Venture capital firms spent 2021 deploying massive amounts of capital at earlier and earlier stages. The $643 billion in global venture investment marked a 92% increase over 2020, resulting in record valuations.
In the United States alone, startups raised $281 billion in venture funding in 2021, a 105% year-over-year increase, according to York IE Fuel.
Now, less than a month into 2022, we’re starting to see signs of change. The public markets have been trending down. You can’t spend more than a few minutes on Startup Twitter without reading a post about VCs taking a more cautious approach this year. And Axios wrote last week that we’re on the downslope of the startup valuation peak.
What does this mean for York IE and the companies we invest in?
We don’t begrudge startups for taking advantage of the huge pools of capital that have been available. But we believe in building strong companies that are capital efficient.
If a startup’s revenue doesn’t justify its valuation, that startup might not be in a position to use its funding effectively. And that means the founders sold more of their company than they needed to in order to accomplish their business goals.
The amount of money you raise is a vanity metric, and your valuation is nothing but a paper return until you exit. Make sure your fundamentals — revenue, customers and growth — justify your valuation now, because you don’t necessarily know when that moment is going to be.
At the end of the day, every company is going to be valued on its fundamentals, not what’s going on in the market.