Atman January 2024 Update
From all of us at Atman, we hope you enjoyed the holiday season with those important to you and that 2024 has been off to a great start.
The US Economy Continues to Roar
As we step into the new year, the US economy shows strong signs of vitality. Vehicle sales surged in December 2023, recording a 1.1% increase, and retail continues its robust momentum into 2024, growing by 0.6% compared to the previous month — surpassing analysts’ expectations.
This economic buoyancy has led to a rebound in the bond yield of US treasuries to approximately 4.3%, reflecting the market’s reassessment for a realistic soft landing orchestrated by the Federal Reserve. Consequently, the outlook for Q4’s GDP has been revised upwards, signaling a positive economic forecast for Q1. However, this growth also brings uncertainty regarding the outcome of the “landing” phase of the economy.
An area of concern is that although retail sales show momentum, consumers increasingly turn to credit card debt to fund these purchases, as reflected by the $1 trillion in outstanding debt. As interest rates remain high, more and more consumers are unable to pay down their outstanding debts.
The Evolving Venture Market — Rule of 40 No Longer: Embracing New Possible Models to Value Startups
The venture capital landscape is undergoing a significant transformation. The time-honored Rule of 40, once a staple in evaluating late-stage venture investments, is giving way to the new “Rule of X.” This shift, led by conservative firms like Bessemer, marks a change in how VCs assess and value businesses. The traditional Rule of 40, which combined gross margins and growth rate to gauge a startup’s health, must be updated in our current economic climate. The emerging Rule of X focuses on integrating Growth Rate with Free Cash Flow, especially pertinent for cloud-based businesses, recognizing the compound impact of growth. According to it, growth matters more than FCF Margin (twice as much), but one can’t fully trade off profitability today for the growth that can come tomorrow. The key is that with the “growth at all costs” era being over, balancing metrics across FCF, margins, and burn quality is necessary.
The New Normal for Venture-backed Startups
Despite these changes in valuation methodologies, as discussed in our December newsletter, the venture-backed startup landscape is still defining its new normal. According to Carta’s Q4 private market report, there has been an increase in median pre-money valuations across all venture capital stages, except for Series C, in Q4. The most notable change was Series A, where median pre-money valuations jumped from $29 million to $45 million. Seed stage valuations are now at a median of $13.3 million, with average round sizes hovering around $3 million. Despite these increases, overall round sizes are trending smaller, indicating a more cautious investment approach.
Before the boom of 2019–21, many startups managed to graduate to a quasi-profitable state with their seed rounds alone. We observe that graduation to a Series A is a much harder phenomenon at this point. While each VC calibrates on what is ideal (with the rule of X being an example), we believe we’ll see more companies planning to raise only a seed round, followed by sustainable, profitable growth. This approach is quite novel, as it removes the obligation of stage financing from several entrepreneurs.
The result: founders that follow this approach return to the helm of their destiny versus being at the mercy of the venture capital. Understanding and adapting to these evolving trends is key to our continued success and the success of our portfolio companies. It is a welcome change for us at Atman; although up rounds may not happen as frequently, this will reflect positively on our funds’ ability to deliver exceptional returns.
Meet the Egregore: Adam Burrows, Co-Founder of Range Ventures
Who is Adam?
Adam co-founded Range Ventures in 2020. Before Range, Adam was on the executive team at two of the biggest Denver tech successes, HomeAdvisor/Angi (2017 IPO) and Guild (2022 Series E). He has a JD from Harvard Law School and a BA from the University of Michigan.
What is Range Ventures?
Range Ventures is the go-to pre-seed and seed fund in Denver to capture the boom in Colorado tech.
How much capital have you raised so far?
$53M for Range across 2 funds so far.
How many companies have you started? Range is my first founding experience!
What industries do you believe you have deep expertise in? I am a generalist but have deep expertise in marketplaces, SaaS, proptech, edtech.
What are you most excited about right now? I am really excited about how the current environment is forcing constraints and discipline on founders to make extremely thoughtful and strategic choices. As a relatively new venture investor, it’s now very clear to see why so many successful companies come out of times like these.
What has been one of your biggest lessons so far in business? Building a tech company has very extreme emotional ups and downs, and in the end, things are rarely as good or as bad as they seem in the moment.
What book(s) have changed/shaped your life? Thinking in Bets by Annie Duke and The Undoing Project by Michael Lewis are at the top of my list. I LOVE the lessons from the psychology of decision-making and behavioral economics, and it has really changed the lens through which I view the world.
If you could have dinner with anyone, dead or alive, who would it be with and why? Jim Henson. He was an unparalleled creative genius who brought joy to millions and tapped into the wide-eyed child in all of us.
What do you believe to be true that you cannot prove? The things you worry most about are not actually the things that you should be worrying about.
