[nsedlet]

Maybe this is a dumb question but I thought valuations had fallen a bunch since mid 2022 and now lots of VC firms are struggling with companies (especially mid-to-late stage) who raised at much higher valuations than they can now get in the market. But this firm is saying that current valuations are too high to make new investments. Would it not be a good time to invest in later stage startups? Or is the issue that the forward growth potential of these companies is lower now for some reason.

[mandevil]

Valuations have "fallen" but not actually fallen: there are very bad consequences to raising what's known as a "down-round"(1) so no one is actually doing that unless they are absolutely forced to. So no company is interested in actually allowing an investment at that lower valuation. They only do that if they are absolutely forced to, because they desperately need the money.

So while yes, when the valuations go down seems like a perfect time to buy (buy low, sell high!), in these closed markets it is difficult to find someone to accept your money when it is down. This is a big difference from the publicly traded market, where you can essentially always buy stock. But in these private markets, everyone agrees that the value of a share of company X is lower than before, but no one is willing to sell you a share today at that price, so you can't actually invest your money.

1: Where the top-line valuation is below the previous valuation. This is extremely bad for a company because investors almost always have protections for a down-round, so the loss generally is felt entirely by the workers and the founder.

[makestuff]

To get around this will companies just extend their runway with a line of credit or some other form of debt?

[mobattah]

There are several strategies companies can employ. One common approach is to raise an extension or bridge round. Many startups are adopting this method, with estimates indicating that approximately 40% of current funding rounds fall into this category.

In these cases, companies raise funds at the same valuation as their previous round, often labeled as Series A+ or Series C+ or Series B Extension.

Another, less common strategy involves using a SAFE (Simple Agreement for Future Equity), which will convert to equity during the next priced round.

[ckdarby]

That is possible, or hit break even. You'd be surprised how quickly a company can go from -50% margins to positive margins when their job is on the line.

[tenacious_tuna]

About a year ago my org made shaving costs our highest priority. Our infra team spent half a year slashing our cloud spend, and we've been pushing hard to become cash flow neutral.

I have to imagine this priority shift is in part due to the money markets being what they are.

[YetAnotherNick]

Also, for the heavy loss making sectors, the marketing budget became close to 0.

[ritzaco]

private valuations are weird. There's some abstract idea that 'valuations have fallen' for sure - people are saying things like "I don't think COMPANY_BLAH that raised $100M at a $1B valuation is actually worth $1B"

But it was never officially 'worth' that much in the same way as a market cap of a public company anyway. If they do a downround, where they raise money at a lower valuation than the previous one, that's generally bad for everyone, so there's a strong tendency to try to 'wait it out' and just pretend they're still worth $1B and hope the market recovers and no one has to write down their investments.