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Well, it’s happening.
Ever since shares of major tech companies like Block Inc., Peloton Interactive Inc., and Robinhood Markets Inc. began to fall off a cliff last fall, investors have wondered when the pain would trickle down to early stage companies. I saw something last week that made it clear to me the market has turned.
A seed round in a strong company repriced at 15% below the prior valuation…while the deal was still in progress! This despite no new information from the company.
A year ago, this would never have happened.
But that’s what it took to bring in the money the company needed. That valuation drop came with another $1 million in capital from a new investor.
In this more difficult fundraising environment, the companies I see as most at risk aren’t those who accept slightly lower valuations. It’s companies that didn’t take advantage of the hot market to build a war chest.
Late last year and even into 2022, I’ve seen some startups raise just 8-9 months of runway. The standard is 12-18 months.
In a hot fundraising environment, I think companies should’ve raised 24 months worth of cash or more. But some startups only wanted to sell a smart part of the business now, confident they could get a higher price in the near future.
Those rosy predictions are looking less and less likely.
So where does that leave a company that didn’t raise while the raising was good? Undercapitalized and heading into a harsher fundraising environment where they may not be able to raise at all.
Throughout the boom, I passed on companies that didn’t raise at least 18 months of runway. And now I’m glad I maintained that discipline.
Long term, I see a solid outlook for early stage startups with ample warchests. Many companies in my portfolio are growing revenue over 20% a month, regardless of turmoil in public markets.
But for companies that thought the good times would last forever, the future is hardly as bright.
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