Patrick Trümpi auf LinkedIn: Why is the current economic situation so difficult for start-ups and… | 19 Kommentare

Why is the current economic situation so difficult for start-ups and scale-ups that grow mainly through investment rounds?

Let’s look at an example to illustrate this

Our example software startup raised a 20 Mio. (Series A) in December 2021 at a valuation of 70 Mio.

Back then, the startup probably raised that round with around 1 Mio. in annual recurring revenue (ARR)

That was possible because the most important factor to estimate the valuation of a company is the annual recurring revenue (ARR)

VCs take that revenue and multiply it by a number (called the “multiple”) to determine the valuation. Back then, those multiples were up to 120. Insanely high. The market drove those multiples through the roof, especially in case the growth rate of the startup was also very strong

The multiple for our startup above was: 70 Mio. (valuation) / 1 Mio. (ARR) = 70 (multiple)

As I said, that was realistic 6 months ago

What changed in the past 3 months?

Those multiples crashed from 120 to 10 (or with a really good growth rate a maximum of 20)

Suddenly, in a matter of months, the startup is valued at 10 Mio (1 Mio. ARR * 10 multiple)

That might still be ok in some circumstances

But not if you plan to raise another round (Series B in this case)

If your valuation is at 10 Mio, you cannot really raise money. Raising a round below the current valuation (called Downround) is not an option because the percentages you give away from the company are going to be really high and the current investors are going to lose.

This circumstance blocks the owners from raising more money now and in the near future

How can the startup be saved?

With the current multiples of 10, the startup needs to get to 7 Mio. in ARR to be equally valued as of December 2021

That will be really hard

Growing from 1 Mio to 7 Mio ARR can easily take 2 years

So either the startup can sustain for as long as it will reach the 7 Mio. or the economic situation improves

Only the first option is a safe option