This downturn is a great time to found a startup
cloud-based software the industry has had an incredible period of growth and success. Recently, however, we have seen a deep correction in public markets. The Bessemer Cloud Index that tracks public stocks in this category is down more than 40% from its peak in November 2021.
This valuation reset is now rippling through the private venture-backed market, hitting early-stage companies first before early-stage startups feel the effects. This is a big problem for startups and venture capitalists. Many founders are now wondering if now is the right time to raise capital and what amount is realistic.
Let’s take this question one at a time. First of all, if you’re just getting started – or even if you’re still dreaming of your own startup – is a downturn like this even a good time to start a business?
We believe this is an excellent time.
Raising less gives you more room to make mistakes, more time to correct your trajectory, because the performance pressure is less.
Why? The short answer: in the beginning you need a few clients, not many, and you need their time to be able to work with them, which they don’t have anymore now that things are slow. Since you won’t be scaling for a while, small ACVs are fine. The most important thing at this stage is to hire and retain talent, which is both easier now. Once the market recovers, your startup will be ready to scale.
If you are already further along, have early market validation, signs of product-market fit, and are ready to raise a Series A, the second question is: can you even raise in this market?
Just a few months ago, Series A rounds of $10-15 million seemed to be the norm. Is it still possible? Venture capitalists have raised record amounts of new funding in 2020 and 2021, and much is said about the amount of “dry powder” available.
What is also true, however, is that the valuation reset is making its way into the market. This means that many venture capital firms are now busy focusing on their existing portfolios – the high-growth B- and C-stage companies that have raised substantial cash and are operating at high burn rates.