San Francisco startups are showing cracks

We haven’t done a deal in San Francisco because valuations are still absurd.  However, we frequently talk with companies in San Francisco in case we can find an attractively priced inside round, down round or perhaps lead a cap table/balance sheet restructuring.  More recently though, we have started to see SF based companies have trouble raising money that 6 months ago probably could have gotten a deal done. Below are two examples:

 

-One SF company we spoke with last week does about $208k of MRR but burns $250k of cash a month.  Year over year revenue growth is healthy at 116%, but the burn to MRR ratio of 1.2x is too high, especially given that the Company is going through $1mm of cash every 4 months.  As a result, this company has had to cut staff significantly and is attempting to do a down round.

 

-Another company we spoke with yesterday in the Bay is doing $60k of MRR but burning $180k of cash a month for a whopping 3:1 burn to MRR ratio.  Additionally, they’ve got $1.6mm of notes on the balance sheet that will convert at a 20% discount.  This will cause any new investor to suppress his valuation further to adjust for the immediate dilution from note conversion.  Growth is over 100% YOY but given the level of burn, ugly ratio, and the note, in all likelihood this is going to be a distressed sale, if they can find a buyer. 

 

Although these are only two examples, we are seeing similar trends across all companies we monitor:  we record the median revenue multiple startups are asking for when they raise money (requested pre-money valuation/ARR), and that multiple across the nation has come in significantly: since Q3 2015, the multiple was 12.4x, but when we look at only 2016, the multiple is 8.5x.  This data set includes 311 companies since Q3 2015 and 75 companies in 2016.

 

While the market has been showing cracks since January, San Francisco was relatively immune.  Now we’re starting to see that even companies in SF need to care about burn, their burn to MRR ratio, and the amount of convertible debt raised.

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