Here are some of the interesting takeaways from our exploration of Finance team structures at the Series C:

1. External Hiring Trend for CFOs: A whopping 84% of CFOs are hired from outside the company. This trend, anecdotally speaking, is often due to the rapid growth of startups, which leaves little room for nurturing internal talent to meet the demands of a Series C-level company. Moreover, only 45% of the CFOs sampled had previously held a CFO role. This suggests that if you’re aspiring to be a CFO, applying for the role externally, especially if you possess the necessary experience, might be the most strategic approach.
2. Remote Work Influence: The Covid era has significantly impacted work structures, notably in the realm of remote work. Surprisingly, only 52% of CFOs are based in the same location as their companies. This trend indicates a shift in thinking — while it’s beneficial for executive teams to be co-located, there’s a growing recognition that top finance talent can be found beyond traditional startup hubs like the Bay Area or New York. This opens up more flexible hiring options, especially for operational finance roles.
3. Proactive CFO Recruitment: Companies typically initiate their search for a CFO around 18 months before their Series C funding round, a strategy that is crucial for several reasons. This time frame allows the newly appointed CFO ample opportunity to gain a deep understanding of the company’s financial situation, which is vital for strategic decision-making and effective budget planning. Furthermore, this period is invaluable for the CFO to establish strong relationships with the board and investors, ensuring financial strategies are aligned with the company’s goals and investor expectations. Simultaneously, it provides the necessary time to build and organize a capable finance team, recruiting skilled professionals and setting up efficient processes.
4. Shifting Educational Trends for CFOs: The landscape for CFOs is transforming, and so are their educational backgrounds. Currently, half of the CFOs hold an MBA, while only a quarter are CPAs. This trend marks a departure from conventional qualifications, aligning with the evolving perception of the CFO role as more strategically focused in finance. On the other hand, Vice Presidents and Directors of Finance often lack similar levels of educational attainment and public company experience, underscoring a notable difference in the experience of CFOs compared to other senior finance roles.
5. Experience Journey to CFO: The path to becoming a CFO typically spans about a decade, starting from a Head of Finance role. The leap from VP of Finance to CFO is generally shorter, hinging more on specific background and experience (as mentioned above) rather than just years in the field.

Overall, these findings shed light on the dynamic and evolving landscape of finance leadership in fast-growing startups.

Source Information: This data was compiled from a comprehensive analysis conducted by Thomvest, utilizing information from Pitchbook, LinkedIn, and CPAVerify. The study focused on 100–120 software-centric startups that recently raised Series C stage as of November 10, 2023, specifically excluding any extension rounds.

In the venture capital world, we find ourselves navigating a peculiar period labeled as the Schrödinger’s Valuation Period. This term draws from Schrödinger’s renowned thought experiment, which develops a paradoxical scenario where a cat simultaneously occupies a state of both life and death within a box. Similarly, we’re witnessing a phase where startups might boast strong valuations on paper, yet potentially be full write-downs. The reality of their situation, akin to the fate of Schrödinger’s cat, will only be revealed upon ‘opening the box’ — in this context, when they step into the market for fundraising. While it is still too early to open the box and understand where many companies truly are, we are beginning to observe intriguing shifts in valuations and extensions.

Analyzing Pitchbook data on US-headquartered software companies backed by VCs, we can see the paradigm shift and interesting trends beyond the stats above.

The condensed version:

• Series A valuations demonstrate an approximate multimodal distribution, tending to cluster around multiples of $5M. The most common three valuations for 1Q ’23 were $25M, $40M, and $15M. Deals with a pre-money valuation of $40M occurred significantly more frequently in 1Q ’23 compared to 1Q ’22. On the other hand, the once common peak of $100M valuations, a hallmark of 1Q ’22, dwindled almost to obscurity by 1Q ‘23.
• As we progress through the stages, the interquartile ranges continue to shrink significantly in 1Q ’23, showing a narrower spread of valuations. The IQR at the Series A stage contracted by 36%, while at the Series B stage, it narrowed even further by 61%. The most substantial contraction was observed at the Series C stage, where the IQR diminished by a considerable 72% when comparing 1Q ’22 vs ’23 — this implies a much tighter range of valuations.
• The declining right skew in valuations suggests a reduction in aggressive, high-end valuations. However, this trend may be influenced by a self-selection process in the later stages, where companies that need to raise funds earlier due to high burn, lack of traction or cash flow issues might be more willing to accept lower valuations
• AI valuations in Q2 ’23 are likely to create a veil over median valuation calculations, obscuring the widespread struggles many startups are facing in the valuation process

The nitty gritty:

Series A

When comparing the frequency and distribution of valuations within Series A funding rounds for two distinct periods, specifically the first quarter of 2023 (1Q ’23) and the first quarter of 2022 (1Q ‘22), we noticed a significant shift in trends. During the first quarter of 2023, there was a notable surge in deals with a pre-money valuation of $40M, in stark contrast to the patterns seen during the same period in 2022. In a shift of trends, the once prevalent $100M valuation, a characteristic trait of the first quarter of 2022, dwindled by the first quarter of 2023.

Our deep dive into the 1Q ’22 deals revealed a surge in aggressive crypto-focused valuations, suggesting a potential recurrence of similar spikes on the right tail. With the venture capital world increasingly turning its focus to transformative AI startups, we anticipate a possible resurgence of these valuation spikes in the second quarter of 2023 (2Q ‘23).

When evaluating the quartiles of Series A valuations, we did see a contraction in the interquartile range as the 75th percentile contracted. As mentioned in the summary points, the contraction is relatively muted when compared to the Series B & C range. Generally speaking, Series A valuations tend to aggregate around a handful of figures, as seen in the multimodal analysis. This is due to the dependance on early indicators of traction, which results in a constrained spectrum of acceptable valuations at this stage.

Series B & C

As we move towards the later stages of venture funding, the contraction in multiples becomes vividly apparent. For the majority of 2021, the data displayed a right-skewed distribution, but this drastically contracted in late 2022 and early 2023.

For Series B valuations, the third quartile, in particular, has experienced a deep contraction. To illustrate this point, the interquartile range for Series B pre-money valuations plunged from $218 million in the first quarter of 2022 to $84 million in the same quarter of 2023. This drastic compression of the interquartile range indicates a reduction in valuation variability and compression within the VC market. We often see median figures posted indicating drops, but equally important seeing the collapse of the third quartile, which speaks volumes as to how the valuation landscape is unfolding.

For Series C the contractions were even harsher. We observed a 72% contraction in the interquartile range from Q1 ’22 to Q1 ’23, primarily driven by a 64% decrease in valuations on the aggressive right tail.

However, it’s important to note that many later-stage companies have the ability to extend their financial runway longer than their earlier-stage counterparts. This capability could potentially introduce some bias into the data.

