For What It’s Worth: Startup Valuations Are Said To Dropping But Other Factors May Be More Important

Does it matter that startup valuations are said to be falling?

The short answer is: yes, of course, it does. If you run a company that is seeking to raise finance then a lower-than-expected valuation will mean that you will have to hand over more equity to investors in order to raise the finance you require.

But according to Katy Wigdahl, CEO of Cambridge-based speech recognition technology company, Speechmatics, there is a longer answer. Speechmatics has just raised $62 million in a Series B round led by Susquehanna Growth Equity with existing investors Albion VC and IQ Capital also participating. As Wigdahl sees it, a large valuation shouldn’t necessarily be the north star when it comes to selecting investors.

Cause For Concern?

This year has seen something of a panic around valuations. In the post-pandemic period, tech stocks on the public market fell back. This, combined with renewed caution on the part of investors has – anecdotally at least – fed through to lower valuations of private companies. The immediate impact of this may be that companies coming to the market could struggle to raise money on what they see as acceptable terms.

Clearly, it’s in no one’s interests for valuations to slide to a level where raising money becomes genuinely difficult but Wigdahl’s view is that the valuation on offer should only be one factor in determining whether or not to do a deal. So when I spoke to her – coincidentally on the same day that the Bank of England delivered its gloomiest economic forecast for a generation – I was keen to find out more about those other factors.

Founded in October 2006, Speechmatics operates in a relatively crowded speech recognition market where long-term success is likely to be determined by the quality of the technology on offer. For its part, Speechmatics has developed a multi-language solution and the current goal is to develop a system that can understand the nuances of every individual human voice. Not surprisingly, Machine Learning and Artificial intelligence are key technological components.

Why Series B?

As Wigdahl explains, much of Speechmatics progress to date has been funded by bootstrapping, but the decision to embark on a Series B raise was driven by an ambition to drive further growth in the face of stiff competition. Investment was required not only for further research and development but also to give the company more marketing heft. Wigdahl cites establishing a stronger presence in North America. “Over 60 percent of our revenue comes from the U.S. but it’s all booked through the U.K.,” she says.

Wigdahl is clearly proud of the company’s technology, which is enabling Speechmatics to win business in industries such as media (subtitles), banking (transcriptions) and education tech (text accompanying audiovisual content). But perhaps surprisingly, she and her team did not feel the need to chase the highest valuation.

“Last year was very hot (for valuations),” she says. “So I spoke to investors to get an understanding of the multiples.”

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

Off The Table

So, Speechmatics took valuation “off the table” and began to look instead 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 could – in Wigdahl’s view – add the most value in terms of delivering on the growth agenda.

But didn’t that mean surrendering more equity? Wigdahl says companies should consider the circumstances. “Valuations matter when you are exiting. It is not so important when you are growing the business.”

The important thing, then, was to choose a partner that could help put the company on a growth curve that would ultimately deliver a better return for all.

Susquehanna was seen as a good partner in part because of its understanding of the market and its willingness to undertake extensive due diligence. That last point might come as a surprise to founders who dread the prospect of being grilled by potential investors, but Wigdahl says she found it refreshing. “To me, the due diligence was a kind of validation,” says Wigdahl. “It also helps you think about what you’re doing and achieve clarity of focus.”

Looking ahead, Susquehanna is seen as helping the company build a growth strategy while also making introductions to portfolio companies. The aim now is a $100 million turnover in four years.

Wigdahl says she took a pragmatic view of valuation. Maybe that’s not possible for everyone, especially in the current economic climate when fundraising could become ever-more-difficult. But it’s a reminder that what matters in the end is what the company is worth at the point of exit