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Monday, March 23, 2020

Startup Valuations in Recessionary Environment

Just 1+ mth ago back in early feb,  I was noticing that startup space esp early startup space, (Early meaning Series A , Seed space) seems largely living in lala land where valuations don’t seem affected by slowdown or is anyone worried about the spread of coronavirus.

Now the situation in my assessment should and will change  as the entire world economy is whacked big across the board and for the foreseeable future.

The funny thing is I still see startups thinking of valuing based on revenue or profit multiples that are totally out of whack with listed comparables. Here are some facts:

1) crazy guy in the room giving crazy valuations is in deep crap themselves having to sell prime assets now to redeem debt and show value. So no more crazy vision fund bets distorting market. And there is no one to replace them. 

2) loss making Uber is now worth about 6-8 times 2019 revenue high. i suspect if we use real revenue on grab and gojek they are really worth 40-50% less than last round which is validated by what secondary sales is showing. 

Slightly loss making grub hub is worth about 2-2.5 times it’s revenue. Saas which should benefit has also seen a rerating with profitable salesforce being valued at ps ratio of 7. The list goes on and the revaluation has happened and is not done.

So what to make of all this? Private Startup valuations should at least fall 20-30% just to follow market comparables. Add another 10-20% if you are not profitable or dominant in space. 

That brings us back to startup seed valuations at S$2m-4m or so. Or back to 2010-2013 levels which makes more sense. Series A should adjust accordingly. And maybe quick path to profit should be an indicator too. 

PE ratios back in 2002-2010 used to be 8-15 times for tech plays depending on strength of business. Go do the math..

This is not a sell serving article because I stand to lose a lot more if valuations go down than up having already invested in 31 startups and 7 VCs. We still intend to invest in 3-4 more startups this year and have already done 1 new investment and 3 follow on this year in engagerocket, worq and rara delivery.  For us it’s about backing founders. 

My goal is to tell founders to not live in lala land any more and don’t count on getting any easy outside money if this situation prolongs another quarter. And if you do survive, know that your business is probably worth a lot less than you think now. All this should generate actions on your part and behavioral change. I hope I am wrong and we get a V shape recovery 2nd half.. but we don’t plan on hope...

The only little silver lining is some VC at A and B rounds have dry powder. (Provided no pulling of LP capital. Not likely right now but we never know.) so this is a time to know if your VC really support you or not on cash infusion or loans.

Another positive note is that founders should also remember that many successful businesses grew out of tough recessions and were built with little or no early investor money. Building a profitable business in a recession strengthens your efficiency and mindset. And once you have a high quality profitable business, there will be lots of ways to monetize your hard work when the upturn comes!

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