. Steve Blank explains why a founder would agree to cram down – and advice on what he could do instead.
If you’re not good at budgeting, it’s time to learn for the good of your startup. Marjorie Radlo-Zandi explains the importance of making sure you have enough money to fund your startup. Your lead will vary depending on the industry you’re in, but Radlo-Zandi walks you through how to calculate that number and what to do if you get lost.
Walter Thompson takes a timely and honest look at what worries investors in today’s market. As he notes, Carta says the number of seed deals funded between Q4 2021 and Q1 2022 dropped by 41%. Dollar volume also fell from $2.62 billion to $1.81 billion, a 31% decline. The survey gathers insights from investors including 500 Global CEO Christine Tao and Maveron partner Anarghya Vardhana to understand what they are looking for when dollar tranches get smaller.
What am I now? (April 2022)
This is probably the question on everyone’s mind right now. As public market values are reduced, how does this impact the startup community and, more importantly, you? This article includes an applicable valuation framework and other factors that may affect your price. Depending on where you are, today’s moment can be a refresh, a reset, or a full reckoning.