It’s a tough pill to swallow, but the entire VC ecosystem is slowly accepting that it will be a long slog to return to the peak of pandemic-era valuations.
In 2021, it was not unusual for companies to raise capital with lofty valuations, in some cases more than 100x revenue. But those days are long gone. The best companies are now valued much lower. IVP, a major investor in VC-backed companies, says premier companies are more likely to fetch valuations of around 15x annual recurring revenue.
Startups that raised capital in late 2020 and 2021 need to grow into their valuations—or face the grim reality of a down round. How long it will take them to catch up to their previous price depends on four factors:
- ARR at the time of the previous funding round
- The revenue multiple of the previous round
- A revenue multiple they could realistically fetch in the current environment
- The current growth rate
There are a couple of things to keep in mind when thinking about valuation changes:
Revenue growth rates are falling. Many startups are facing economic headwinds. An average early-stage SaaS company nearly doubled its revenue in 2021, but that growth rate fell to under 60% last year, according to data from Kruze, an accounting firm that advises companies in the VC ecosystem. Revenue growth declined even more drastically for e-commerce startups. In 2021, an average startup in the sector saw its top line grow by 84%. A year later, that rate fell to a mere 6%.
New multiples depend on growth rate. While VCs consider various company characteristics when valuing a company, no factor has as much weight as the revenue growth rate. While startups growing at 100% or more a year could be valued at 12x- 15x, slower growers will likely be assigned a single-digit valuation multiple.