Navigating tough times
Author: Iva Rakocevic — Associate Partner
After over two decades of a bull market run, we have been facing a downturn. Companies are struggling, inflation and rising interest rates, energy prices, changes in consumer habits, and in general global instability have influenced it all.
Both crypto and private markets are declining, which makes some entrepreneurs and investors think that we are approaching something like a dot-com crash that might last for the next two years. With no soft landing, valuations are compressing as the interest rates increase. The fundamental valuation reset and rapid market adjustments are massively affecting the venture market as well.
“To justify $1 billion valuations, a cloud unicorn today would need to plan on doing $178 million in revenues in the next 12 months if you apply the current median cloud software multiple (5–6x forward revenue).”
Following public market adjustments, it is becoming incredibly difficult to justify a single-digit unicorn valuation.
What is the new reality in venture?
VCs are aware of the fundamental reset and will be very selective when it comes to new portfolio companies, using new metrics and similar multiples from the leading public companies in the respective sectors.
With the recession coming in the next months, there will be less capital allocated to venture. We might think, that VCs are under pressure to deploy money already raised, but knowing that the pace of deployment over the last two years was so fast, the majority already deployed almost everything, leaving the last pieces to support their existing portfolio companies. This is also supported by the fact that VC funding dropped 20% quarter over quarter in Q1 this year.
There is so much uncertainty in the economy right now and most investors are awaiting clarity to be certain about making an important decision.
What is the new reality for entrepreneurs?
In such an environment, getting capital becomes more uncertain and expensive, which makes the fundraising process long and challenging. This puts additional pressure on founders to carefully watch their cash balance and manage their runway. It’s been advised, that if you have an option of not raising capital and still growing 2x, it’s meaningful to extend the runway and show capital efficiency. However, if you still do need to raise, be fast, take what’s available, correct the valuation and adjust to ensure at least 30+ months runway.
Re-evaluating your valuation might be a lifeboat. As the public markets experience decreased valuations, it is worth getting a rough estimate for the change in your valuation, by comparing public companies in your sector.
Metrics, in particular, burn multiple, and when under control will properly guide you on how to grow efficiently.
Why recession might be good?
The current reset is healthy and much needed for the ecosystem, where everyone will take time to make thoughtful decisions, do meaningful work and develop deeper relationships.
It’s actually a great time to build a company! Remember that some of the most iconic companies were born during the recession (Google, Amazon, Airbnb, etc). It is a great opportunity to win in the new market conditions, showing that you are more resource-efficient, adaptive and have a longer runway to the public markets.
Knowing that very early-stage companies are most recession-proof, we expect to see many founders starting transformational companies today!
At Kavedon Kapital, we remain founders focused and very excited about what you have been working on! Drop us a line, if you need help navigating the current circumstances, or let us know if you are winning the game in such a difficult environment.
Either way, we are here to help.
If you are an Investor realising the importance of switching to a Venture Capital model built on Circular Economic principles, get in touch with us to learn more about how Kavedon Kapital can help.
Our deal room is also open, so all high tech early stage Founders please head over to this page to submit your deck.