The promise of "growing into our valuation from 2021" is a common claim made by companies looking to price their IPO or secure funding in private rounds. This statement implies that the company will wait until they can match their previous valuation, rather than accepting a down round or lower valuation.

But How Long Does it Take?

When we hear this promise, we’re left wondering how long it takes for companies to grow into their 2021 valuations. Unfortunately, the answer is often not as straightforward as expected.

According to data from Irving Investors, only a handful of software companies have been able to achieve sustained growth of 30% at scale for five years. These companies include Snowflake, ServiceNow, Datadog, and MongoDB. However, these examples are extremely rare and not representative of the majority of startups.

The Problem with Delaying Reality

When companies delay acknowledging the decrease in their valuations, it can lead to bad decisions being made about spending cash that was once cheap to raise. This is particularly concerning as it relates to raising money at lower valuations, which can result in significant dilution for existing investors.

Why Companies Won’t Face Reality

Public market investors don’t care if a company does a down round. Unless there are guaranteed return or dilutive instruments in the cap table, they won’t be affected by the valuation decrease.

However, many companies refuse to acknowledge this reality and instead choose to delay accepting lower valuations. This can lead to continued cash burn and a lack of recognition that market conditions have changed.

What the Data Won’t Tell You

While data can provide insights into company performance, it won’t tell you everything. Public market investors don’t care about down rounds unless there are specific instruments in place that guarantee returns or dilution.

Conclusion

The most surprising aspect of 2022 was late-stage companies’ refusal to acknowledge the actual decrease in their valuations. It’s time for these companies to wake up and recognize the changing market conditions.

If we were a pre-IPO company, the conclusion would be simple: "My high-quality public comps have lost 60% of their market cap / enterprise value, so my market cap is probably off by something similar to that." If you want to raise money now, it will be at a lower valuation with more dilution.

Few companies are willing to take this medicine now. Why not start operating within the new valuation context as soon as possible? Many startups continue to burn cash and fight the decrease in valuation through delays, debt, ratchets, and punitive convertible notes that will all inevitably result in significant desperation in the future.

What’s Next

In conclusion, it’s essential for companies to acknowledge the change in market conditions and adjust their strategies accordingly. By recognizing the reality of decreasing valuations, startups can make informed decisions about their fundraising and growth plans.

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