The drastic contraction in the interquartile range for Series B and C valuations reflects a more conservative outlook among investors. This is due to a combination of factors such as a slowdown in the global economy, belt tightening at the enterprise level, market saturation in certain tech sectors, past experiences with overvalued startups and general portfolio management.

What does this mean for startups

Unlike what we saw in the Great Recession, the tech industry now appears to be the canary in the coal mine, experiencing significant workforce reductions, severe multiple contractions, and early slowdown indicators in sales. When examining data from the venture capital world in 2007/2008, we observed an initial decline, mainly affecting the third quartile. However, more highly valued deals emerged just two quarters later.

In the current climate, these contraction trends suggest that startups may face an uphill battle in securing aggressive valuations. Startups in sectors directly affected by significant macroeconomic shifts — such as those triggered by Federal Reserve interest rate hikes or stagnation in the real estate market — are likely to feel an even greater impact. This is particularly true unless they operate within the AI domain, where a stronger interest seems to persist. The current macro environment is navigating companies towards showcasing solid fundamentals along with a realistic pathway to profitability to attract investors. VCs are likely to be more discerning, scrutinizing startups’ financial health and sustainability more closely before making an investment decision.

Q2 2023 data will likely show a higher concentration of aggressively valued AI-related deals, which could boost overall figures. But if we examine the non-AI-related sectors more closely, we might find a tech industry trying to weather the storm while relying heavily on extensions.

Following the unfortunate collapse of SVB (and now acquisition by First Citizens), the startup and venture capital sphere has turned its attention to self-examination, searching for methods to safeguard their startups from unexpected events down the road.

Drawing on insights from conversations with over 20 CFOs, I have compiled a set of actions currently being taken by CFOs to protect startups from the shock waves of the SVB bank run and potential future incidents of a similar operational magnitude.

Cash Management Policy Changes:
CFOs are revisiting existing investment policies and creating new ones to ensure the safety and preservation of their capital. One of the critical aspects of this process is the creation of Investment Policy Documents. These documents outline the acceptable securities and requirements around investments that ensure their safety, such as Moody’s ratings, acceptable collateral, and duration-appropriate portfolios. CFOs are re-evaluating these documents to ensure that they are comprehensive, up-to-date, and flexible enough to adapt to changing market conditions.

In addition to revisiting their investment policies, many CFOs are also implementing changes to their debt facility covenants. These changes involve allowing more flexibility around cash locations and secondary bank accounts. Many companies are establishing contingency bank accounts that contain two cycles worth of payroll to ensure that they can continue payments even in times of financial distress. CFOs are also instituting more robust rules, procedures, and contingencies for wire transfers. This is to enable emergency transfers, especially in situations where a key individual may be unavailable to authorize wires.

Furthermore, CFOs are taking steps to protect their funds by ensuring that all money market funds are registered in the company’s name, rather than with agents. This is in response to recent events where even money market funds were off SVB’s balance sheet but inaccessible, resulting in panic for many companies. It is crucial to establish a strong foundation for change through the implementation of these measures while also assessing additional risk exposures across the company.

Financing Risk & Liquidity Availability:
As the startup community embraces First Citizens Bank’s acquisition of SVB, stakeholders are cautiously optimistic about the continuity of founder friendly service offerings and leniency that has long characterized SVB. Finance leaders are beginning to explore their options with other financial institutions and editing models to prepare for the possibility of LoCs not being fully available or having more onerous terms. This process can be particularly challenging during times of macroeconomic headwinds, looming bank failures, and the rising rates set by the Fed. As a paradigm shift takes place in the banking industry, numerous CFOs are worried about the terms they may encounter in the future. SVB was renowned for its founder-friendly approach in the venture world, and it is unclear if the banks in today’s environment will be as founder friendly.

Moreover, the venture equity markets are not as robust as they once were, which could add further complications to CFOs’ decisions on liquidity options. For many startups, navigating this rapidly evolving landscape and obtaining the necessary financing to stay afloat may prove to be an intimidating undertaking. Prior to the SVB shockwave, many startups raised extension rounds quickly, leveraging their strong financial position and using various incentives such as additional warrants to entice equity holders. In light of the current macroeconomic conditions, it is highly probable that various incentives will persist for many startups. However, the situation could potentially worsen, leading to a rise in pay-to-play scenarios, stronger warrant prerequisites, and/or enhanced preferred terms.

Cash Timing Ripple Effects:
The temporary cash freeze imposed by SVB has sent ripples through the startup community, particularly for those smaller companies that have a short runway and are dependent on monthly cash flow. As AR experiences delays, CFOs are scrambling to find ways to mitigate the impact on their businesses. Some are offering discounts for early payments, while others are exploring short-term lending options that leverage their AR accounts. Still, some CFOs are resorting to delaying AP payments to align with the timing of their expected receivables, all in an effort to ensure their companies have the liquidity needed to weather the storm.

The eventual receipt of AR funds will result in a mere wash for larger companies (and be a non-issue), but for startups that are on a tight runway, the impacts of these AR delays can be meaningful.

Moreover, in light of the chaotic events that occurred in March, CFOs are anticipating a potential delay in bookings (and ultimately billings). Organizations may not have had the capacity to move quickly during the crisis to finalize sales agreements with significant ACVs. As a result, several deals may be postponed to April, which for many companies marks the start of Q2. It is incumbent upon CFOs to obtain assurance from sales leaders that deals are merely postponed rather than canceled, and that Q2 forecasts can be adjusted accordingly.

Reinforcing Weak Points:
CFOs are increasingly seeking additional safeguards for their organizations’ critical operations that extend beyond banking relationships. For instance, many CFOs are collaborating with their engineering teams to ensure backup solutions are in place for cloud services, such as AWS, GCP, or Azure, to minimize the risk of disruptions. Furthermore, finance leaders are exploring multiple partnerships for payment processing, international payroll, legal counsel, and other key areas that could potentially bottleneck or even halt business operations. By proactively addressing these concerns, CFOs can bolster their companies’ resilience and navigate the the next crises with greater confidence and preparedness.

Diversify Equity Base:
The recent SVB crises has served as a stark wake-up call for CFOs across the financial landscape, highlighting the true willingness of cap table participants to provide assistance in times of need. While it is important to acknowledge that many VCs were themselves impacted by the crisis, with their own funding abilities uncertain and funds frozen in accounts, CFOs are now prioritizing diversification of their equity base to ensure greater stability for their organization.

To achieve this, CFOs are considering a range of factors when diversifying their investor base, including the capacity for long-term financing and the ability to provide extensions or follow-on rounds as needed. Additionally, the size of the firm and its agility during times of crisis are being considered (along with signals of long-term partnership).

It is crucial for CFOs to recognize that true partners are those who stand by your organization during difficult times. While anyone can appear to be a supportive partner when times are good, it is the resilience and reliability demonstrated during crises and hardships that truly reveal the strength of a partnership.

