"Extend your runway" has been the loud and clear mandate VCs have given their portfolio companies since the downturn began in spring.

The guidance on the amount of runway—the number of months a startup can operate before it runs out of money—varied, but the general advice ranged somewhere between 18 months and 36 months.

Investors were hoping that, over that time frame, startups would grow into their sky-high, pandemic-era valuations and, therefore, avoid resorting to a dreaded down round.

But valuation multiples may have fallen too far from their 2021 peaks for many late-stage companies to catch up to their last valuation as quickly as investors initially hoped. That's according to PitchBook calculations using valuation data shared by IVP, one of the oldest Silicon Valley VC firms.

Ajay Vashee, a general partner at IVP, said that he is seeing high-quality companies try to raise funds at levels drastically below the median valuation garnered at the height of the pandemic.

In 2021, the median late-stage valuation for SaaS deals reviewed by IVP was 114.3x ARR, according to a presentation the firm shared with PitchBook. That multiple expanded more than seven times from the 15.5x ARR fetched by SaaS companies in 2017. These multiples are based primarily on Series B to Series D SaaS deals IVP has evaluated over the years.

"I think we are back at 2017 levels, just as public markets have reverted to 2017 [prices]," Vashee said. PitchBook's VC IPO Index, which tracks the performance of formerly VC-backed companies, declined 61.3% in 2022.

While some startups are open to accepting a 15x ARR multiple, they are generally companies that last raised in 2017 or 2018, and therefore won't be agreeing to a lower valuation, Vashee said.

"The companies that raised 100x ARR aren't coming back to market yet. They have years of runway and are trying to figure out how to grow into the last round valuation," he added.

But many startups will likely find that their years of runway simply don't give them enough time to grow into recent valuations.

At current revenue multiples, a hypothetical startup would need to grow at 100% a year for about two years in order to grow into their 2021 valuation, according to calculations by PitchBook applying the 2017 multiple observed by IVP. The required runway jumps to five more years, or until late 2027, for companies growing at 40% annually.

Although Vashee did not discuss the growth rates of IVP companies, Miguel Luiña, a managing director of fund investments at Hamilton Lane, has said that some of the firm's managers have told him that some of the key late-stage companies' annual revenue growth has dropped from 60% to 40% in recent months.

So, when will companies need to raise more capital?

While about 80% of IVP's companies have over two years of runway,  some of those companies will likely be coming back to market at the end of this year, Vashee said. "You don't want to be raising with just a few months of runway left."

Given all this, even startups that are growing healthily are likely on course for a down round if they raised at an elevated 2021 valuation. For late-stage VC-backed companies, the severity of that outcome will depend on their revenue growth rates and whether and how much tech stocks rebound from current prices in the coming months and years.

Featured image by heychli/Shutterstock

Related content