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 2024. 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.
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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.
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.
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.
There is a long list of reasons that a startup to 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.