Communication Plan:
Although it may not be a matter that falls squarely within the purview of a company’s CFO, it is nonetheless a crucial component of overall risk management. As such, CFOs are now pushing their startups to prepare a comprehensive communication strategy that effectively addresses any potential financial or product-related issues that may arise. One key element of this strategy is the development of communication templates that can be customized for various stakeholders, such as customers, investors, and management. It is essential to understand the messaging that resonates best with each group and to tailor the content accordingly. Additionally, it is incumbent upon startups to establish a clear process for approving emergency communications and implementing the necessary follow-up procedures to ensure that messages are consistent, accurate, and timely, and that all relevant stakeholders are kept informed.

In short, startups need to be proactive in their approach to risk management, recognizing that effective communication is an integral part of mitigating potential issues and safeguarding against negative outcomes. By prioritizing the development of a comprehensive communication strategy, companies can better position themselves to weather any challenges that may arise, while maintaining the trust and confidence of their stakeholders.

VC/Startup Sentiment:
Finance leaders are beginning to model in downside regulatory cases. As the government steps in to provide assistance to the tech industry, it could become increasingly difficult for companies to advocate for pro-tech policies, such as the repeal of Section 174 R&D amortization policies. These policies have the potential to create tax liabilities for certain companies, making it more important than ever for businesses to keep a close eye on shifting political winds.

In Conclusion
As the business world continues to navigate the aftermath of the SVB collapse, CFOs are taking proactive measures to mitigate risk and ensure business continuity in the face of future disruptions. From revisiting investment policies to diversifying investor groups, implementing failsafes, and developing communication strategies, companies are prioritizing risk management and resilience. As the old adage goes, “If you’re only going to prepare for the last crisis, that’s the only crisis that you’re going to be prepared for.” With these strategies in place, businesses can rest assured that they are well-prepared for whatever the future may hold.

Having just established a finance tech stack at a Series B company, I understand how critical the right finance infrastructure can be at an early stage startup. The right finance tools lay the foundation for the company and ultimately drive efficiency and improved insights across the organization. When I was looking for the right tool set, I would have appreciated an “early stage CFO-tech starter pack” to help point me in the right direction of tools I should evaluate. I thought it would be helpful if I could unpack why a finance tech stack is so important and recommend a few tools that will make your life easier.

Why is a finance tech stack so important?

Beyond standard finance needs, the finance tech stack needs to address the following points for a seed to early series B company:

• Integrate with the marketing, sales, and HR stack to have the most robust and accurate data
• Build in automation to shorten the time to close and decrease finance hours spent on tedious tasks
• Provide insights to manage cash burn impact and find cash savings opportunities
• Scale with the organization with minimal disruption

Deciding which tool is right for your early stage startup

Given the key functional objectives listed above (and assuming your outsourced accounting team already has the Accounting Systems in place), I would recommend looking at the following tools during your evaluation:

AWS Compute Spend Tools (Finance Aspect)

Why is this needed: As the head of finance at an early-stage SaaS company, you will have to work across your organization to cut spend while providing operational efficiencies using financial levers. AWS cost is one of the leading expenses at many startups, and having your finance/engineering team working in concert to curb compute spending is essential. While there are technical engineer-led solutions to reduce AWS spend, there are also finance-led cloud cost optimizations that can help curb some compute spend as well.

Recommended Solution(s): ProsperOps is a hands-free AWS cost optimization tool that autonomously builds, manages, and optimizes a portfolio of savings plans and RIs on your behalf. By implementing ProsperOps, you will save finance hours since their system automatically optimizes the compute RIs and savings plans on an ongoing basis. You will need to work with your platform team to implement ProsperOps and get it installed on your instance. Once ProsperOps is in place, you will begin to see your effective savings rate and see how much you are saving on compute spend. Keep in mind that cost optimization for AWS will come from multiple angles, but ProsperOps helps with the finance angle.

Global Hiring Tools

Why is this needed: Companies have leaned more heavily into global hiring as remote work and cash conservation has increased. There are many laws, taxes and complicated organizational structures that are associated with hiring globally. Fortunately, recent SaaS solutions have made managing global employee compliance much simpler. As a finance leader, you want to make sure you do not have any large tax liabilities or compliance issues with global employees.

Recommended Solution(s): Remote helps you hire globally without a local entity (EOR model) and they handle payroll, local taxes and compliance. Remote helps your company expand globally without the headaches usually tied to going global since the company is set up to be compliant in 60+ countries. Additionally, the flat fee pricing structure is fair compared to what I have seen from other EORs which require a percentage of the salary (which can get costly with engineers).

Sales Tax Tools

Why is this needed: As your company expands into different states and as you hire more employees, you may begin to hit physical or economic nexus and be required to pay sales tax.

Recommended Solution(s): Your outsourced accounting firm might have already put Avalara in place to calculate the sales taxes on your invoices since Avalara is widely regarded as the established tool in the space. While Avalara is traditionally implemented by many outsourced accounting/finance teams, I am seeing a newcomer called Anrok replace Avalara in the tech stack. Anrok provides a more straightforward UI, helps with new state registrations (nexus and actions), and automates filing and payments in every SaaS taxing state and city. When it comes time for registration and filing, Anrok offers free registrations for all jurisdictions and files returns automatically and at no extra charge. Additionally, Anrok tracks both economic and physical nexus which is not available with many competitive tools. Overall, if I was building the finance tech stack at a new company, I would definitely demo Anrok.

Accounts Payable / Expense Tracking Tools

Why is this needed: In today’s CFO tech stack, you need intelligent tools that can monitor all dollars going out the door. With AP/Expenses it is important to be able to tag transactions and have the platform automatically associate expenses with employees, categories and events. A strong spend platform should allow you to expedite your month-end close due to the automated tagging, automatic reminders and seamless receipt matching capabilities. In addition, expense tracking tools should help provide a view on real-time cash spend and provide alerts in a timely manner.

Recommended Solution(s): Chances are you already have Bill.com, Expensify and/or a bank credit card. While those are great tools to get started, it is important to evaluate alternatives to a bank credit card to ensure that you can capture spend data, look for opportunities to save money and get real time analytics on spend by department. Two cards to evaluate are Divvy and Ramp. Both companies have enhanced their analytics, automation, and UI.

On the analytics front, because of advanced tagging/event cards in the Divvy and Ramp apps, you can begin to get more granular on the ROI of events (for example, you can aggregate the expenses associated with a marketing event and on a granular basis determine the $/Opportunity). Combining Bill.com and Divvy is the easiest since it is under one umbrella. However, there are different factors a finance professional needs to consider when picking between Divvy, Ramp, Brex (or any other card offering), including cash reserves, company formation, and cash rewards. Eventually you will want to look into solutions like Airbase which combine all of the tools into one platform.

Compensation / Ownership / 409A Tools

Why is this needed: When hiring you need to understand the percentile bands for compensation to ensure you are handing out the right amount of equity and cash compensation. Additionally, you will need to maintain your cap table, monitor equity executions and handle your company’s 409A valuation.

