Managing Your Startup In 2016: New Rules For A New Environment


Image Credits: Merydolla (opens in a new window) / Shutterstock (opens in a new window)

Ajay Agarwal


Ajay Agarwal is a managing director at Bain Capital Ventures, where he focuses on early-stage SaaS investing.

More posts from Ajay Agarwal

It’s a new environment for startups in 2016. Financing will get harder. Valuation inflation will dissipate. Profitability will be in vogue again. And old-fashioned business fundamentals will balance out the disruption frenzy of the past five years.

Given the new investment climate, what’s an entrepreneur to do? To answer that, let’s first examine the factors behind Silicon Valley’s climate change.

First, public market valuations for relatively young technology companies have been declining of late — especially for those that remain unprofitable. For example, we’ve seen valuation multiples for unprofitable SaaS companies drop by more than 60 percent from 2014 to today (see below). Valuation multiples for profitable SaaS companies, by contrast, have dropped by less than 30 percent.




Second, recent IPOs (Atlassian aside) have generated less than stellar returns for late-stage investors. Square, Box and Etsy are good examples of this trend, where early stage investors were rewarded with strong multiples on their long-term investments, while late-stage investors suffered mixed results. TechCrunch has referred to recent tech IPOs as the new down round.

Third, we’ve seen Fidelity and others publicly mark down their valuations of private company investments, from Dropbox and Snapchat to Zenefits and Dataminr.

In short, public and private investors aren’t simply discussing bubbles and valuation concerns like they were in early 2015 — they’re taking action.

Given that new world order, here’s my advice for early stage and late-stage entrepreneurs to navigate the shifting sands:

Accelerate profitability: Build a financial plan that gets the company to profitability on 50 percent as much capital as you may have wanted to raise six months ago. If you were planning to raise $100 million previously, build a plan that gets you to profitability on $50 million. If $50 million, then $25 million and so on. We’re already seeing the profitability premium kick in with public SaaS companies, as outlined above.

Prepare insiders to step up: Over the last two-three years, outside investors did not expect earlier inside investors to participate at any material level in later-stage financings. Early stage investors thus benefited from other firms’ capital in later rounds. In the new environment, I anticipate new investors will expect existing investors to contribute significantly to new rounds, providing up to one-third or one-half of the new funding.

Be willing to have multiple new investors in the round: Beyond valuations, the risk tolerance of late-stage investors is changing. New investors will want to write smaller checks to mitigate their risk and exposure — and to reserve capital if the company does need a new round (because external capital is not a given). As a result, entrepreneurs should be prepared to bring together multiple investors at the $10-$15 million level as opposed to finding one lead investor willing to put in $25-$50 million.

Adjust your expectations: Recognize that a clean deal at a flat valuation should be considered a “win” in this environment. Let’s consider a company that last raised at $200 million valuation on a $10 million run rate two years ago — and has now grown to a $30 million run rate (a super healthy tripling of ARR). Absent the new climate, the company might expect to raise a new round at 10x to 12x multiple for $300-$360 million valuation. However, if you factor in that public SaaS multiples have been cut in half or more, a price of $150-$180 million would more fairly reflect the market. Thus, a flat round at $200 million would be a win despite the company’s fast growth.

Prepare your employees: This may be the hardest challenge, given how actively some startups pursued unicorn status to accelerate recruiting efforts. Now, despite two years of massive progress and growth, you need to tell employees that the next round may be flat — and convince them the company isn’t losing market momentum. Professional investors understand all too well that external financings will fluctuate — two years ago, the price was probably too high; today, it may reflect market reality; in the future, it may be too low. It’s important that your employees understand the cost of capital will go up and down based on market dynamics (not just company performance).

The silver lining

The climate change in late-stage private markets will cause some challenges for entrepreneurs and their teams — and result in a higher cost of capital. However, history tells us there is a silver lining for the smart startups that adapt, focus on fundamentals and extend their runway.

That silver lining is a “flight to quality” that typically occurs during periods of multiple compression and financing downturns. As a result, the financing arms race will hopefully subside — and the best startups in each category can grow more efficiently knowing it will be tougher for the No. 3, No. 4 and No. 5 companies to raise capital.

More TechCrunch

Ahead of the AI safety summit kicking off in Seoul, South Korea later this week, its co-host the United Kingdom is expanding its own efforts in the field. The AI…

UK opens office in San Francisco to tackle AI risk

Companies are always looking for an edge, and searching for ways to encourage their employees to innovate. One way to do that is by running an internal hackathon around a…

Why companies are turning to internal hackathons

Featured Article

I’m rooting for Melinda French Gates to fix tech’s broken ‘brilliant jerk’ culture

Women in tech still face a shocking level of mistreatment at work. Melinda French Gates is one of the few working to change that.

