The past five years have been a wild time for venture capital, startups, and investors. Many of the old rules have gone out the window, and everyone is now scrambling to figure out what will actually work over the next 5–10 years instead of relying on what worked in the past.
Two major changes have happened during this period, and they are deeply connected. My observation, though, is that many startups and investors still have not fully figured out how those two changes work together.
The first is that valuations have risen dramatically for certain types of companies. If you are a native AI company, apparently you can value your business at 1,000 times top-line revenue and people will at least listen. Congratulations. But if you are an old-school SaaS company, or a medical or life science company, you are playing a very different game under a very different set of rules. Why? Because your exit opportunities are usually much smaller than those of the hottest AI companies. Public SaaS companies are trading around 7x top line at best these days. So if you are using AI companies as your valuation comps, but your likely exit is only $100–$250 million, the math simply does not work. You still have to play by the old rules. Startups and investors alike need to understand the tight relationship between valuation and exit opportunity.
The second change is that raise sizes have gone up. Ten years ago, a pre-seed company might raise $500K to $1 million. Today, we are seeing $2 million as a more normal number, with many rounds landing in the $5–10 million range. And that is before even getting to the absurd $100 million “pre-seed” rounds we now see in AI. This matters because the ratio between amount raised and valuation is not arbitrary. Valuations have not only gone up because exits have gotten bigger in some sectors. They have also gone up because companies are expected to move faster, grab market share sooner, and scale more aggressively than they used to. That takes real capital. High valuations are not supposed to exist just to help founders keep more equity. They are supposed to give companies the fuel to create value faster.
So if you are going to push valuation up, you also need to push up exit potential and raise enough capital relative to that new valuation to show how you are actually going to grow and scale the company fast. Otherwise, the story falls apart.
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