In December 2021, I highlighted the dangers of tech startups raising capital at inflated revenue multiples between 40x and 70x. At the time, it was clear that valuations were being driven more by hype than by financial fundamentals.
The warning sign...
In December 2021, I highlighted the dangers of tech startups raising capital at inflated revenue multiples between 40x and 70x. At the time, it was clear that valuations were being driven more by hype than by financial fundamentals.
The warning signs were there. Now, years later, the consequences are materializing.
Many of those companies raised at sky-high valuations without ever achieving profitability. As cash reserves dry up, they are facing a harsh reality. Market multiples have contracted significantly, and those inflated valuations from 2021 are now a liability.
The consequences of inflated valuations
The AI wave is showing the same patterns
What worries me is that we are seeing the same dynamic play out today in the AI sector.
Early-stage companies are raising at valuations that assume future dominance, long before product-market fit or revenue. The technology is exciting and the potential is real, but history tells us that not all companies will emerge winners.
When the hype settles, those with sound business models and disciplined financials will remain standing. Others will be left dealing with down rounds, layoffs or worse.
What founders should focus on now
Itay Sagie is a strategic adviser to tech companies and investors, specializing in strategy, growth and M&A, a guest contributor to Crunchbase News, and a seasoned lecturer. Learn more about his advisory services, lectures and courses at SagieCapital.com. Connect with him on LinkedIn for further insights and discussions.
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Illustration: Dom Guzman