Recommended Solution(s): This category is lumped together because there is one tool that solves all of these problems — Carta. Carta is a centralized tool that can solve many issues arising as a startup’s head of finance. The tool does much more than just managing equity! For example, you will inevitably receive the following question: “How much can we offer for XYZ position?” Previously, you would have to reference tools that aggregated self-reported data. However, with Carta’s Total Compensation tool, you now have the most accurate data on equity compensation benchmarks, and via HRIS integrations, you have a high degree of data accuracy with salary data as well.

On the 409A front, the process is relatively effortless since Carta already has most of your data in the system. The platform handles all aspects of the 409A process, including board approval. All-in, it is hard to replace a tool like Carta since it covers so many aspects that are crucial to a CFO. (Full disclosure: We liked Carta so much that we are an investor)

Financial SaaS Metrics / Analytics Tools

Why is this needed: As a finance leader you need to be able to provide visualizations to your stakeholders (CEO, Board, etc) that can illustrate the performance of the company — things like a cohort analysis, runway metrics and standard SaaS metrics. Additionally, these tools should provide insights to help your exec team shape the company’s trajectory.

Recommended Solution(s): I did an overview on some of the key dashboard / planning tools last year (here: FP&A Tools). Since then, the landscape has changed. For the finance world, Mosaic has made it easy for a startup SaaS CFO to connect to your CRM solution, QBO, and HRIS to get insights into financial / SaaS metrics, headcount, cohort analysis, etc. Mosaic is a robust tool that puts those insights at your fingertips, but like most startup CFOs, you will continue to additionally rely on Google Sheets or Excel for complex modeling, distribution, and inputs.

In that case, it is always helpful to pair Google Sheets with a tool like Aleph, which can pull information directly into Excel via API from QBO or your CRM to replicate the finance dashboards you see in traditional enterprise tools. Aleph is a relatively new startup, but based on their product roadmap, I can see them becoming a relatively inexpensive alternative for CFOs to get the necessary metrics while maintaining native platforms such as Excel or Google Sheets.

Invoicing Tools

Why is this needed: You need an easy way to see AR aging, recurring payments, receive payments and invoice customers in a timely manner

Recommended Solution(s): Using QBO at this stage of a company’s lifecycle for invoicing is relatively easy. Keeping in mind the company’s business model, you may also want to look into recurring billing software such as Chargebee or more robust tools such as Maxio, which cover everything from invoicing/ subscription management to ASC 606 revenue recognition. To note, Maxio acquired SaaSOptics and Chargify to create a more robust platform. What tool you select here depends on your sales motions and contract/payment structure.

Parting thoughts:

While I found the tools above helpful during my tenure as the head of finance, it is important that you demo various tools to find out what works for your business structure and your personal preferences. It’s my sincere hope that you find my recommendations for your finance tech stack to be helpful for your startup. I would welcome any comments or suggestions you may have on this critical topic via email eddie@thomvest.com.

Excel has been the primary tool in the Financial Planning and Analysis (FP&A) stack since the early 1990s. To have such a dominant role for over 30 years is impressive, but we are starting to see early stage companies transition to FP&A tech earlier in the maturation process. When evaluating the landscape of tools that are available for startups, we note that there are roughly 3 buckets of solutions:

1. Solutions for large / complex enterprises from SAP, Oracle and IBM

2. Solutions for medium-large companies (varying in complexity) from Anaplan, Planful and Adaptive Planning (Workday)

3. Solutions for mid-market and SMB level companies (low complexity) provided by a plethora of companies

When speaking to industry leaders in the space, we discovered that half of the customers looking to sign up for FP&A tech are shifting away from Excel (vs another solution). When companies transition from Excel to an FP&A SaaS solution, they are looking to solve some key pain points such as versioning issues, system integrations, analysis speed and more. The current tools in the space have been helpful, however we are seeing a new set of startups (such as Mosaic & Jirav) attempt to perfect some of the remaining pain points that are not fully addressed by the incumbents.

For companies that want to transition to an FP&A tool, here are a few key issues to keep in mind when narrowing down the list of potential solutions:

• Tool Complexity: Almost every finance professional is an Excel wizard, so it’s beneficial to find a tool that follows the same logic and formula structure as Excel (to a point). With larger enterprise systems, we tend to see unique languages or formula writing that requires a bit of training. You should consider your team’s ability to ramp given the complexity of the FP&A tool.
• Business Specific Functionality: While there are standard industry metrics, many companies have a unique way of looking at metrics. A few of the systems we looked at had limited customization when it came to specific KPI, reporting and dashboard adjustments. If your company has unique KPIs or dashboard views, you should ensure that the tool allows for the type of customization and adjustments that you are used to making.
• Implementation: It is important to have a realistic estimate of how long the implementation period will be based on your business complexity and the amount of friction within your systems. We have seen implementation periods range from 48 hours with some of the new tools, to 2–3+ quarters for some of the larger enterprise solutions.
• Internal Integration: Your FP&A tool should serve as the primary data accumulation tool for the company, so it’s crucial that you’re able to connect all your tools and grant access to select employees. You should also ensure that the solution provider that you go with understands the complexity of your business upfront since many lower-end solution providers will underbid the integration complexity when selling the tool with hopes of making it up through expensive ongoing service costs.
• Price: Surprisingly, most of the CFOs we talked to mentioned that they are not as price sensitive when it comes to picking a tool, but rather they want to make sure the tool reduces headaches, makes closing the books easier and allows teams to provide analysis quickly. This is an area where leaning on a cheaper solution may come back to bite you as you either make up for any savings with exorbitant services costs or decreased productivity.

The landscape:

CFO reviews & opinions by tool:

Notable Disruptors

Some of the trending cons that came out through our discussions focused on following pain points: reporting, formatting, user interface, speed and implementation. In our search through the FP&A landscape, we found two notable disruptors that are addressing these pain points: Mosaic and Jirav.

Mosaic (https://www.mosaic.tech/)
Mosaic’s founding team comprises of ex-Palantir finance team members who were frustrated with the slow speed, high complexity, and inefficiencies of the other tools on the market. While the company is in early-stage, the product solves many pain points that we have seen with other tools that cater to this market.

• Implementation and integration: Mosaic easily integrates with your ERP, CRM, HRIS, and payment provider.
• Preloaded templates: Mosaic offers best-practice financial analysis templates with easy custom analyses in a pre-loaded catalog.
• Financial model: The system creates a baseline scenario from which you can run sensitivities, tweak assumptions, build in additional line items and add in your assumptions.

Jirav
Jirav is another tool that stands out given the quick integration period and customization within the tool.

• Implementation and integration: Jirav reduces the amount of time needed to get your chart of accounts aligned with the sub-ledger, which reduces integration time and expenses. It also connects to NetSuite, Intacct, QuickBooks, and Xero with a few clicks.
• Reporting and analytics: Jirav automatically generates easy-to-read financials and customizable reporting packages to get the right stakeholders’ information.
• Automation: Jirav automates things that are not value-added activities, such as updating spreadsheets with actuals.

