A guide for founders who have run a job less than 12 months
Valuations in 2022 have fallen like a stone as the war in Ukraine rages, inflation skyrockets and the Fed tightens the screws.
Fintech firm Klarna, whose valuation fell 85% to just $6.5 billion from $45.6 billion a year ago, is an extreme example of this. Klarna’s problems also have to do with the “buy now, pay later” subsector falling out of favor, but it’s not the only one. Nearly all tech companies are seeing their valuations fall – the Nasdaq is now more than 31% below its all-time high on Nov. 19, 2021.
The pessimism of the public market also bleeds through the private market. Even early stage deals are affected; many new seed and Series A deals now value startups at about 50% less than last year.
Why make a realistic valuation?
In the midst of a global collapse, it is critical for a startup’s management to realistically assess the company’s valuation to increase its chances of securing the next round of capital or an exit through mergers and acquisitions. Tech companies that continue to hold on to their unrealistic valuations for 2021 will find it challenging to finance or sell the company and risk running out of runway.
The higher you expect your startup’s valuation to be, the less likely the deal will go through.
Selling your company below last round valuation can be painful, but closing it, firing all your employees and liquidating the assets will be excruciating to say the least.
Companies with a decent runway — say, more than 12 months — don’t need to change their valuations unless a merger and acquisition event occurs. But companies that don’t have that much cash on hand may find it helpful to reassess their valuations so they can consider more realistic financing options.
Now is a good time to lower your valuation as investors are already seeing their portfolios lose money. In fact, venture firms in the US are required to review valuations on a quarterly basis in a process called “mark-to-market.”