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Valuations for tech start-ups have fallen. Why? and What does it mean?

About five months ago the market sell-off smashed valuations in the tech. sector. Angel funds felt the brunt of the lower valuations and lower multiples. Many start-ups have lost out for now.

Yolanda Redrup 1 writing in the AFR this week wrote about this trend in her piece,Tech valuation crunch hits start-up angel deals

Adrian Bunter, an angel investor and Venture Advisory executive director said that pre-seed deals that were being closed at $3 million to $4 million valuations in 2021, were now being priced at $2 million to $3 million. That’s a significant recalibration in a relatively short period.

Business person working at desk on laptop with i-pad, reviewing graphs and charts on screen

The recent drop has clearly impacted deal flow.

Redrup reported that only the best companies were now closing investments, with less money flowing to start-ups. That said, this development may lead to more capital being available for existing portfolio companies, as opposed to newly founded companies.

It’s not all over for start-ups. There’s still plenty of money chasing good opportunities.

It’s just that investors are now being more selective, more cautious. Quite understandable given the recent volatility in global markets, supply chain disruption, fuel costs becoming more expensive, inflationary pressures, and interest rate rises, all of which give early-stage investors reason to pause – or at least to deploy smaller amounts of capital than before the market turned south.

“Cut Through Ventures” reports that it’s not the deal value that’s changed, rather it’s the total number of deals. In March there were 72 deals, in April there were only 38. Given the circumstances, it is likely this trend will continue through this month and possibly beyond, until the market regains confidence.

Redrup quotes ”Tractor Ventures” CEO and partner in the Side Stage Ventures investment syndicate, Matt Allen, who commented on the scale of this tighter investment trend. 

“In March there was around $830 million from VC’s that was going to local start-ups in Australia. In April the number had more than halved, to $371 million”.

Matt Allen-Tractor Ventures
What’s happened?

Public valuations are now lower. The downgrade has impacted the amount of investment for early-stage companies.

In the US. Joanna Glasner shared broad findings from a Crunchbase analysis of big U.S. venture rounds for 2022 and last year. It includes a chart of monthly deal counts and investment totals that shows that whilst it’s not a precipitous decline, it has clearly fallen below peak and average. 2

What should founders looking to raise capital do in this climate?

First, start-ups have to present a great story – a compelling reason for investors to get in now, rather than later.

And second, start-ups need to back it up with solid, recurring revenue numbers, projected to grow quickly.

Investors are looking for value and are now more circumspect in their evaluations and investments in young companies, given the current market conditions.

But, at the end of this cycle, there’s likely to be plenty of value waiting to be unlocked.

And that’s why Oasis Partners, a boutique mid-market advisory, merger and acquisitions company in Australia and the UK, keeps a watchful eye on the start-up sector. After all, it’s the innovative start-ups, with creative solutions, that express the potential to grow very fast. Some break-out to become leading and larger entities, in record time.

Whilst Oasis Partners is more focused on owner-led businesses that are further along the business life cycle, we also have a vested interested in the success of the emerging tech sector.

Mike McGrath, CEO comments:

Photo image of Michael McGrath-CEO of Oasis Partners
Michael McGrath - CEO of Oasis Partners

"We’re interested because start-ups grow to become bigger businesses. They offer opportunities for tomorrow. This cohort of early-stage companies typically want to scale - fast. One way to accelerate growth is to grow market share. If they can raise funds, or deploy retained earnings, they can make strategic acquisitions”. There’s another set of founders, perhaps a few years further into their journey, who are more opportunistic (or just exhausted!). This set may choose to exit earlier if they can find a merger partner that has assets, resources and reach that will allow the venture to scale much faster and more effectively. The selection of the partner is key, as is ensuring a good cultural fit and alignment. However, we have seen some outstanding outcomes for earlier stage businesses who are open to the right merger"

Michael McGrath-CEO of Oasis Partners


At Oasis Partners we are most frequently retained by the shareholders of established private companies seeking an exit. Whilst early stage tech. valuations have seen a change of sentiment, we see no such shift from acquirers who are strategically motivated. Established private companies with an enduring future remain in strong demand.

References
  1. Yolanda Redrup -AFR Reporter- May 24, 2022 Reporter, “Tech valuation crunch hits start-up angel deals” https://www.afr.com/technology/tech-valuation-crunch-hits-start-up-angel-deals-20220520-p5an7p#
  2. Joanna Glasner – CrunchBase-20 May, 2022 “U.S. Venture Rounds Of $100M-Plus Are Trending Lower”. https://news.crunchbase.com/news/large-venture-capital-deals-down-2022/
  3. Michael McGrath-CEO-Oasis Partners – https://www.linkedin.com/in/michael-mcgrath-4b115013/

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