falling investments, except in the seed phase, Financing for growth

By announcing that it would cut 12% of its workforce at the beginning of the year, virtual events platform Hopin set the (new) tone in the startup ecosystem. For several weeks, layoff plans multiplied in Silicon Valley as technology stocks plummeted. “The US market always reacts very quickly,” notes David Sainteff, a partner at Global Founders Capital, a venture capital fund that invests in seeds.

And it’s not over. According to Pitchbook, “The situation has changed a lot in the first quarter and the venture capital market is still not feeling the full impact.” For now, it is mostly “late-stage” start-ups that are affected. The number of mega seed rounds (over US$100 million) is becoming scarce around the world.

lower ratings

“Advanced-stage investors are becoming increasingly selective. And instead of betting on five startups, they only bet on two or three of them”, observes Salomon Aiach, investor at Earlybird, a German venture capital fund. Funds that sign big tickets like Tiger Global, Coatue or SoftBank suffer big losses and prefer to turn to smaller fundraisers that can bring them big in the future.

Another consequence of the drop in tech stocks: startup valuations are falling for the most part. “There was valuation inflation in 2021. We shouldn’t expect to see those levels again anytime soon,” said Jérémy Nakache, a partner at Marlin Equity Partners, a US investment fund.

To achieve unicorn status, the valuation multiple for a software startup (SaaS) is now five, up from twenty at the end of last year, according to Craft Ventures. This drop is spreading at different stages of maturity, especially in series A. But I don’t feel comfortable paying as much as during Covid”, explains Salomon Aiach.

reduce costs

In 2021, start-ups raised millions in pre-seed or seed… without a product, just a Powerpoint! To get up again today, a few “slides” are no longer enough. “Investors are increasingly sensitive to metrics. Only start-ups that show strong signs of revenue and margins will be able to increase,” says David Sainteff.

Those who will take time to refinance or who will not be able to do so have little choice: to save money. Investors are asking their start-ups to spend less and less quickly. Quite unlike last year! In the United States this translates into mass layoffs and in Europe into less expeditious measures.

“We tell our start-ups to be careful with their money, to review their recruitment, marketing acquisition and international deployment plans. It’s better to show local traction than attacking multiple markets,” emphasizes Salomon Aiach.

the priming resists

Only start-ups that raise seeds are saved at the moment. “There will always be very good founders. And it is in times of crisis that we see the most innovative projects emerge”, recalls David Sainteff.

According to Pitchbook, the valuation of a seed start-up was $11.5 million in Q1 2022, compared to $8.5 million at the end of 2021. insane prices because it invests in a team and in a market size”, confirms Salomon Aiach.

Last consequence of this correction: the increase in disposals. But not for everyone. “The big software players are focusing on their business and are less aggressive in mergers and acquisitions. But mergers and acquisitions between startups, which are usually done through stock exchanges, are accelerating. It’s quite healthy because it restructures the verticals”, emphasizes Jérémy Nakache. It’s shopping time.

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