If you’ve been reading up on startup valuation, you might have heard the line, “valuation is an art, not a science.” After all, investors consider how the business faired in the past and how it’s projected to perform. Not to mention, factors like market position, team, tech, and so many others also come into play.
However, with a new emphasis on growth valuation, businesses have been valued based on their growth potential instead of their financials or brand recognition. And this has caused major problems for startups and VCs alike.
What’s the problem with startup funding?
Startups are at their best when scaling quickly and generating large amounts of revenue. They can only do this for so long before they need to start thinking about expansion.
This is where growth capital comes into play. Growth investors are committed to helping a company grow its business and scale quickly if they are involved in financing a startup. In return, they are looking for high returns on their investments. This allows startups to hire employees, pay rent, buy materials, and buy new equipment while growing their businesses.
They may be unable to do this with their funds because they have limited experience or budget. They may not have the option to go public or sell equity to investors to raise capital either.
Jacked up startup valuation in 2021
As the economy recovered from the onset of the coronavirus disease pandemic in 2020, 2021 was a breath of fresh air for players in the economy.
For the first time, many were ready to move on and fuel up various industries that stood still in 2020. According to TechCrunch, this resulted in free-flowing funding and a rise in startup valuation.
For instance, VC funding almost doubled from $335 billion in 2020 to $643 billion in 2021. In addition, there were 586 new unicorns in 2021 compared to 167 in 2020. Though the funding seems awesome for founders, it could spell disaster in the long run.
For instance, the once-inflated startup valuation can be a big problem with 2022’s geopolitical issues, inflation rates, and normalizing tech conditions.
How VCs can help solve the problem
Venture capitalists are adapting to the changing landscape of funding for startups. They are now looking for earlier-stage investments that are more focused on a company’s growth potential. The new standard for valuing companies is based on their ability to generate revenue and grow their business.
VCs are now looking for companies with proven growth models, strong customer traction, and strong sales teams. This is a change in the investment approach. They used to only look for the best possible financial return on their investments. Now they are looking for promising growth companies that can generate revenue and achieve massive growth. This new standard for valuing companies is based on the ability of the company to grow.
Evolving investor expectations and the future of funding for startups
VCs now expect startups to be more liquid. This means they will need to be able to raise large amounts of capital from the public markets at any time. This is a significant shift in the investment approach. VCs used to only look for the best possible financial return on their investments. Now they are looking for promising growth companies that can generate revenue and achieve massive growth.
The public markets may not be able to provide the liquidity these companies need. This means venture capitalists must step in to provide liquidity for their portfolio companies.
In the end, it’s all about investors now looking to fund startups that can withstand the test of time. After all, it’s not about the art of seeing the startup’s potential anymore; it’s more on the science of what it has actually done before.
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