Guest post by the Tech Ireland team about the Irish Tech Startup scene.
The startup investment climate seems to be cooling as we start into 2023. TechIreland’s yearly Startup Funding Reviews will reveal more soon, but one topic that is sure to be discussed is the prospect of startup valuations going down.
Markets are under pressure, inflation and interest rates are high and we are living in an era of war. Macroeconomic challenges are impacting the startup sector, reducing valuations and increasing the cost of capital. But do lower valuations truly define a startup’s worth? To what extent is a startup’s valuation a measure of its success? Valuations are one measure, but they are not the be all and end all.
Irish Tech Startup Valuations Coming Down? It’s Not all Bad News
Peter Bennett, Head of Technology at Davy says “A company’s valuation is only truly useful when it comes to a transaction around the equity ownership of that company. Over much of the life of a company, performance measures should be the focus as performance drives valuation, not the other way around. So over the long-term a well-managed company, with a solid business model and strong fundamentals should perform well and should find its way towards a premium valuation despite the market’s ups and downs.”
Startups are born to build; they innovate, create jobs, transform communities and drive value. Their valuation is specifically relevant when they seek to raise external capital to fuel high growth that exceeds revenue. In times of economic slowdown and lower valuation with little external funding, startups might grow more slowly, but slower growth also has its advantages.
Fergal McAleavey, Partner & Head of Corporate Finance at EY states, “Companies are often too focused on their valuation; valuation should only really come into focus, when raising new equity capital or selling the company, outside of these occasions, the core business focus should be on stable and continuous growth. The pressure to focus on higher valuations often leads companies to making sub-optimal decisions, particularly in the current funding environment where international funding capital is scarce, a focus on stable and recurring or predictable revenue growth, coupled with cash generation or at least reducing your cash burn to extend your funding runaway is vital and will be rewarded with higher valuations.”
Research from the University of California, Berkeley and Stanford has shown that many tech-startups fail because they try to scale prematurely or to grow too fast. Slower growth allows startups to spend more time thinking about their product, to get closer to their customers, to gain market share and to manage their finances steadily, iterating their product to meet customer needs, and making more considered recruiting, purchasing and spending. Slow growth might be more measured growth that does not force startups to grow unnaturally fast.
Tech startups that develop resilience and are close to their customers could have long-term growth prospects that will make them more attractive to investors over the years. Irish tech successes like Fexco, Teamwork.com, Spearline among others are great examples of scaling organically. TechIreland’s data shows bootstrapped tech companies employ more than 80,000 people on the island of Ireland. So if these are times of measured growth, we might look to build more resilience and enduring value. When markets bounce back, as they surely will, such startups will have built enduring value.
Perhaps we should look to 2023 as a year that will deliver more measured growth – to build resilience, get closer to customers and develop to deliver customer value.
Peter Bennett adds “It’s a difficult balancing act for management teams, “should I go for growth or take a more measured pace?” Each case will be different and need to be assessed on its own merits. However, building a resilient, robust quality company should always feature on management’s agenda at times of pace or relative calm. Opportunities to take risks present themselves in both environments. Being prepared and ready to take advantage should be the goal ultimately”
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