In Startup Decoupling & Reckoning by Elad Gil, the author lays out the situation many mid-to-late stage startups will be in starting at the end of 2023. Companies raise capital for 2-4 years of runway. Valuations have risen sharply compared to public markets. Raising money will be more difficult as startups that don’t have product-market fit will not hit key milestones relative to their valuation.
This reset will result in many startups either running out of cash or seeking an acquisition. With a large number of startups looking to sell, acquirers will get flooded with deal flow from late 2023 to 2024.
Update 2024-12-07: There are signs this is coming true.
- Four unicorns went bankrupt, out of business, or fire saled (WeWork, Olive, Convoy, Veev)
- Pitchbook reports 3,200 venture backed startups went out of business in 2023 who had collectively raised $27 billion
- Carta reports 2x the startups (87) who raised $10MM or more on their platform shut down in 2023
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B2B SaaS businesses targeting enterprise customers that want to be in good shape to raise their Series B during a downturn need to have a run rate of $7-10MM ARR, growing at 2-5X year over year, gross margins 75-85%, and an LTV to CAC ratio of 3-5X. That’s because multiples fell from 100 to 39 times ARR and the target valuation multiples for Series B is ~20X ARR.
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Startup Multiples Fell from 100 to 39 Times ARR in 2023
According to a recent presentation by Redpoint, ARR multiples for Series B and C companies dropped sharply from the all-time-high in 2022 (100x) to a more sober 39x, representing a 4x premium compared to public markets.
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Time Between Series a and Series B Is 31 Months on Average
In 2023, the average time between raising a Series A and Series B round increased to 31 months according to Crunchbase. With startup funding falling 67% in 2022, more startups could face a difficult time getting funding. Some predict startups will run out of cash in 2023 with the most fiscally conservative ones run out in 2025 unless conditions change.
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There is a long list of reasons a startup might fail, but running out of money is high among them. A common piece of advice for early startups is to make rapid progress towards “default alive” as in, running the business on revenue rather than relying on outside investment.
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Protect Against the Downside by Enjoying the Upside
Bill Gurley, GP of Benchmark Capital said, “The best ways to protect against the downside is to enjoy every minute of the upside.” Markets have cycles and it’s difficult to time the market. One way to protect against downside risk is to take full advantage of the upside. That way, your returns cushion the inevitable downturn.