Rounds are like small life rafts on a flat sea of valuations…
…thinking they’re headed to El Dorado in 2024
Another investor said it best — all they are seeing are “rescue rounds badged as something else”.
By this they meant founders are asking for money, badging it as “scale to X target”, or “expand to Y group” …but actually the founders just need cash ASAP, to keep afloat.
Rounds are taking longer to close as due diligence and negotiations are drawn out, investors have gone back to ‘fundamentals’ (aka asking ‘what is this company really worth’), and are just taking fewer bets on companies outside of their core investment thesis. This means companies are getting more rejections, or taking longer to get funded, or aren’t getting offers at valuations they see fit.
Founders are thus going back to their existing investors, and maybe a few close ‘friendly’ new investors, to do ‘bridge rounds’. This bridge being a smaller round to take them from seed to series A or Series A to Series B etc.
A different investor said to me that all they are seeing is pre-seed internal bridges — ie pre-seed companies coming back to only existing investors (mostly angels) to get a bit of cash to get them to 2024.
Why 2024? There is a feeling, more amongst founders to be honest, that 2024 will be the El Dorado of valuations. Valuations will go back to the glory days of 2021 or at least be an awful lot ‘better’ than now. Betting on this, founders have agreed to flat rounds (ie rounds that have the same valuation they closed the last round on) to get more money in the door to stay alive…hoping they can then raise at a significant valuation uplift next year. To do so, tough decisions are being made — to try and balance slower growth with making it to 2024. Founders are cutting costs, they’re focussing their strategies and finding quick, visible wins.
But what to do VC investors love? Lean models, focussed strategies and growth as the core KPI. The net result will be to improve the companies that survive, and lose companies that can’t. However, this doesn’t also mean that 2024 will be a year of bumper valuations — because investors will still focus on fundamentals, and keeping their funds going. Fundamentals may even become more important, because actual growth will be key in a market of ‘improved businesses’.
Valuation uplifts will come, but as a result of tangible growth. Which is difficult to achieve in survival mode.
There are some nuances to that, especially for the EdTech seed investment and UK impact investment spaces that I’m focussed on, but that’s for another time.
My advice to founders would be to:
- Firstly take a step back to recognise how hard you’re working in tough times, trying to do the best by your vision and your team.
- Secondly, to see how tough times can improve your business for future.
- Thirdly, stay focussed on your core impact and growth, as that narrative will get you the valuation uplift in 2024…not some macro picture.
