If you talk to a lot of early stage investors, they’ll tell you that they live in two different worlds right now.
Part of their day is filled by reviewing startup pitches that show the exciting potential of generative AI, and the rest of the day is spent helping existing portfolio companies survive the recession. is spent.
This dichotomy between generative AI and all other startups is also evident in our evaluation data.
Compared to 2022, the median pre-funding valuation of generative AI companies’ early-stage rounds is up 16% so far this year, according to PitchBook data. Meanwhile, prices for all other startups raising Series A or Series B fell nearly 24%.
“The tipping point is huge,” said Sundeep Peechu, general partner at Felicis Ventures. “There’s a general feeling of ‘wow, generative AI has revolutionary potential.'”
Some generative AI startups with no revenue at all can now raise series A rounds at valuations of around $250 million, Peechu said.
Rewind, a startup that records and makes all your meetings, emails and electronic correspondences searchable, has earned a $350 million valuation from the NEA based on just $700,000 in revenue, according to The Information. reported. Rewind founder Dan Siroker told The Information that other investors were also willing to put a price tag of up to $1 billion on the startup.
In another example, LangChain, an AI startup with “minimal” revenue, has garnered a valuation of more than $200 million in a round led by Sequoia, Business Insider reported.
However, the evaluation environment is very different for non-AI companies.
Yash Patel, general partner at Telstra Ventures, said the best Series A startups can achieve 10x annual recurring revenue valuations, but early-stage startups can achieve valuations as low as 5x their ARR over the next 12 months. He said there were more examples of raising funds.
“We expect the company to grow at least 300% annually,” said Patel. That means he’s expected to have a pre-money valuation of $15 million for a Series A company with about $1 million in revenue and growing at this pace. This is very different from the high prices assigned to generative AI-enabled companies.
growing pains
Some investors say the pool of companies eligible for Series A funding has recently shrunk as revenue growth has become more difficult.
“We are seeing companies trying to raise Series A’s that frankly aren’t ready to raise Series A’s,” said Julius Schwerin, partner at venture firm RTP Global. The quality of the company doesn’t matter,” he said. Even during the VC boom last year or two. ”
As most corporate customers have switched to cost-cutting mode, the startups selling to them are finding it more difficult to consistently grow their revenues. Schwerin said sales growth has slowed across RTP’s portfolio of 110 companies.
Recent data from Kruze Consulting, an accounting firm of more than 750 companies from seed to series C companies, shows that early-stage startup revenue growth will drop significantly in 2022. As of the end of 2021, Kruze’s SaaS customers increased by about 100% in the same year. However, revenue growth slowed to less than 60% by the end of 2022. And the growth of e-commerce startups nearly came to a halt.
Schwerin expects the rate of seed-to-series A graduates to drop significantly in the next few quarters, as fewer companies are growing at a pace that attracts series A rounds.
One thing is clear: investors are evaluating generative AI and all other startups by a very different standard. The former focuses on pure potential, the latter on ruthless and reliable returns.
