TLDR:
- Venture capitalist Michael Ho discusses fluctuating revenue multiples in venture capitalism
- Startups must have a convincing growth strategy to attract early-stage funding
In a recent article, venture capitalist Michael Ho delves into the complexities of revenue multiples in venture capitalism, emphasizing the common misunderstandings surrounding valuation shifts across funding rounds. Ho highlights the importance of having a convincing growth strategy for startups to continually attract early-stage funding, as they are often valued based on future potential rather than current worth.
Ho points out that projected values in series A, B, and C funding rounds can vary vastly due to external economic factors, potentially leading to serious financial consequences if not managed effectively. Startups nearing their Initial Public Offering (IPO) phase typically operate using mainstream public company Annual Recurring Revenue (ARR) multiples, with a benchmark of around 6x ARR observed during the IPO. However, high-growth companies may command higher-than-average ARR multiples due to market conditions and growth rates.
It is crucial for founders to understand that high early-stage multiples may not continue throughout subsequent funding rounds, and adjustments must be made to align with IPO stage figures. The trend of decreasing valuations with each funding round is driven by a surge in seed capital and high multiples for pre-seed startups, creating a competitive environment among investors.
Recent fluctuations in public valuations, with the largest decline in ARR multiples in investment history, suggest that securing future funding may be more challenging for startups. Strategic planning and financial forecasting are essential for startups seeking venture capital in this dynamic and competitive environment.
