How did the current market affect Startup valuations at the pre-seed and angel stage?
The current market dip means uncertain times for startup companies. Unprecedented financial times are always something to consider with a startup. Figuring out how to navigate turbulent markets at a pre-seedand angel stage can be difficult. Successfully navigating through downtrend markets can feel impossible when you must sell investors your startup’s ideas in a competitive environment. How does a downtrend market affect valuations, and how can startups adapt to boost investor confidence?
Let’s look at how downtrend markets affect the pre-seed and angel stage and what can be done to navigate through it.
Pre-seed and Angel Stage Valuations
and seed stage, not so much. When there is a market dip, there is no denying that valuations will suffer. And although there are a lot of fluctuations amongst more established startups looking to grow bigger, pre-seed and angel stage valuations are looking a little different.
There is marginally more optimism for this stage of financing startups. Some experts would even go so far as to say that things are “business as usual.” Here at the 200 Billion Club, our funding rounds are currently opening and closing as normal for these startups.
There is a logical reason why pre-seed and angel stage valuations remain the same when a market is dipping. While more established startups in the later stage of development are evaluated on their revenue potential, pre-seed and angel startups are evaluated on an investor’s belief in the team. This belief extends to the vision of the company. Investors base their valuations on belief rather than hard metrics like more established companies making these early-stage startups much less sensitive to market conditions.
However, this doesn’t mean that their relative immunity will remain. Startup deals are happening worldwide. Despite the current viability of these startup deals in the market dip, stable valuations could change soon. No business is entirely immune to a market dip, and pre-seed and angel startups will feel the pinch. While they are measured on a different “scale” to startups in various stages, investors do expect financial returns from their investments.
An anonymous UK angel fund investor says that pre-seed are beginning to be hit by this market dip. The UK-based company says that angel investors are beginning to ask for 20-25% decreases in their valuations.
So while there is a buffer for early startups’ valuations, we will undeniably start seeing these decline. Knowing which sectors are more severely affected by the market dip can aid in developing a business strategy to strengthen the valuations of pre-seed and angel stage startups.
Sectors Affected By Market Devaluations
A useful bellwether for early-stage startups is to look at trend in valuations of their later stage counterparts. As valuations are affected more directly and intensely than newer stage deals in these current market conditions. Comparing valuations based on a startups sector becomes a useful tool.
Currently these decreases in valuations are trending toward consumer-facing businesses. .
For example, companies like Deliveroo and DoorDash.com have drastically seen their share prices tank. These startups are looking to raise growth stage capital in the next quarter. But in shifting perspective from a founder to a late-stage investor, you wouldn’t want to be throwing cash at a delivery company with a high valuation from a previous round in this dipped market. Valuations from Q4 of 2021 have tanked by 60%.
In addition to customer-facing businesses, B2B SaaS companies are also looking at some uncertain times ahead.
So what are the surviving sectors we are seeingin the current dip in the market? Experts agree that technology-based companies, particularly deeptech, are a good option for investors to bet on in dipping markets.
Marcin Hejka, the co-founder, and general partner at OTB Ventures specializing in deeptech investments, says that market downturns are the best times for enterprises to begin improving efficiency. This cannot happen without deeptech in this digital age. The deeptech space is possibly the least impacted part of the venture capital market, according to Hejka.
Companies with technology components are shown to increase their valuations, despite the dip in the markets. Consumers search for solutions in market dips, and investors can identify the sectors that offer these more efficient services.
How to Successfully Navigate a Market Dip
The question is, “What should founders do in the face of an economic downfall?” The good news is that founders can do something despite the uncontrollable nature of a market dip. Leaner companies with strengthened processes are more likely to weather dipped markets and grow more efficiently after a market dip.
We’ve seen many venture capitalist telling startups to start downsizing and focusing on efficiency rather than growth. This will strengthen their core business in the face of a downturn and make sure that one they can survive and two have a stronger position when capital is available again.
However, this isn’t always the most viable option. Searching for common trends in a company’s sector will help you establish how to recalibrate your goals for a new lower valuation environment.
As multiples become lower, companies can establish how much increase in annual recurring revenue (ARR). They need to make to reach the same value as their last valuation round.
With a target ARR in hand, it is time to evaluate if the business is growing efficiently to reach its financial and growth goals.
Burn multiples of your company are defined as the cash burned divided by the net ARR added. Burn multiples are a metric that you can evaluate every quarter and track closely to stay on plan. Burn multiples are the metrics that are more easily controlled when there is market turbulence, and you need to reach specific financial goals.
Additionally, you need to be aware that fundraising and capital become more uncertain in turbulent economic times and more expensive. This means that you must carefully watch your cash balance and manage any runway your company may be experiencing before it gets off the ground. Adjusting spending and hiring can go a long way to ensuring that you have a viable business in a market downturn and after.
Businesses that focus on surviving market downturns will reap the benefits of their efforts. Markets are cyclical, and the companies that can survive this evolving nature will often see an increased market share with massive growth opportunities thanks to efficient operations.