12 hours ago
I’m rooting for Melinda French Gates to fix tech’s  broken ‘brilliant jerk’ culture

Blue Origin has successfully completed its NS-25 mission, resuming crewed flights for the first time in nearly two years. The mission brought six tourist crew members to the edge of…

Blue Origin successfully launches its first crewed mission since 2022

Creative Artists Agency (CAA), one of the top entertainment and sports talent agencies, is hoping to be at the forefront of AI protection services for celebrities in Hollywood. With many…

Hollywood agency CAA aims to help stars manage their own AI likenesses

Expedia says Rathi Murthy and Sreenivas Rachamadugu, respectively its CTO and senior vice president of core services product & engineering, are no longer employed at the travel booking company. In…

Expedia says two execs dismissed after ‘violation of company policy’

Welcome back to TechCrunch’s Week in Review. This week had two major events from OpenAI and Google. OpenAI’s spring update event saw the reveal of its new model, GPT-4o, which…

OpenAI and Google lay out their competing AI visions

When Jeffrey Wang posted to X asking if anyone wanted to go in on an order of fancy-but-affordable office nap pods, he didn’t expect the post to go viral.

With AI startups booming, nap pods and Silicon Valley hustle culture are back

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says

A new crop of early-stage startups — along with some recent VC investments — illustrates a niche emerging in the autonomous vehicle technology sector. Unlike the companies bringing robotaxis to…

VCs and the military are fueling self-driving startups that don’t need roads

When the founders of Sagetap, Sahil Khanna and Kevin Hughes, started working at early-stage enterprise software startups, they were surprised to find that the companies they worked at were trying…

Deal Dive: Sagetap looks to bring enterprise software sales into the 21st century

Keeping up with an industry as fast-moving as AI is a tall order. So until an AI can do it for you, here’s a handy roundup of recent stories in the world…

This Week in AI: OpenAI moves away from safety

After Apple loosened its App Store guidelines to permit game emulators, the retro game emulator Delta — an app 10 years in the making — hit the top of the…

Adobe comes after indie game emulator Delta for copying its logo

Meta is once again taking on its competitors by developing a feature that borrows concepts from others — in this case, BeReal and Snapchat. The company is developing a feature…

Meta’s latest experiment borrows from BeReal’s and Snapchat’s core ideas

Welcome to Startups Weekly! We’ve been drowning in AI news this week, with Google’s I/O setting the pace. And Elon Musk rages against the machine.

Startups Weekly: It’s the dawning of the age of AI — plus,  Musk is raging against the machine

IndieBio’s Bay Area incubator is about to debut its 15th cohort of biotech startups. We took special note of a few, which were making some major, bordering on ludicrous, claims…

IndieBio’s SF incubator lineup is making some wild biotech promises

YouTube TV has announced that its multiview feature for watching four streams at once is now available on Android phones and tablets. The Android launch comes two months after YouTube…

YouTube TV’s ‘multiview’ feature is now available on Android phones and tablets

Featured Article

Two Santa Cruz students uncover security bug that could let millions do their laundry for free

CSC ServiceWorks provides laundry machines to thousands of residential homes and universities, but the company ignored requests to fix a security bug.

2 days ago
Two Santa Cruz students uncover security bug that could let millions do their laundry for free

TechCrunch Disrupt 2024 is just around the corner, and the buzz is palpable. But what if we told you there’s a chance for you to not just attend, but also…

Harness the TechCrunch Effect: Host a Side Event at Disrupt 2024

Decks are all about telling a compelling story and Goodcarbon does a good job on that front. But there’s important information missing too.

Pitch Deck Teardown: Goodcarbon’s $5.5M seed deck

Slack is making it difficult for its customers if they want the company to stop using its data for model training.

Slack under attack over sneaky AI training policy

A Texas-based company that provides health insurance and benefit plans disclosed a data breach affecting almost 2.5 million people, some of whom had their Social Security number stolen. WebTPA said…

Healthcare company WebTPA discloses breach affecting 2.5 million people

Featured Article

Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Microsoft won’t be facing antitrust scrutiny in the U.K. over its recent investment into French AI startup Mistral AI.

3 days ago
Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Ember has partnered with HSBC in the U.K. so that the bank’s business customers can access Ember’s services from their online accounts.

Embedded finance is still trendy as accounting automation startup Ember partners with HSBC UK

Kudos uses AI to figure out consumer spending habits so it can then provide more personalized financial advice, like maximizing rewards and utilizing credit effectively.

Kudos lands $10M for an AI smart wallet that picks the best credit card for purchases

The EU’s warning comes after Microsoft failed to respond to a legally binding request for information that focused on its generative AI tools.

EU warns Microsoft it could be fined billions over missing GenAI risk info

The prospects for troubled banking-as-a-service startup Synapse have gone from bad to worse this week after a United States Trustee filed an emergency motion on Wednesday.  The trustee is asking…

A US Trustee wants troubled fintech Synapse to be liquidated via Chapter 7 bankruptcy, cites ‘gross mismanagement’

U.K.-based Seraphim Space is spinning up its 13th accelerator program, with nine participating companies working on a range of tech from propulsion to in-space manufacturing and space situational awareness. The…

Seraphim’s latest space accelerator welcomes nine companies

OpenAI has reached a deal with Reddit to use the social news site’s data for training AI models. In a blog post on OpenAI’s press relations site, the company said…

OpenAI inks deal to train AI on Reddit data

X users will now be able to discover posts from new Communities that are trending directly from an Explore tab within the section.

X pushes more users to Communities