In an ideal world, founders and investors would always agree on a startup’s value.
But as founders know all too well, it’s not perfect, and that’s especially true for startup valuations.
Valuations have received more attention than other metrics and figures for startups in recent years. As has been widely reported, startups are often overvalued after the COVID pandemic. Then, in 2023, there was a big disconnect in what startups and potential investors considered to be fair valuations, according to a report from the Emerging Companies and Venture Capital practice of the Morris, Manning & Martin law firm. This, combined with other macroeconomic trends, led to a decline in deals reaching the check-writing stage last year.
2023 saw a number of rounds where funding amounts declined or remained flat, meaning startups raised more money without increasing their overall valuation.
Temperature check: What is the status of evaluation today?
So where will we be in 2024?
Sid Mookerji, founder and managing partner at Atlanta-based venture capital firm Silicon Road, told Hypepotamus recently that “valuations are coming back to reality,” which has allowed his team to do more deals in the commerce space. So far this year, the team has written six checks, with more on the way. That’s a lot more than in past years, when Silicon Road was focused on writing follow-on checks to its current portfolio companies.
He added that it’s a supply and demand issue that’s prompting the valuation readjustment.
“There are a lot of companies out there right now that need to raise money to stay in business, but there are fewer venture funds writing checks,” Mookerjee said.
What startups need to know
So what do startups need to know to get through this period? For companies looking to raise venture capital, the key is to show off revenue numbers.
Mookerjee said venture capital firms are expecting revenue growth in 2024, so a startup looking to raise Series A funding, for example, will have to make more revenue than it did last year if it wants to hit its target valuation.
Greg Ficely, founder and president of Integra Valuation and Advisory Services, who works with startup founders through the valuation process, told Hypepotamus that while founders are “optimistic by nature” and may be tempted to chase high valuations early on, in order to preserve maximum equity, it’s often best to “raise as little money as possible and prove early traction to capture higher valuations in subsequent funding rounds.”
“Startup founders need to be well educated on how to determine a reasonable valuation when pitching to investors, which includes considering founders’ experience, the company’s market size, competition, size, stage, sector, growth, profitability, etc.,” Ficely added. “An effective valuation efficiently attracts investor capital by creating a ‘win-win’ opportunity for founders, investors, and employees, meaning each party receives sufficient incentive to continue participating in the company through a successful exit.”
