I think software startup valuations will stay on the high side for the while, compared to 2019 levels.

We’re already seeing fewer crazy-high deals, but valuations aren’t dropping off a cliff as a whole.

Here’s why:

Just like anything scarce that has a price, valuations are driven by supply and demand in a market of startup buyers (investors, acquirers) and startup sellers (founders, shareholders).

What’s it worth if no one wants to buy it? Not much.
What’s it worth if you have too many desperate buyers? A lot.

Early-stage startup valuations have gone up in the last two years.

Pre-revenue startups are getting investments on valuations of $5M, $10M, and higher. This was $2M-$4M a few years ago outside Silicon Valley.

In-revenue SaaS, fintech and marketplace companies are getting investments on 10x, 15x or higher multiples of revenue. This was 5x to 10x a few year ago.

There are many more investable startups that are looking for funding these days. But this increased supply of startups isn’t driving valuations down.

Why?

Because there is much more money (demand) trying to invest in high-potential tech companies than there is the supply of startups.

I don’t see this changing any time in the next year.

So much money is still coming in to find worthy early-stage software startups to invest in.

It’s a recurring-revenue SaaS, fintech, web3 gold rush.

New funds with big raises, old funds with bigger raises, super angels, hoards of angels, seed funds, startup sector funds.

So. Much. Money.

Not. Enough. Fundable. Startups.

If you aren’t getting investors or the valuations you want, you haven’t created enough demand from interested investors who are competing to invest in your scarce startup.

The founder, the pitch, the business fundamentals, the traction are all important. But not as important as “clearing market” with high demand to invest in your company.

That means 3-5 investors with competing term sheets, so 20 investors who really like your story, from 50-100 investors who have heard your pitch.

That’s almost a full-time job for a CEO if they are doing it quickly. And it takes a lot of time to meet with 50+ real investors.

It’s about having a choice of the right investment partner for what the founder is trying to achieve in the future, not about getting a crazy valuation.

More startups will be created every year for a while.

But I see even more money coming in chasing big returns in software and SaaS companies.