While Excel has been the dominant back pocket tool for decades, the growing number of attractive FP&A software solutions for small companies means that the era of Excel as the overwhelming tool of choice may be finally starting to shift (albeit slowly).

As the pandemic emerged in late Q1, there was a great deal of uncertainty around how startup valuations would respond in Q2 and beyond. Anecdotally, we saw valuations stay stable — if not increase — during the coronavirus pandemic. In order to validate this, we wanted to take a deeper look into deal data to analyze how Series A pre-money valuations fared and how that compared to the initial proxies that we looked to for guidance.

Predicting the Impact

Back in April, we noted that while there were not a lot of similarities behind COVID’s financial impact and what we saw during the Great Recession, we did believe that there would be a similar “shock period” — a period directly following a paradigm shifting event — that would have a direct impact on valuations in venture. Our objective at the time was to leverage the crash as a proxy for what we may see when it comes to valuations during the “shock period” (Q2 2020) and resulting “aftershock period” (Q3+). The analysis revealed the following predictions:

• Using the Great Recession as a proxy, we assumed a relative recovery in the venture world by Q3 2020 (the aftershock). Our belief was that by Q3 2020, companies would have made opex adjustments, pivoted to react to the situation, reduced burn, and removed some level of uncertainty.
• Even with a relative recovery in valuations by Q3, we expected to see a lower median than two quarters prior due to a slower growth environment
• During the “shock period”, we expected a contraction in the interquartile range and a lower median Series A valuation in Q2 2020

Watching Everything Unfold

What was unusual about the first half of 2020 was that the VC world did not “press pause” when it came to Series A valuations as predicted. At the same time, there were a number of unexpected external responses that impacted and improved the course of valuations throughout this past year, including:

• Immediate federal response leading to the Paycheck Protection Program, which gave VC-funded companies additional runway to raise capital if necessary
• Recent influx of venture capital raised prior to COVID, which led to competitive rounds (higher demand)
• Many startup companies thrive in paradigm shifts and COVID accelerated the ability for many disruptors to gain market share
• More sophisticated founders leaned on lessons learned from previous crashes and knew the importance of ensuring runway early

In order to confirm what we anecdotally experience, we delved into the data and ran some analysis. That analysis was run against three scenarios:

1. Disclosed Pre-Money: All deals where the pre-money was disclosed
2. Excluding Health Tech: Similar to the first scenario, but excluding health tech startups, since the pandemic may skew funding round sizes in those verticals
3. Deal Size Proxy: Includes all deals where a deal size is available, we then use a standard ownership % acquired to back into the pre-money valuation. This analysis also excludes health tech companies.

Other notes: We removed any outliers using the 1.5x IQR method.

The Results

• Medians: Not only did pre-money medians not drop, they increased slightly. This is primarily due to the 1st quartile increasing as lower quality deals were avoided during the initial shock period. In most scenarios, we saw a $1M–$2M increase in median Series A pre-money valuations during the “shock period” and then another $1M–$2M increase during the “aftershock period.”
• Interquartile contraction: We saw slight IQR contractions during Q2, however the third quartile stayed relatively flat, meaning the contraction came from a higher first quartile. During the Great Recession, we saw the third quartile drop a bit and the higher valuation deals did not occur during the shock period. Unlike the Great Recession, the large deals continued to occur during the coronavirus pandemic.
• Unexpected flatlining: One interesting trend we did not expect was the flatlining of valuations. Prior to the shock period in the first quarter, valuations generally hovered around multiples of 5. But during the shock period, many deals were struck at exact multiples of 5 as reported by Pitchbook, not backed into. For example, you will see almost a straight line of dots around the $30M pre-money in 2Q 2020 (right graph below). In a time where fundamental valuation may have been difficult, VCs may have leaned more towards traditional ownership percentages.

Going Forward

While the past few months have unfolded in a way none of us could have expected, we have been pleasantly surprised with the resilience of the venture market. Even more, it does not appear that valuations will be easing up anytime soon. In the public markets, there has been a lot of ongoing speculation as to whether the valuations are ahead of themselves. We remain optimistic that the long-term returns outweigh the risks of VC investments in worthwhile startups.

Over the past five years, we have seen a gradual but accelerating transition among CFO leaders within the startup world. What used to be a role dedicated primarily to accounting, compliance, IR/board communication, financials and forecasting has evolved to a cross organization leadership role with a deeper focus on strategic data analysis and proactive decision making (in addition to traditional finance/accounting decisions). To make this transition even more challenging, there are a myriad of complex issues that today’s CFOs are facing, often making the strategic aspects of their role difficult to successfully fulfill.

To explore these challenges, we reached out to early and mid-stage CFOs (in the venture world) to get their perspective. We also talked to a number of other key stakeholders including vendors, accounting outsourcing firms, CFO recruiters and entrepreneurs in the space. Our first task in our research was to investigate how early and mid-stage companies were constructing their CFO software stack so we could better understand what the current pain points are.

Here are some of the initial themes regarding the changing role of the CFO that evolved from this analysis:

Insight #1: Almost every early stage CFO we spoke to uses roughly the same piecemealed software stack for initial CFO tools (and they struggle to modify their “financial toolkit” as the business grows): When it comes to core financial software, most startups rely on a fusion of tools. For starters, many younger startups rely on Quickbooks and then look to connect, either through API or manually, to be able to incorporate best-in-breed tools (such as Bill.com, Carta, Expensify) into their platform.

By starting with the foundation of Quickbooks and then building on top of the product, CFOs are able to piecemeal a tool that ends up being productive and cost efficient for the company. However, once complexity increases within the business, the needs for a more sophisticated tool like Intaact or Netsuite become clear. Unfortunately, many mid-stage CFOs find the cost and implementation of these tools to be cost prohibitive and are resistant to making the leap.

When we pressed the Head of the Technology department at a top accounting outsourcing firm about why many startups don’t resort to some of the more cost effective all-in-one startup offerings (excl. Intaact or Netsuite) earlier in the process instead of the piecemealed stack, we were told many CFOs (and even CEOs) develop a level of comfort with their piecemealed best in class tools and are unwilling to make a transition. In other words, the upside benefit doesn’t seem to justify the risk (See insight #5 below).

Main Takeaway #1: Early to mid-stage CFOs prefer to bundle best in class tools and as a result the ability to connect, either through APIs or other integration layers is key for any CFO focused product. Many CFOs do not want to add additional G&A expenses, so products must scale down pricing to the size of the company and/or base pricing on use

Insight #2: Excel appears to remain the home of planning / forecasting for early stage companies: We found many of the available planning and forecasting tools do not yet make sense for early to early/mid-stage startup CFOs since the costs are prohibitive and/or there are not enough data points to make any predictive analytics useful. Instead, most rely on their expert Excel skills (with some venturing to Google Sheets) to run forecasting / planning models from a handful of data sources. This continues to be cumbersome, especially with the challenges of versioning issues and manual input requirements.

