The two years between Jan 1, 2020 to Jan 1, 2022 have been especially bullish for startup fundraising – (i) more money, (ii) at higher valuations, (iii) coming more easily. At Tau Ventures we saw an uptick in general of 40% along these three metrics [this article was written before Instacart cut its valuation by nearly 40%]. Below are historically the norms at least in Silicon Valley:
| Stage | Key Proof Point | Dilution | Valuation as function of amount raised |
| pre seed | powerpoint | N/A – convertible 15-20% discount | N/A – cap that is 3-5x amount raised |
| seed | early seed = prototype
late seed = pipeline of customers |
20-30% | 3-5x |
| series A | product-market fit | 15-25% | 4-7x |
| series B | business model taking off | 15-20% | 5-7x |
| series C+ | growth | 10-15% | 7-10x |
Some caveats and reminders:
1) Emphasis on the word “norms” since there are always exceptions. The numbers are not comprehensive of every industry, but informed primarily by 20+ years working within the software sector (as opposed to cleantech, med devices etc).
2) Pre-seed is the institutionalization of what used to be called family / friends (and some say fools). Remember also SAFE is a special type of convertible.
3) Seed is sometimes priced, other times convertible, and in the latter case there is a strong argument to use the cap as a proxy for valuation.
4) Valuation and Dilution are two sides of the same coin i.e., if you get 20% dilution then your valuation is 5x the amount you are raising.
What has been happening in Q1 2022 thought seems to be reversing the 40% uptick back into the old norms. Below is data from Carta, also published in a recent TechCrunch article:
As with any complex system multiple factors are at play; our view at Tau is there are three main ones. One, the market is expecting covid is going from pandemic to endemic, which means the economy is moving towards a new stability and money that was previously over-allocated in tech will start flowing back into other sectors. Two, it’s the downstream effects of the Ukraine crisis that has been affecting especially oil, gas and supply chains. Three, inflation has risen, the Fed has put in a much expected hike in interest rates, which will reduce money in circulation and thus somewhat brake VC investments.
What does this mean for startups?
At Tau we focus primarily on seed, especially late seed, and our guidance to entrepreneurs remains to raise enough to get to product-market fit aka series A within 9-18 months. Nobody has a crystal ball but if past is the least imperfect predictor of future, then below are three practical adaptations we are recommending for entrepreneurs in general:
1) Cash Is Prince – Move the dial towards being more cash-conscious to the same levels as pre-pandemic. This could mean reducing burn, raising debt, generating revenues earlier, breaking a larger upcoming fundraise into two pieces, taking a good term sheet now rather than waiting for a better one later, among others. If there is further turbulence ahead then cash could become king, or even emperor.
2) Emphasize Equity – Tech salaries are at all-time high, making it even more challenging for startups to attract and retain talent. At Tau we advocate giving potential hires three core choices – high salary + low equity, low salary + high equity, medium salary + medium equity – so they can decide what is best for them. In a world where money is getting a bit scarcer, startups can naturally dial up equity more than salary – which comes with subdials including vesting schedules, cliffs, and refresher grants.
3) Manage Expectations – Beware that raising at better terms in the last two years had come with a cost. If the company hasn’t hit the metrics to enable the next milestone then the chances of lower uprounds, flat rounds or even down-rounds are much higher. Managing expectations here refers especially to your own as CEO but also existing investors who also have their own economic interests at stake.
Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.
