The market correction has come for the first group and start-ups
After largely unaffected by the pressure that market turmoil has put on big tech companies, early-stage startups are starting to feel the chill.
Changes in market climate often come quickly, but these trends can take some time to appear in a comprehensive data set. But the deal-by-deal evidence gives investors a good idea of which way the wind is blowing.
As a limited partner in close contact with early stage venture capital firms, Michael Kim has a particularly clear opportunity in the early stage venture capital market. His company, Cendana Capital, is a fund that supports dozens of seed companies, including Lerer Hippeau, Susa Ventures, Freestyle Capital and Uncork VC. Kim also regularly checks Series A-focused funds about their funding requirements.
His takeaway is that aggressive investors have recently taken a distinctly more conservative approach to early stage deals.
Over the past two or three months, initial deal and first-degree valuations have fallen dramatically, and early-stage investors have become more selective, focusing on startups that can achieve larger revenue targets than were required in the past.
Last year, the typical best-in-class Series A deal was raising about $20 million with a post-money valuation of $120 million, according to Kim. But recently, those volumes and valuations have slipped to about $10 million and $50 million, respectively, he said. As a result, founders accept to further mitigate the risks they have in their companies.
In addition to lowering valuations, some investors are focusing more on revenue growth. Kim said that some venture capital firms, including Sequoia, are starting to require companies to show more robust revenue before looking for Series A. A Sequoia spokesperson declined to comment.
Over the past three to four years, the minimum Series A raise has been about $1 million in annual recurring revenue. But Kim said that bar has now risen to between $1.5 million and $2 million in ARR.
“The company can’t just show it [revenue] Overnight “.
This suggests that early stage startups will need more time and capital to reach the next round of funding.
Kim said some of these companies are now beginning to ramp up seed extension rounds, helping them beat them up to raise Series A. Rollover is a microfinance that is executed at the price and terms of the previous round.
The seed stage is also seeing a significant drop in valuations, he said.
“One of our fund managers was looking at an initial round for a Mexican company, and they wanted to raise $4 million out of $25 million [pre-money] “Realistically speaking, that would probably happen at $12 million [pre-money] evaluation.”
One exception to this trend is Web3 and other initial deals related to cryptocurrency.
“In terms of coding, that’s crazy,” Kim said. We hear about $7 million in tours completed with $30 million [pre-money valuation]. “
Although coins and crypto stocks like Coinbase have plummeted recently, Kim said he expects investors to continue to integrate into Web3 projects at the early stage. Some investors may be encouraged by the fact that crypto assets have rebounded from previous recessions.
“The last crypto winter was 2018,” Kim said. “If you’ve been making investments throughout 2018, you’ve done really well.”
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