When we asked CFOs what pain points they have in Excel, they indicated they were looking for something more robust that could allow easy historical point of view forecasts (i.e. go back to a certain date and easily see the variance), a variance explainer (i.e. something that can compare actuals to the forecast and see what assumptions drove the variance) and an automatic forecaster that allows for easy click adjustments and built-in easy integrations with many other tools.

Once companies advance to the back half of being a mid-stage startup or late stage startup, we have seen a convergence towards tools like Anaplan or Adaptive Insights as an upgrade — but still many CFOs still defaulted to incorporating outputs into excel or sheets.

Main Takeaway #2: Early stage CFOs do not have enough data points to make predictive forecasting useful. For the most part, Excel nailed the product market fit over two decades ago for being the go-to with models and forecasting and it remains the “gold standard” for now. Many CFOs would like a tool that can integrate the piecemealed software stack into a forecasting tool, however, many of the available tools are cost prohibitive or not worth the trouble given the effectiveness of Excel at the early to mid-stage.

Insight #3: CFOs and their teams now have the ability to see a lot of the financial picture in real time: Dashboards are a great tool for businesses trying to assess current state against specific KPIs. However, dashboards alone don’t tell the full story, leaving companies reliant on finance or BI teams to influence the forecasts and paint the full picture.

Many CFOs we spoke to indicated they relied on tools such as Looker, Tableau or their own accounting systems to create their dashboards to give them the insight needed for key decisions. The downside is any incorporation into forecasting requires exporting the output and adjusting an Excel model.

Main Takeaway #3: CEOs/Founders want to know where the company stands at any given point in time and dashboards help solve that. However, the CFO and BI team provide additional value by interpreting the tracker KPIs and translate these implications into forecasts or adjustments that need to be made. A cost effective, easy to implement and widely used integration between dashboards and financial models would help automate more of the process that hasn’t yet been established in many early to mid-stage startups.

Insight #4: The prerequisites for qualifying as a CFO are changing: From our discussions with recruiters in the space, we have come to realize new requirements for the head finance role have shifted from a heavy accounting background (i.e. classic CPA CFO) to someone with a lighter accounting background and experience in investment banking, corporate development and/or operations (+an MBA).

Generally, when this next-gen CFO or VP of Finance is recruited, there is a heavy focus on determining if the company has a strong controller, since the CFO-to-be wants to focus less on the accounting side and more on the value-add finance / strategy side. We similarly see the shift reflected on the recruitment side with many teams looking for someone with prior strategic experience and strong data driven decision making capabilities.

With this shift, there is a growing interest in tools to help fill the capability gaps a VP of Finance or CFO needs in transitioning from the CFO 1.0 current role to the CFO 2.0 “future state”. Additionally, due to the displacement of some AP/AR functions from software enhancements, we have seen many roles shift up more to the analytical side of accounting and finance which provides more strategic value to the company.

Main Takeaway #4: CFOs, VP of Finance and Finance team roles are shifting more towards value-add analytics, so tools that can help empower finance team members to deliver their key deliverables, including automated analytics, easier UI/UX, and data flow throughs are helpful.

Insight #5: There is ongoing and stress-inducing tension for today’s CFO to be innovative, but not to take any unnecessary risks in managing the business.

One of our CFOs said a board member recently pulled him aside and mentioned “if you make money on the interest in the bank account, no one will care, but if you lose money or create financial issues, you will be gone.”

While a bit harsh, the likely intent of that message was to convey that conservatism is best when it comes to management of the company’s finances and accounting, especially when a young startup is focused on cash preservation. For many CFOs, the upside of implementing a new tool can be relatively minor (especially in the eyes of the founder), while the downside can be extreme (and potentially career fatal) if the company’s finances go awry.

As such, not surprisingly, CFOs tend to lean towards proven products they have previously used. When we asked what it would take for CFOs to convert to a new tool, they mentioned they would need to have at least two quarters of running the tool parallel to their current process to ensure everything works. While we assume this would not be the case for some of the simpler software solutions, for anything involving the general ledger, cash tracking or forecasting implications, a strong level of trust must be built first.

Additionally, once a company gets comfortable with their current tool set, it is hard for the company to “graduate” easily to the next tool. For example, we have heard of companies that stick with Quickbooks even when ARR tops $100M. The incumbents have a “tried and tested” moat which makes CFOs and founders lean towards name brands out of an abundance of caution rather than taking a risk when it comes to key finance and accounting tools.

Main Takeaway #5: When it comes to finance and accounting tools that can impact cash, tracking, reporting and the general ledger, there is a heavy focus on using the “tried and tested” companies to provide these services. The requirements to replace any of these financial tool legacy systems is a very high bar for more startups. As such, having significant customer testimonials and reassurance the new product will deliver is necessary.

Summary — There has never been a more challenging or exciting time to be a CFO — the role is changing dramatically along with the companies that serve them. Startups that want to create a new essential financial or accounting platform, product or service for today’s CFOs would be wise to listen carefully to what their potential customers are telling them. By working together innovatively and taking calculated risks, CFOs and their vendors can be very successful and take their performance to a new level.

Here is what we learned:

1) Brick and mortar businesses will continue to be impacted as a large contingent of consumers prefer to stay in, regardless of regulation

• Reliance on brick & mortar store fronts will continue to be a pain point as 50% of respondents plan to stay home during weekends: Companies that lend to or supply companies that rely on brick & mortar store fronts as a component of business operations will continue to see cash flow issues as consumers stay home during weekends and work from home — regardless of regulations.
• Businesses requiring in-person activities remain at risk as 40% of respondents plan to work from home: Sales methods that require on-premises demos, meetings with management, and site visits will continue to be impacted as employees continue to prefer working from home. Until response levels decrease, we expect a continued shift in sales methods.
• Startups should re-evaluate office spaces: With the work from home preference mentioned above, now is a perfect time for companies to evaluate long-term transitions to a flexible work from home structure.

2) Air travel will continue to remain on pause, impacting businesses and shifting dynamics across many fronts, including fundraising

• Roughly 80% of the respondents would not feel comfortable traveling within the next quarter: Processes such as fundraising, site visits, and even BOD meetings will continue to be impacted as the willingness of people to travel remains low. Companies need to plan in advance how to structure fundraising, site visits and BOD meetings for a continued Zoom first environment.
• 25% of respondents will not feel comfortable traveling for 1+yrs: Unless a vaccine is present, we can expect some longer term shifts in businesses that rely on recreational and business travel.
• Only 17% of the respondents feel comfortable flying today

3) Half of the respondents do not plan to wear masks in public, leading to concerns of spikes as public spaces begin to open

• Only 50% of respondents plan to wear a mask in public: Based on knowledge to date, this figure raises concerns of another potential spike that leads to the patterns we saw above relating to air travel, working from home and staying in on weekends. As such, there may be continued concerns for businesses in the entertainment, travel and other brick & mortar focused companies.
• Optimism on continuing life as usual (pre-covid) remains low: In February and March, the general population did not understand the severity of COVID-19. However, as the cases went from 30 to 213,144 within 2 months, continuing life as usual was no longer an option and now only a quarter of respondents plan to continue life as usual if COVID continues to spread.

