We have seen that startup valuations recently went through a roller coaster. In 2021, there was a true boom, with valuations reaching historical peaks. That optimism was driven by a large flow of capital and a post-pandemic enthusiasm that seemed to have no end. However, that bubble burst, leading to a significant correction in 2022 and 2023. Much of this came from the irresponsibility of some startup managers who, with a lot of cash on hand, began spending more than they should on matters not critical to the business, and in doing so, pulled back investor appetite. I have discussed these topics in a few previously published articles:
Now, in 2024, we are starting to see signs of a still quiet recovery. What is behind this shift? Three main factors are driving this recovery:
sustainable business models,
digital transformation, and
regulatory compliance.
Investors are increasingly focused on startups with sustainable and scalable business models. Sustainability is no longer a choice, but a necessity. Startups that demonstrate a robust and scalable business model are attracting more investment. This shift in focus is essential to ensure the long-term return on investments made. It shows that ESG (Environmental, Social and Governance) practices are here to stay and will be increasingly required by major investors.
On the other hand, the digitalization of businesses continues to be a powerful driver of startup valuations, as investors have a strong interest in not being left on the sidelines of the digital revolution. Sectors such as fintech are at the forefront of this transformation. Companies like Griffin and Flagstone have secured significant funding, setting new valuation benchmarks. These companies not only attract investment but also set standards for the industry.
In addition, startups that successfully navigate the complex regulatory landscape are standing out. Obtaining licenses and achieving regulatory compliance increases investor confidence and, consequently, the valuations of these companies. This factor cannot be underestimated in an environment where security and trust are paramount. Regulatory bodies themselves are beginning to adapt to new technologies and are initiating a movement toward regulating and using them, attracting new perspectives for various businesses.
Artificial intelligence (AI) is playing a crucial role in startup valuation in 2024. AI startups are seeing their valuations surge due to the transformative potential of the technology. Valuations of early-stage AI startups frequently exceed US$70 million, while those at more advanced stages can reach around US$100 million. AI is seen as a technology with enormous potential, which justifies these high valuations. But those who think these valuations are achieved with good ideas alone are mistaken. It takes a great deal of planning and the correct integration of technologies into businesses that tend to be promising.
"Using AI just to ride the hype does not create value."
But is all this enthusiasm sustainable? The entire discussion space around AI, especially generative AI, leads to significant investments, even in startups with minimal or nonexistent revenue. Examples include Anthropic and LangChain, which saw impressive increases in their valuations over short periods. However, we as experienced investors and evaluators are concerned about the sustainability of these high valuations, noting that many of these startups still do not generate significant revenue.
Even so, we are seeing a significant recovery in the Seed and Series A funding stages. Valuations are rising gradually, but it is also noted that deal volume has declined, indicating a greater focus on quality over quantity. In Series B, the recovery is even more pronounced, reflecting a more selective and competitive investment environment. This is explained by the fact that this Series tends to be used by companies that have already passed through the most critical phases of the business and already have results that support their future projections.
Another interesting point is the possible reopening of the IPO window, which was closed for much of 2023. According to Pitchbook, there is cautious optimism that the IPO market may recover, bringing new opportunities for startups and investors. This return of initial public offerings could provide an additional boost to startup valuations, creating a more favorable environment for new market entrants.
I continue to believe that startups must maintain their strategies of demonstrating value and not just good ideas, being adaptable to ensure their long-term success, and, of course, protecting their cash with all their strength. But it is undeniable that innovation and adherence to regulations remain crucial for attracting investment. So, neither too high nor too low.
"The world loves good ideas, but rewards those who show they can execute them with mastery."
Some articles for those who want to read more on the subject:
Startup Valuations in 2024: Trends, Innovations, and Case Studies
For valuations, it's AI versus the rest of VC
Eye On AI: Valuations Are Not Slowing Down
AI startups still snag huge valuations despite lack of revenue
Return of IPOs, fewer unicorns and more startup predictions for 2024
Article also published on LinkedIn.
