Even startups with lots of runway probably can’t grow into those sky-high valuations

“Extend your lead” has been the loud and clear mandate that venture capitalists have given their portfolio companies since the recession began in the spring.

Guidance on the number of runways (the number of months a startup can operate before running out of money) varied, but general advice ranged from 18 to 36 months.

Investors hoped that during that time period, startups would grow to their sky-high pandemic-era valuations and thus avoid resorting to a feared round of downside.

But valuation multiples may have fallen too far from their 2021 peaks for many late-stage companies to reach their latest valuation as quickly as investors initially expected. That’s according to PitchBook’s calculations using valuation data shared by IVPone of the oldest venture capital firms in Silicon Valley.

Ajay Vashee, general partner at IVP, said he is seeing high-quality companies try to raise funds at levels drastically below the median valuation earned at the height of the pandemic.

In 2021, the median late-stage valuation for IVP-reviewed SaaS deals was 114.3x ARR, according to a presentation the firm shared with PitchBook. That multiple expanded more than seven times from the 15.5x ARR achieved by SaaS companies in 2017. These multiples are primarily based on Series B to Series D SaaS deals that IVP has evaluated over the years. years.

“I think we’re back to 2017 levels, just like public markets are back to 2017. [prices]said Vashee. PitchBook’s VC IPO Index, which tracks the performance of formerly VC-backed companies, decreased 61.3% in 2022.

While some startups are open to accepting a 15x ARR multiple, they are typically companies that last raised in 2017 or 2018 and therefore won’t accept a lower valuation, Vashee said.

“Companies that raised 100x ARR are not yet back on the market. They have years of track record and are trying to figure out how to grow to last round valuation,” he added.

But many startups are likely to find that their runway years simply don’t give them enough time to grow in recent valuations.

At current revenue multiples, a hypothetical startup would need to grow at 100% per year for about two years to reach its 2021 valuation, according to PitchBook’s calculations using the 2017 multiple observed by IVP. The required track jumps to five more years, or until the end of 2027, for companies growing at 40% per year.

Although Vashee did not discuss the growth rates of IVP companies, Miguel Luiña, managing director of fund investments at hamilton laneHe has said that some of the company’s managers have told him that annual revenue growth for some of the key late-stage companies has fallen from 60% to 40% in recent months.

So when will companies need to raise more capital?

While about 80% of IVP companies are more than two years old, some of those companies are likely to return to the market later this year, Vashee said. “You don’t want to be breeding with only a few months of track.”

Given all this, it is likely that even startups that are growing in a healthy way ongoing for a negative round if they raised at a lofty 2021 valuation. For late-stage VC-backed companies, the severity of that outcome will depend on their revenue growth rates and whether tech stocks rebound from current prices in the next few years. months and years, and to what extent.

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