A Framework for Navigating Down Markets
The market has taken a downturn, and every other blog or tweetstorm seems to offer the same general advice: conserve cash, extend runway, shift from focusing on growth to focusing on efficiency. We’ve advised many of our later stage growth companies through market ups and downs, and we’ve realized that, when the market dips, founders crave advice that goes beyond the platitudes and provides a tangible framework to quantify the magnitude of the change in valuations and what it means for their next round and charting their future course.
In this post, we go through the diagnostic framework that we use when we sit down with founders: reevaluate your valuation, understand your burn multiples, and build scenario plans.
We start with quantifying how valuation multiples have changed (your valuation multiple is the ratio of your valuation to revenue). Here, public markets provide the best basis for recalibrating private growth valuations because public markets tend to see the effects of decreased valuations first. For instance, in the current market (as the graph below shows), median public company software valuations have dropped from 12x forward revenue to 5x or less since highs in October 2021, representing an almost 60% decline. The same goes for fintech and consumer internet companies, which are also down over 70-80%.
However, the impact on venture markets will not be clear until data for the coming months and quarters filters in, and even then, many deals announced in Q2 were likely priced in Q1. In other words, it can take 6+ months before we see what impact the public market downturn has had on venture funding.
