How increasing interest rates % may impact startup valuations $

As a venture capital fund, we often receive questions from founders about the current investment climate and how macroeconomic conditions might impact their fundraising efforts. There are number of macroeconomic factors that may impact VC funding terms, but we would like to mention one fundamental shift that cannot be ignored neither by VCs and angels, nor by startups. In April 2022, the 12-month EURIBOR turned positive for the first time since February 2016, thus making a clear signal that the era of free money is over. By the end of 2022 12-month EURIBOR exceeded 3.2%. This has caused yields on risk-free financial instruments, such as German government bonds and bank deposits, to become positive which means that the investors can now place their funds in risk-free or "almost risk-free" term deposits at reputable banks and earn 4-5% per year. As a result, the required return for venture investments will increase significantly to account for the riskier asset class. All of these factors have significant impact on startup valuations.?

In May 2022, Y-Combinator advised its portfolio companies to plan for the worst and cut spending. Since then, a number of articles have been published warning of decreasing valuations and more difficult fundraising prospects. It is not surprising that startups that raised their pre-seed rounds at a $10 million valuation or valuation cap will likely face a significant down round if they do not meet the financial metrics required by the next round investor.?

At the same time, a number of European VCs have announced new funds for FY22. For example, EQT Ventures announced a new €1.1 billion fund in November 2022 for early-stage European and US startups. SpeedInvest announced $500 million in new funds in December 2022 for pre-seed and seed investments in Europe, and Index Ventures announced its second $300 million seed fund in November 2022 for investments in Europe, the US, and Israel. However, more institutional money for early-stage startups does not mean that fundraising will get easier. Investors have their own target returns and if the market trends indicate that valuations at later stages have decreased significantly, it will also impact pre-seed and seed investment terms. According to a TechCrunch article from May 2022, "as interest rates rise, startups and VCs are playing a new game," and Series B/C investors have started using public comparable companies as benchmarks for valuations. It should be expected that if Series B/C valuations are adjusted, Series A and seed valuations will also be adjusted to reflect the yield expectations of early investors.?

Taking all of these factors into consideration, it can be concluded that early-stage startups should prepare for challenging times in terms of fundraising. Despite the fact that top-tier VC funds have announced new funds for early-stage investments, VCs are now more selective and demanding. At New Nordic Ventures, we believe that early-stage startups should consider focusing on extending their runway by carefully assessing opportunistic expenditures. For example, some early-stage startups with limited runway a should reconsider aggressive expansion strategies and focus on markets where they already have traction. We have found that it often pays off for an early-stage company to focus on its initial market or industry where it has initial traction and a higher probability of demonstrating positive commercial dynamics and financial ratios. It is also more important now for early-stage companies to focus on financial results. Those who are able to extend their runway by generating revenue are more likely to attract VC attention.?

New Nordic Ventures has not changed its investment thesis or approach. Since the beginning, we have focused on early-stage startups with strong founding teams, innovative technologies, and clear value propositions. We will continue to support these startups as they navigate the current market conditions and work towards achieving their long-term goals.?