The past few years have been far from normal, with the global pandemic creating significant disruptions in the startup ecosystem. From my experience working with clients over the last 1.5 years, more than 50% have encountered flat or down rounds. This has led to considerable tension between CEOs and their existing investors, particularly VCs, who are hesitant to reduce portfolio valuations, as it negatively impacts how they are presented to their LPs.
After a period of rapid startup growth, 2023 saw a sharp resurgence of down rounds. However, recent data suggests that we may now be past the worst of this trend, as down rounds for Series A through Series D declined from Q1 to Q2 this year. Early-stage rounds like Seed and Series A, which peaked in down rounds early last year, have also been gradually decreasing since then.
Combining these insights with the Bessemer Cloud Index, which indicates that we are currently near the bottom of the multiples seen over the past three years, it's clear that SaaS companies, particularly startups, should start exploring alternative funding options. SAFE agreements, for example, offer a more flexible path compared to down rounds, helping protect a company’s growth trajectory while avoiding unnecessary dilution.
Key Insights from the Charts
In Exhibit 1 from Carta, the data shows that down rounds peaked in Q4 2023 and Q1 2024. Across funding rounds (Series A, B,C, D), there has been a noticeable decline in the percentage of down rounds byQ2 2024.
In Exhibit 2, the Bessemer Key Cloud Metrics snapshot from the past three years shows that the sharp decline in revenue multiples, which started in late 2021, has now stabilized. For example, the median startup revenue multiple, which was nearly 18x in late 2021, has hovered between 6x and 8x since mid-2022.
There is a clear connection between these two indicators—the stabilization of revenue multiples correlates with a reduction in the occurrence of down rounds. These charts have been instrumental in reinforcing my belief that the market is stabilizing, making SAFE agreements amore viable funding option for startups. Additionally, these lagging indicators offer valuable insights that could help predict future trends.
Recommendations for Startup CEOs
Given that the down round trend appears to be easing, here are a few recommendations for startup CEOs:
1. Explore Alternative Funding: Consider other funding mechanisms such as SAFE agreements, venture debt, or strategic partnerships. These options provide greater flexibility while helping avoid excessive dilution as you secure the necessary resources for growth.
2. Investor Relations and Communication: Strengthen transparency with both current and potential investors. Sharing updated financials and market data (such as the Bessemer Cloud Index) can help boost confidence and enable you to negotiate better funding terms.
Despite these recommendations, it's essential for startup CEOs to keep their focus on ensuring the company's ability to operate and execute its business plan. In the trade-off between valuation (dilution)and execution, the latter is far more critical for long-term success.
Based on my experience, I encourage startup CEOs to share these charts and insights with potential investors when discussing valuation and deal terms. This approach may provide more flexible funding options.
