What Does Tech Startup Investment Look Like, Post-COVID?
Since the Great Recession, a macro-level bull market has corresponded to a certain set of criteria for VCs. Growth above all else. Users now, revenue later. Cash spent is irrelevant, only top-line growth matters. Founders matter and nothing else does. While some of these principles will likely remain cornerstones of venture investing – nobody invests in low-growth companies or B- teams – a new set of criteria seem almost certain to emerge in the coming months that will define great startups.
You can’t control whether your founding team gets an A or an F grade from investors. You can’t control what market you’re in. But here are some things that VCs will be asking about that may never have seemed like critical factors previously:
Capital Efficiency – How much did you spend to hit your current revenue level? How much capital will it take for you to hit the growth targets you’ve laid out? Typically, CAC:ACV of 1:1 is a good number, so you should be boosting revenue by somewhere near the amount you’re raising, and you should have sold almost as much as you’ve spent. If this ratio is far off, investors are going to have questions. Growth at any cost is less acceptable when capital is tight.
Revenue Multiple/Valuation – When public market SaaS companies trade above 15x annualized revenues, investors are less valuation sensitive. They know that hitting your numbers will mean an appropriate risk-adjusted exit is in the future. But if public markets condense, that likely will mean exit multiples condensing. And if an investor is only going to get 6 or 8x revenue when they exit the company, they sure as heck don’t want to be buying in at a 16x multiple – that’s a great way to make no money on a company that’s grown successfully. Expect to have conversations
Breakeven-Scenario Growth – Your investors have heard that with the large round you’re raising, you can sustain 100-300% growth for the next 18-24 months, and that your capital will last that long assuming you hit plan. But what if you raise far less than you expect, or can’t raise at all? What does the company’s growth potential look like if forced to operate at breakeven? Is this even possible?
No Growth Runway – If all new sales stopped tomorrow because your customers’ purse strings tightened, how much would the money you’re raising last you? Is it long enough to wait out an external shock to your industry and survive until the rebound? Or does your plan to survive for 12-24 months count on an aggressive growth plan to keep the company afloat?
The state of the post-COVID fundraising world remains to be seen. But in order to be prepared for an ’09 market as well as a ’19 market, the above factors need to be top of mind.