This downturn is an excellent time to found a startup
The cloud software industry has experienced an incredible period of growth and success. Recently, however, we have witnessed a deep correction in the public markets. The Bessemer Cloud Index tracking public stocks across this category is down over 40% from its November 2021 high.
This reset in valuations is now rippling through the private venture-backed market, hitting late-stage companies first before early-stage startups feel the effects. That’s a big deal for both startups and venture firms. Many founders are now wondering if it is the right time to raise capital, and how much is realistic.
Let’s take this one question at a time. First, if you are just getting started — or even still just dreaming about your own startup — is a downturn like this even a good time to starting a company?
We believe it is an excellent time.
Raising less gives you more room to make mistakes, more time to correct course, because the pressure to perform is lower.
Why? The short answer: in the beginning you need a few, not many, customers, and you need their time so you can work with them, which they have more of now that things are slow. Since you won’t be scaling for some time, small ACVs are okay. More important at this point is to hire and retain talent, which is both easier now. Once the market goes back up, your startup will be ready to scale.
If you are further along already, have early market validation, signs of product-market-fit, and are ready to raise a Series A, the second question is: Can you even raise in this market?
Just a few months ago, $10-$15 million Series A rounds seemed to be the norm. Is that still possible? Venture firms raised record amounts of new funds in 2020 and 2021, and much is said about how much “dry powder” is out there.
What is also true, however, is that the valuation reset is working its way through the market. That means many venture firms are now busy focusing on their existing portfolios — the high-growth B- and C-stage companies that raised substantial cash and operate at high burn rates.