According to one of the top venture investors, Fred Wilson, startups are going to have a tough year in 2023. It’s definitely going to be a lot tougher than late 2020 to early 2022. But Mr. Wilson said in his post that the startup valuations are heading back to 2015 where where seed rounds were done around $10mm, A rounds were done around $15mm to $25mm, B rounds were done around $25mm to $50mm, and growth rounds had a cap at 10x revenues. And, that is assuming companies who are raising have achieved product market fit. Companies who do not have product market fit won’t be able to raise and most of them will fold.
The current predicament for startups is partially self-inflicted. Both investors and founders got less disciplined in the past few years. People raised too much money at outrageous valuations and subsequently spent the money too quickly without showing proper progress. We had unicorns like DataRobot which got a $6B valuation with <$150M ARR!!! and is now imploding. This mania was partially fueled by the cheap money available. But now we are in a new era where cost of capital is a lot higher and valuations are being weighed down by the gravity of normalized 4-5% interest rates.
I feel it’s a bit silly to make this prediction. It’s like predicting a hangover after consuming too much alchohol at a fancy party the previous night. But here we are. The party is over. We must deal with the aftermath. It’s not going to be pretty but great founders will make it work and get a lot done with less. I am looking forward to their resourcefulness.
Will the IPOs come back? I believe we are going to see some IPOs in 2023. Many late stage companies issued RSUs with a 10-year expiration so they are going to IPO for their employees albeit with a lower valuation. Instacart is probably going to pull the trigger this year but its valuation will be a fraction of their $39B valuation in 2021. Their most recent 409A valuation was already down to $10B. Instacart is currently facing many headwinds such as high interest rates, high labor costs, inflation and competition from DoorDash. If they can IPO at $10B, I would think that is a very good outcome.