By announcing that it will reduce 12% of its workforce at the beginning of the year, virtual event platform Hopin set the (new) tone in the start-up ecosystem. Within weeks, job layoffs in Silicon Valley increased, as a result of the dizzying decline in tech stocks. “The U.S. market has always responded very quickly,” said David Sainteff, partner at Global Founders Capital, a venture capital fund that invests in seeds.
And it’s not over yet. According to Pitchbook, “the situation changed significantly in the first quarter and the venture capital market has not yet felt the full impact”. So far, it’s mainly “final stages” that start-ups are affected. The number of mega seed rounds (over $ 100 million) is dwindling around the world.
“Late stage investors are becoming more selective. And instead of betting on five start-ups, they bet on just two or three of them, ”said Salomon Aiach, an investor in Earlybird, a German venture capital fund. Funds that sign big tickets like Tiger Global, Coatue or SoftBank suffer huge losses and prefer to go back to smaller fundraisers that could bring them big in the future.
Another consequence of the loss of tech stocks: the valuations of start-ups are falling for the most part. “There was inflation in valuations in 2021. We should not expect to see these levels again any time soon,” said Jérémy Nakache, partner at Marlin Equity Partners, an American investment fund.
To achieve unicorn status, the valuation multiple for a software (SaaS) start-up is now five, up from the twenty end of last year, according to Craft Ventures. This decline spreads to different stages of maturity, especially in the A series. But I’m no longer comfortable paying as much as it was during the Covid era, ”Salomon Aiach explains.
By 2021, start-ups have amassed millions in pre-seed or seed … no product, just a Powerpoint! To lift again now, a few “slides” are no longer enough. “Investors are becoming more sensitive to metrics. Only start-ups that show strong signs of revenue and margins can rise, ”David Sainteff said.
Those who take the time to refinance themselves or fail to do so have little choice: to save money. Investors are asking their start-ups to spend less and faster. Opposite of last year! In the United States, this translates into mass layoffs and in Europe in less rapid steps.
“We tell our start-ups to take care of their money, to review their recruitment, marketing acquisition and international deployment plans. It is better to show local traction than to attack certain markets ”, emphasis Salomon Aiach.
Resistant to priming
Only start-ups that raise seed are left so far. “There is always a very good founder. And it’s 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 is $ 11.5 million in the first quarter of 2022, compared to $ 8.5 million at the end of 2021. “With seed, you can always pay insane prices because you’re investing in a team and on a market size ”, confirmed Salomon Aiach.
Final result of this correction: the increase in disposals. But not for everyone. “The big software players are focused on their businesses and are less aggressive with M&A. But mergers and acquisitions between start-ups, typically done through share exchanges, are accelerating. It’s pretty healthy because it restructures the verticals, ”Jérémy Nakache underlined. It’s time to shop.