4) We are starting to see increasing fear around making payments on debt, rent, mortgage and student loans

• Fear around ability to pay bills has seen a small initial spike as negative responses around future payments has increased: The percent of people who “definitely won’t be able to pay” remains around 7%, however the fear around making payments saw an uptick in August. As government programs dry up, we may see certain spikes in “definitely won’t be able to pay”
• Uncertainty leading to hesitations/fear as 27% of respondents are negotiating payments or fear they wont be able to make payments: Uncertainty around businesses, city openings, PPP, and headcount reductions has led to an increase in fear around respondents being able to make debt/rent payments (as seen with the spike to 18% of respondents in August being afraid they wont be able to make payments).
• Repayment issues may be on the rise: Businesses in lending, real estate, and payments may experience issues as we see a continued shift to negative responses on payment ability and government support drying up.

5) Regional dynamics were seen early on

• East Coast went from the lowest sentiment score (average rating of sentiment answers) to the highest, showing the impact of increased case counts: The East Coast started at a lower benchmark, however given the rise in cases, sentiment has increased and it now leads all other regions. The Midwest is currently showing a lower sentiment score as many states within the region have case counts <20K.

Conclusion:

While the end of this pandemic is not yet clear, we are beginning to see some measures start to stabilize. Consumers have moved past the initial impact of the pandemic and are learning to cope with mandatory mask guidelines and fewer in-person activities. Unfortunately, this will remain troublesome for businesses that rely on these in person interactions as sentiment has not shifted drastically. We will continue to see the businesses that have adapted to new virtual environments thrive and those that haven’t yet adapted will need to quickly get up to speed. This pandemic doesn’t yet have a clear end in sight and the businesses that can innovate and adapt in this state of adversity will make it to the other side.

For the full survey results, you can visit the presentation here:

Thomvest COVID-19 Survey

Layoffs are nothing new to American businesses, but as President Harry Truman once observed, “It’s a recession when your neighbor loses their job, and it’s a depression when you lose yours.” The COVID-19 pandemic has forced many companies to make tough decisions around headcount (both proactively and out of necessity) in an effort to decelerate ongoing cash burn. While many factors impacting the severity of cuts still remain to be seen, we have enough of a signal to assess emerging trends around current headcount reductions and company responses.

To analyze the data, we looked at a number of variables and data sources including funding to date, the number of investors, last raise, last valuation, last financing type, and original FTE starting base. We triangulated Roger Lee’s layoff.fyi database with Pitchbook, private information, and data from Compensia, to analyze recent headcount reductions.

As of the end of April, the data has already revealed the following trends across key categorizations:

• Series A, B & C: The median headcount reduction is largest to date for Series A companies having approached ~30% as compared to Series B at 27% and Series C at 19%. Additionally, when you look at the interquartile range, the spread between the 75th percentile and the 25th percentile for Series A is 22% vs 13% at Series C — showing a greater spread in Series A reductions as the third quartile is roughly ~40%
• Last Funding Date: Looking at the date of last funding as a proxy for cash balance, we can see that based on companies that raised money in 2020, the proactive layoff range appears to be 15–25%.
• Initial Headcount Size: The median % of layoffs is relatively consistent between 50–250 FTE, however the headcount reduction is substantial for small companies. Companies that have a starting headcount of <50 employees are seeing deep cuts (75th percentile at 50%) while the percentage of headcount reductions with companies that had 50–200 FTE continue to have a slightly longer right tail but have a median that hovers around 27%
• Division: The job candidate pool will be flooded with Engineers and Sales team members as a high percentage of laid-off headcount (as reported so far on an opt-in basis) leans towards those categories.

A Quick Note on the Data

As you can imagine, the first companies to make cuts in 2020 were the ones that were severely impacted by COVID. Due to this phenomenon, roughly 40% of the collected data is from Travel, Retail, Real Estate, Marketing, and Transportation verticals. Additionally, we are only in the second inning of a nine inning game which means one should view this analysis as descriptive of the current available data and not inferential. We will continue to evaluate the evolution of headcount reductions as the second wave of impacts continues to take shape during Q2. Lastly, we worked to scrub the data to exclude companies where information was inconsistent or missing and we excluded any companies that shut down completely. As such, this is an analysis of companies that are believed to be a going concern.

Stage of Company Financing Matters

One cut we used to look at layoffs was to view the percent reductions by the last series raised. As expected, Series A has the largest interquartile range with a 75th percentile of 42% and 25th percentile of 20%. As companies mature, find product-market fit and maintain a steady stream of recurring revenue, we would expect the headcount reduction percentages to decrease (at least in the initial wave) and the range of percentages to compress. For both Series A and Series B, the right tail is relatively long indicating some earlier stage companies are making drastic headcount reductions. By series C, the interquartile range compresses, and companies are generally grouped around the median of 19% (vs the 30% median seen with Series A companies).

As the graph below shows, we can see that as the groupings shift from Series A to B to C, their median headcount reduction drops. One thing that stands out though is the lack of pattern abiding behavior with Series D companies. This is due to the fact that the data population within Series D over-indexes on verticals that were severely impacted by COVID. Examples of companies that fell into the D grouping were Zola (wedding planning), Gympass (gym membership), Industrious (community workplace), and TravelTriangle (travel planning). Intuitively this makes sense as the initial late-stage data points are most likely companies that saw revenue dry up overnight and had to act quickly. However, we expect additional layoffs from a wider breadth of verticals as the economic damage ripples through other industries.

Cash Is King…Again

It is no surprise that cash on hand plays a large factor in how deep companies cut when it comes to headcount reductions. Looking at the date of last funding as a proxy for cash balance, we can see that for companies that raised money in 2020, the proactive layoff range appears to be 15–25% (20–25% at mid-April). As we dig further into 2018 and 2019, as expected, the interquartile range is much wider for those two years vs 2020, and the 75th percentile for 2018 is ~40%. There is, however, a longer right tail in both 2018 and 2019 with many occurrences of a 20% cut as observed by the skew. 2019 figures are shifted down slightly from 2018 figures given what we can assume is a larger cash cushion to help weather the storm.

The Smaller They Were, The Greater They Shrank

We further evaluated the level of headcount reduction by taking into consideration the starting FTE size. Below we can see that a lot of companies with less than 50 employees are being cut down significantly. In the 50–100 and 150–200 FTE groupings, we see roughly similar trends and a decreasing interquartile range as FTE gets larger. Interestingly enough, while the median percentages stay roughly the same, the impact for smaller companies hits a bit harder since they were already running relatively lean in many functions.

