Context is Critical for Startup Advice

With the continued dark cloud over the economy and public market volatility, there’s been a deluge of startup advice lately. One point that’s been missed is that the advice is often geared towards a certain swing-for-the-fences style startup. Let’s dive in.

When reading TechCrunch and posts from leading venture firms, it’s easy to get sucked in that all startups are the top 10% of venture-backed startups, have raised money at crazy valuations, and are burning inordinate amounts of money. While it’s true that there are more than ever doing that, the reality is that it’s the extreme minority of startups that have done so.

Most startups that wanted to raise money at top-of-market multiples couldn’t. It doesn’t mean these are bad companies. Rather, these are good companies — in the top 1% of all companies just by definition of raising venture capital — building valuable franchises. When a handful of venture firms, crossover funds, and hedge funds paying huge premiums passed on a deal, there were hundreds of additional venture firms that paid more normal-ish multiples. Yes, these firms were stretched higher than their comfort zone, but nowhere near what a tiny number of firms were paying. Put another way, most venture-backed startups raised money at normal-to-high valuations, not exotic outlier valuations.

Whereas a small percentage will have to grow 10 or 20x to have an up round, most startups that raised on a multiple of run-rate will have to grow 2-4x to have an up round — just do the math. If a startup raised at 100x ARR, and multiples are now 10x for the same type of business, they have to grow 10x to get to their last valuation. If a startup raised at 21x ARR, and multiples are now 7x for the same type of business, they have to grow 3x to get to their last valuation. While 3x is massive growth, it’s much less dramatic than 10x.

So, startup advice always need context. Most of the famous firms invest in startups with the biggest markets and fastest growth rates. Most startups have big markets and fast growth rates, and didn’t receive astronomical valuations. Context matters, especially for startup advice.