Friday, September 29, 2023

Startup valuations are said to fall, but other factors may be more important

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Shreya Christina
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Does it matter that startup valuations would fall?

The short answer is: yes, of course. If you run a business seeking financing, a lower-than-expected valuation means you’ll need to relinquish more equity to investors to raise the financing you need.

But according to Katy Wigdahl, CEO of the Cambridge-based speech recognition technology company, speech logic, there is a longer answer. Speechmatics just raised $62 million in a Series B round led by Susquehanna Growth Stocks with existing investors Albion VC and IQ Capital also participate. The way Wigdahl sees it, a high valuation doesn’t necessarily have to be the star when it comes to selecting investors.

Cause for concern?

This year there was some panic around valuations. In the post-pandemic period, technology stocks in the public market fell. This, coupled with renewed investor caution, has led – at least anecdotally – to lower valuations of private companies. The immediate impact of this could be that companies coming to market may struggle to raise money on what they consider acceptable terms.

It’s clearly in no one’s best interest for valuations to slide to a level where raising money becomes really difficult, but Wigdahl believes that the valuation offered should be only one factor in determining whether or not a deal should be struck. So when I spoke to her – coincidentally the same day the Bank of England made its most dismal economic forecast in a generation – I was eager to learn more about those other factors.

Speechmatics, founded in October 2006, operates in a relatively busy speech recognition market where long-term success is likely to be determined by the quality of the technology on offer. Speechmatics for its part has developed a multilingual solution and the current goal is to develop a system that can understand the nuances of each individual human voice. Not surprisingly, machine learning and artificial intelligence are major technology components.

Why Series B?

As Wigdahl explains, much of Speechmatics’ progress to date has been funded by bootstrapping, but the decision to go through a Series B increase was driven by an ambition to drive further growth in light of the fierce competition. Investments were needed not only for further research and development, but also to give the company more marketing power. Wigdahl cites a stronger presence in North America. “More than 60 percent of our revenue comes from the US, but it’s all booked through the UK,” she says.

Wigdahl is clearly proud of the company’s technology, which enables Speechmatics to win business in sectors such as media (subtitles), banking (transcriptions) and education technology (text with audiovisual content). But perhaps surprisingly, she and her team didn’t feel the need to pursue the highest rating.

“Last year was very warm (for valuations),” she says. “So I spoke to investors to understand the multiples.”

And as she discovered, there was a huge range of appraisals on offer – and in some cases very little due diligence was done. “We wanted to partner with an investor who really understood the business,” she says.

From the table

So Speechmatics took the valuation “off the table” and instead started looking at what investors could bring to the party. As a result, the company eschewed some of the “crazy” valuations on offer and went with the partner that – according to Wigdahl – could add the most value in terms of delivering on its growth agenda.

But didn’t that mean that more equity had to be surrendered? Wigdahl says companies should consider the circumstances. “Values ​​are important when you leave. It’s not that important if you’re growing the business.”

So the most important thing was to choose a partner who could help put the company on a growth curve that would ultimately deliver better returns for everyone.

Susquehanna was seen as a good partner partly because of her knowledge of the market and her willingness to carry out extensive due diligence. That last point may come as a surprise to founders who fear being grilled by potential investors, but Wigdahl says she found it refreshing. “For me, the due diligence was a kind of validation,” Wigdahl says. “It also helps you think about what you’re doing and get a clear focus.”

Looking ahead, Susquehanna is seen as helping the company build a growth strategy while introducing portfolio companies. The target is now a turnover of 100 million dollars in four years.

Wigdahl says she had a pragmatic view of appreciation. That may not be possible for everyone, especially in the current economic climate where fundraising can become increasingly difficult. But it reminds us that what matters in the end is what the company is worth at the time of exit

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