Unspoken fact that VCs won’t talk about in Dec 2022:

Most tech companies are not worth their liquidation preference. What does this mean ?

Unspoken fact that VCs won’t talk about in Dec 2022:
This is fine.

Most tech companies are not worth their liquidation preference.

What does this mean ?

It means that a company’s current value would not clear the amount of investment dollars raised, and many VC portfolios and their marketing materials with high IRR and TVPI are stuffed with illiquid and unrealizable paper prices.

During the 2020-22 tech bubble, many tech startups raised money at valuations of 20-100+ times their revenue. So if a startup generates $1MM in annual recurring revenue, they could often raise investment at $20M - $100M valuation.

The VC assumption is that these companies would continue growing at 100-300%+, so the eventual revenue multiple would rationalize to public comps of 10-20x multiple.

Investors had to buy forward 2+ years of perfect execution, and that was the clearing price of making the best VC investments in 0% interest rate land.

However, in Dec 2022 with risk-free interest heading to 5%, top software companies that are industry leaders with celebrity CEOs now trade at 4-6x revenue. Companies can no longer get away with 2+ years of assumed perfection. Companies need to perform today.

If a VC invested 20MM into a 100MM valuation company in 2021 at 1M ARR, and the company executed well and grew 200% to 3MM ARR, a fair valuation comp today might be $18M.

Growing ARR from $1MM to $3MM in a year is non trivial, yet this hypothetical company might actually see it’s valuation down 80%. This is exactly how public tech stocks have performed in 2022.

This is depressing, so what should you do ?

1. You’re a founder: Don’t raise money right now because you’ll get extorted with high liquidation preferences or all sorts of structure that will likely nuke all your value as a common stock holder. Talk to your customers, make sure you’re building and selling them something they actually must buy. Cut anything that doesn’t contribute to the above.

2. If you’re a VC: focus on your existing portfolio companies. Coach them to manage burn and operate efficiently. No founder wants to cut as they’re optimists by nature and thus they all believe they are the special snowflake that breaks the rules. Most likely they aren’t, and you’ll have to be the adult in the room to advise them otherwise.

(If you are or involved with the special snowflake, then you don’t need my advice. Have fun being amazing!)

3. If you’re a LP: talk to your GPs and see how intellectually honest they are about their portfolio and how their strategy will evolve in 2023. Half the GPs I know have embraced the new reality, the other half seem utterly delusional.


Interest rates will come back down at some point. I’m guessing after Q2 2024. You must prepare to survive until then and bide time for multiples and thus valuations to expand.

Survive and be a ruthlessly efficient and durable cockroach over the next 18+ months, and you’ll be deservedly rewarded for your blood, sweat, and tears.


Originally published on Linkedin.

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Jamie Larson
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