Press Repeat

After seeing headcount reduction figures from March and April 2020, I wanted to look back and compare those figures to what we saw in 2008. Using data provided by Erik Beucler from Compensia’s 2008 Recession Survey, we compiled reductions from the most recent crash and compared them to where we currently are as of the end of April.

Overall, indications so far point to headcount reductions that are in the same range as headcount reductions from the most recent market crash. However, there may be a silver lining. Unlike the last crash, the Government has implemented the Payment Protection Program which provides incentives for retaining headcount. The verdict is still out on if the 2 ½ months of payroll will suffice to slow down long-term headcount reductions.

Which Function Gets The Deepest Cuts?

As part of the layoff process, it is important to measure the depth of the reduction (which we covered above), but also where in the organization companies are slimming down and which teams/groups are impacted. Each company has unique characteristics, including structure, locations, products, and growth trajectory, and so there is no cookie-cutter answer for where to cut.

The graphs below are representative of how the layoff lists for the companies are broken by divisions (note: smaller divisions have been excluded). The opt-in on the “alumni lists” ranges from 20–60% and the companies do not publicly list the size of each division — thus we are evaluating the percentage of the headcount reduction layoff list which allows us to understand the composition of the headcount reductions as a percent of total but not as a percent of the division.

That being said, we can look at the graph below to understand where companies are pulling back on previous growth estimates and readjusting to the new economy. Given the high percentage of engineers and sales team members, we can expect the candidate pool for those two divisions to increase dramatically.

Note: Names redacted due to sensitivity

CEO Prime Directive: Survive

If you are the CEO of a start-up company, one of the most painful responsibilities you have is to do whatever it takes to ensure your organization gets to the other side of an economic downturn. It’s emotionally gut-wrenching to have to downsize your organization, but the alternative of going out of business is even worse.

This potential recession/depression is going to be different than anything we’ve seen before in many ways; one of which is the massive amount of government aid being quickly deployed to try to offset some of the pain. As the market evolves, we will continue to monitor headcount reductions with the hopes that fewer and fewer companies make reductions, but it will all depend on how the recovery from the virus starts to take shape across the world.

What Will Happen To Deal Activity and Valuations Near-Term During the Corona Crisis?

Given all of the turmoil in the markets over the past couple of months, we took a step back to understand if any lessons from the Great Recession could be applied to the current financial crisis. While much uncertainty remains, we are now at a place where we are starting to see the initial shocks from the Corona Crash take shape. There are many questions about what to expect when it comes to valuations and the level of deal activity in the next two quarters and beyond.

Nothing Stays The Same — Or Does It?

A lot has changed since the Great Recession — not only with series classifications, but also with the quality of companies, the amount of capital being invested into startups, and the sophistication of investors and entrepreneurs. While the COVID Crash is dissimilar from the Great Recession in many aspects, it is one of the most recent proxies that we have for predicting what will happen next. Using the aftershock analysis from the Great Recession (discussed further in the analysis), we would expect the following to happen to pre-money valuations in Q2’20 and Q3’20 respectively:

• Q2’20 — Median pre-money Series A valuations will drop from $22M in Q1 to ~$17M in Q2 and the 3rd quartile will drop from $35M in Q1 to ~$23M in Q2: If we use 2008 as a proxy, we saw an interquartile range contraction (3rd quartile — 1st quartile) between Q3’08 and Q4’08 and a quick drop in the median. Applying this observation to Q2’20, we would project median pre-money valuations to fall roughly -22% and expect the third quartile to drop -33%.
• Q3’20 — Distribution of Series A pre-money valuations should expand as companies adjust and investor appetite reemerges: It’s not all doom and gloom. By Q3’20, we should expect the distribution of valuations to expand again as companies have a chance to respond, make OPEX adjustments and remove some level of uncertainty. Even with the range expansion, overall pre-money valuations and deal count will remain depressed.

Back To The Future: What We Learned In ‘08-’09

This all sounds reasonable so far, but how did the lessons of The Great Recession guide these conclusions?

Methodology: While there is no perfect comparison, we took a look at the Q3’08-Q4’08 and used Series A pre-money financings as a proxy. We evaluated interquartile ranges, overall distribution, and medians (with exclusions for valuations more/less than 1.5x the interquartile range).

What Really Happened? Many people were faced with the same picture of dismal headlines and grim uncertainty. As Lehman Brothers filed for bankruptcy on September 15th, 2008, the shock-waves were felt through the market, leading to the worst decline in five years for the Dow. As the Fed began sorting through options, Q4’08 was looking pretty bleak and the public markets were taking a tumble. The drop in venture valuations shortly followed as median pre-valuations dropped ~22% and the 3rd quartile dropped ~33% from $14.3M to $9.6M in Q4’08.

As you can see with the scatter plots above, valuations in Q4 had a natural cap around $14M and the 3rd quartile was severely compressed. While there is some noise in the deal count collection for companies that have pre-money valuations available, it appears that the venture market pressed “pause” on deals and migrated away from the right tail of pre-money valuations.

Another thing to point out is that the compression was further exemplified by the interquartile range decreasing from $9.7M in Q3’08 to $5.8M in Q4’08. Even more, in Q3, there was a positive skew of pre-money valuation — with a peak count of around $5-$7.5M and a long tail with roughly equal counts between $10-$12.5M, $12.5-$15M and $15–17.5M. By Q4, we saw compression in the spread of valuations with a weaker positive skew.

Let’s Make A Deal: By Q1 2009, we saw deal count increase slightly (+15%) with the third quartile jumping up 28% to $12.3M and the interquartile range increasing back to ~$9M.

While deal count continued to be impacted, investor appetite for richer priced deals re-emerged. This may have been due to a number of factors including higher-quality companies reemerging for funding, the emergence of aid and stimulus packages, and/or the reemergence of investors who were waiting for the dust to settle to put their capital to use.

What, So What…..Now What?

Let’s be blunt. We are in “uncharted territory” right now during the Corona Crisis. There are some days where it would be understandable if you didn’t want to look at the news at all since it is both shocking and depressing. The amount of wealth destruction in such a short amount of time is unprecedented. And it’s not at all clear at this time if the worst is behind or still ahead of us when it comes to financial recovery.

Let’s try to end on an optimistic note. As we saw in the Great Recession, once the initial drops are eventually over with, there will be an eventual rebound in deal activity and valuations as the strong survive. At this stage, it’s anyone’s guess as to how long that will take this time around and how the capital waiting on the sidelines and the Payment Protection Plan will impact the speed of deal count increases and valuations over the next few quarters. Here’s to hoping it’s a faster and more robust recovery than what we saw during the Great Recession. For now, let’s use this time to monitor the ever-changing situation and do our best to help our companies respond and ideally reemerge better on the other side of this.