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

“Expand your runway” has been the loud and clear mandate VCs have given their portfolio companies since the crisis began in the spring.

Guidelines on the amount of runway – how many months a startup can operate before running out of money – varied, but general advice ranged somewhere between 18 months and 36 months.

Investors hoped that, during that time frame, the startups would grow their pandemic-era valuations sky high and therefore avoid resorting to the dreaded round.

But valuation multiples may have fallen too far from their 2021 peaks for many late-stage companies to reach their latest valuations as quickly as investors initially hoped. That’s according to calculations by PitchBook using valuation data shared by IVP, one of Silicon Valley’s oldest VC firms.

Ajay Vashee, general partner at IVP, said he sees high-quality companies trying to raise funds at levels drastically below the median obtained at the height of the pandemic.

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

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

While some startups are open to accepting a 15k ARR multiple, these are mostly companies that last raised in 2017 or 2018 and therefore won’t settle for a lower valuation, Vashee said.

“Companies that have raised 100k ARR are not yet back in the market. They have runway years and are trying to figure out how to grow into a late-round valuation,” he added.

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

At current revenue multiples, the hypothetical startup would have to grow 100% annually for about two years to break even at its 2021 valuation, according to PitchBook calculations using a 2017 multiple observed by IVP. The required runway jumps to another five years, or until the end of 2027, for companies growing at 40% annually.

Although Vashee did not discuss the growth rates of IVP companies, Miguel Luinha, managing director of fund investments at Hamilton Lane, said some of the company’s managers told him that some of the late-stage companies’ key annual revenues have seen revenue growth. dropped from 60% to 40% in recent months.

So when will companies need to raise more capital?

While about 80% of IVP companies have more than two years of runway, some of those companies are likely to return to the market later this year, Vashee said. “You don’t want to grow with just a few more months of runway left.”

Given all this, even healthy growing startups are likely on the downhill course if they raised at an elevated 2021 valuation. For late-stage VC-backed companies, the severity of that outcome will depend on their revenue growth rates and whether and how much tech stocks recover from current prices in the coming months and years.

Featured image by heichli/Shutterstock

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