NEW REALITIES OF STARTUP, VC INVESTING
By Murat Köprülü
The New Economic Realities
Since March 2021, the massive restrictive monetary policy of the US Federal Reserve has ushered in an era of structurally higher interest rates globally. This historic transition to a higher cost of capital is now entrenched in the economic cycle for years to come. This naturally means all NPV's (net present values) of all companies are significantly lower than where they were only three years ago.
Implications for Startup Tech
In this uncharted environment, the premium valuations and high valuation multiples traditionally enjoyed by startup technology companies are no longer tenable. Expectations of value creation and growth in exit valuations must be fundamentally reset lower.
Rarer Occurrence of Unicorns
The net outcome is not just lower exit valuations compared to pre-March 2021 levels, but also a drastically reduced emergence of unicorn startups valued over $1 billion, with such outliers possibly becoming non-existent.
More Rigorous Due Diligence Needed
Additionally, this new landscape requires even more rigorous and intelligent due diligence by investors to identify the few startups that merit initial angel investment from amongst the hundreds of options.
Greater Investor Involvement
Obtaining a board seat or board observer role is now even more crucial, in order to have an active voice in guiding the company's governance, strategy, marketing, financial prudence, you name it.
Increased Financial Oversight
Monthly financial reporting must be demanded from founders and directors, who must be held liable for any significant deviations from projections, to ensure the business progresses as planned. CEO's must be "fireable".
The Outcome
As a result, the attractiveness of investing in technology startups and early stage companies is substantially diminished in 2023. This new economic landscape demonstrates that the premium multiples afforded to these assets over the past decade now belong to history. A further corollary to this is that entrepreneurs who show pitch decks with slides of competitors exiting at such and such multiples 3, or 4, or 5 yrs ago must be told in no uncertain terms to exit the slide.
